Thinking of Retiring and Selling Your Business?

If you are considering retirement within the next five years and do not have a family member or business partner ready to assume control, you will encounter one final challenge before you can retire: selling your business at a price that reflects the years of hard work you’ve invested.

Selling a business is no simple task. You need to address several critical elements:

• Finding the right buyer
• Selecting a suitable valuation method
• Developing a strategic exit plan
• Effectively structuring the deal.

Engaging an experienced business broker can be highly beneficial. They can assist in maximizing the sale price, enhancing the appeal of your business to prospective buyers, and timing the sale to align with your retirement goals. Below is a brief guide to help you get started.

Preparing Your Business for Sale

While the prospect of retirement may be exciting, hastening the sale of your business is generally not advisable. To attract the right buyers, it is essential to address any outstanding debts, consider internal restructuring, and make improvements to enhance the overall appeal of your business.

In the short term, focus on increasing your income and strengthening your business’s reputation. Although these preparations may require time, they will enhance the attractiveness of your business to potential buyers. Ideally, begin preparing up to two years prior to your planned retirement date.

Choosing the Optimal Time to Sell

Your planned retirement date should serve as the starting point for deciding the timing of your sale. However, several factors may affect your decision as you approach that date.

For instance, if you secure a significant and profitable contract with a new client, you might achieve a higher sale price by selling sooner. Buyers in the life safety industry will be interested in your active customer base and current work in progress to ensure a healthy backlog. On the other hand, if a lease renewal is imminent, selling before renewing the lease could enhance your business’s appeal by offering potential buyers greater flexibility.

Market conditions and economic factors also play a crucial role. If the market experiences a downturn, it may be prudent to delay the sale. An experienced business broker can offer valuable guidance in navigating these considerations.

Structuring the Deal

The sale of your business can be structured in various ways, each affecting the financial outcomes differently. The optimal structure will depend on your goals, the size of the business, the industry, and prevailing market conditions.

Here are some common options:

• Outright Sale (Share Sale): The buyer acquires the entire business, and ownership is transferred to them.
• Gradual Sale: The buyer pays for the business over time, often with financing arrangements.
• Lease Deal: The buyer makes regular payments for temporary rights to operate the business.
• Management Buyout: Key employees purchase the business’s assets and operations.
• Winding Up: If a sale is not feasible, you may opt to liquidate the business by appointing a liquidator to value and sell the company’s assets, with the proceeds paid to you minus the liquidator’s fee.

Properly Valuing Your Business

Once you’ve decided when and how to sell your business, obtaining a professional valuation is the next essential step. In the life safety industry, businesses are typically valued and sold using one of two primary methods:

1. EBITDA Multiples: The valuation is based on a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA), with agreed-upon adjustments.
2. RMR Multiples: If the earnings are insufficient, a higher valuation may be achieved through a multiple of recurring monthly revenue (RMR). RMR consists of recurring monthly income from contracted services such as monitoring, testing and inspection, service contracts, and other recurring services.

Example 1: A business has adjusted EBITDA ranging from $1.25 to $1.5 million and $175,000 of RMR.

• EBITDA model: An adjusted TTM EBITDA in this range could potentially command a multiple of 5-7x, translating to a company valuation between $6,250,000 and $10,500,000.
• RMR model: The RMR multiple for this business might range between 38 and 44 times the current RMR estimate of $175,000, resulting in a company valuation of $6,650,000 to $7,700,000, plus assets.

Example 2: The same business has an adjusted EBITDA ranging from $500,000 to $750,000 and $175,000 in RMR.

• EBITDA model: An adjusted TTM EBITDA in this range could command a multiple of 4-6x, leading to a company valuation of $2,000,000 to $4,500,000.
• RMR model: The RMR multiple for this business might range between 38 and 44 times the current RMR estimate of $175,000, resulting in a company valuation of $6,650,000 to $7,700,000, plus assets.

Additionally, there are other factors to consider. These include value of assets, including vehicles, fixed assets, receivables, and the valuation of work in progress and future contracts.

An experienced broker can help you select the most appropriate valuation method. This will ensure you receive a fair return for your hard work and secure a comfortable retirement.

Finding a Trusted Expert

Our brokerage team, led by principal Patrick Egan, has over 70 years of combined experience specializing in the security and life safety industry. If you are considering retirement and require professional aid with business valuation or guidance on preparing your business for sale, please contact us for a confidential, no-obligation consultation.