Doing the deal

There are going to be many medium and smaller-sized security companies who, for whatever reason, will not be able to cope with Security Industry Authority (SIA) regulation and cannot qualify for the Approved Contractor Scheme. They will be in the business of selling up rather than ‘dying in the saddle’.

There are many family-run companies in the sector, of course, but in spite of the despair of their parents, it is quite common for sons or daughters not to have any interest in wanting to run the business that has fed and clothed them from birth. Experience shows that it would be wrong to try and cajole family members into taking on the responsibility of running a business if they do not want to.

How, then, might owner-managers maximise the return on the business they own – either wholly or with fellow shareholders and partners – and settle down to retirement or a new career in a different industry?

The good news is that the maximum rate of tax on the profit from the sale of a business is unlikely to exceed 10%. This is an extremely benign rate of tax, and is unlikely to be much better at any point in the future. Any property that is used by a given security business sold at the time of the overall disposal will also attract the 10% rate to that profit as well.

In addition, this tax is payable at the end of January in the year following the tax year in which the business was sold. In plain terms, this means that if a business was sold in mid-April of this year, the tax on that sale would be due on 31 January 2007.

Anyone who sold up in March shouldn’t have done, as that one month earlier will mean that the tax is payable in January next year.

Once you have taken the decision to sell – after due consultation with your accountant and/or shareholders and partners – the first thing to be done is market the business. This could be to trade contacts you may already have or by way of advertising in trade magazines (such as Security Management Today!). The prospect of selling to a local competitor may fill you with dread, but it could make financial sense for both parties – even if it’s only a case of them removing a direct competitor from the market.

If you don’t want to sell to a competitor that is entirely your decision.

Marketing on the Internet

Companies can also sell themselves on dedicated web sites such as www.daltonsbusiness.com and www.christie.com If you are in any way hesitant about making public the sale of your business you could ask your accountant and solicitor to front the financial discussions for you and to vet enquiries on your behalf. Alternatively, you could use a PO Box number.

You ought to be aware that any general marketing methods deployed will uncover a fair few timewasters.

Whichever way you may choose to go about marketing your company you’ll need to furnish prospective purchasers with sufficient information for them to make an informed decision on the attractiveness of your business and its value. You will therefore need to produce a small pack of information which, as a bare minimum, must include the following set of essential details:

• a brief history of the business;
• your own brief history, and that of your fellow directors/partners;
• the Terms of Business agreed with your current suppliers;
• the Terms and Conditions of any contracts you give to your own customers;
• a list of all staff members with their ages and length of service (and, possibly, salary details as well);
• full accounts of all your working sites;
• any unique selling points (USPs) pertaining to the company;
• the latest set of company accounts;
• explanations of items in the accounts relating specifically to yourself.

You may ask potential recipients of the above information to sign a confidentiality undertaking. While this is Good Practice, it is very difficult – if not impossible – to rely on such an undertaking.

What about the price?

One of the Golden Rules of selling a business is to never reveal your asking price. Remember the old adage… “He or she who speaks first loses…” This will annoy some people, but in spite of their pleas to the contrary, nobody who is seriously interested in your company will fail to proceed with an offer solely because they have to suggest an initial price. If you do happen to speak first, then whatever price you give – even if it is an eminently reasonable one – will inevitably be used as a ceiling. No-one will ever offer you more than that figure, even if they were in fact prepared to pay more.

A major problem will arise, of course, if all of your concerted marketing efforts amount to nothing. What do you do then? Well, all is not lost. If you have some ‘able lieutenants’ within the business whom you believe could run the company without you, you may well be able to structure a deal that’s acceptable to both sides.

Any assets in the business – such as stock, debtors, equipment and premises – can be used by your team as collateral to borrow money against in order to pay you as part of the sale price.

If the company premises are freehold – or alternatively on a long leasehold – you could choose to ‘extract’ them from the business and rent them back. This has two distinct advantages – it lowers the price of the deal to your guys and affords you an ongoing rental income. Even if the business were to (eventually) fail under its new management team, this course of action will mean that you will not lose a valuable asset.

Confidential invoice discounting

If your business has an element of trade customers, they could be used to raise funds via confidential invoice discounting. There are a number of lenders (such as Venture Finance or most high street banks) who are more than happy to piece together a deal to raise funds by using all of the business’ assets. For the uninitiated, this is typically referred to as ‘structured finance’.

If this is not sufficient to raise the money needed – together with any funds your team can produce from personal sources such as friends and contacts, family or by borrowing some money against the value of their house – then you could lend it to them! A notion that is not as strange as it may seem.

The term Vendor Finance is well known in corporate circles. Basically, no money actually changes hands. Instead, you are given assurances of more money in the future. That may be a fixed amount on a fixed date or a variable sum dependent on, say, the future profits or turnover of the business. In addition, you could well receive interest on this ‘loan’.

Share of the profits

A variation on this theme is that you sell the business for a share of any future profits. For example, as part of the deal, as well as receiving some money up front, you are entitled to, say, 25% of the profits for the next, say, ten years. You would need some safeguards on how profit is determined, and perhaps be able to veto certain transactions or have the cost of those transactions excluded from the profit share calculation.

If you are considering going down this route there is one overriding imperative. It is what venture capitalists refer to as ‘Hurt Money’. You want your team to be totally committed to the business in which you still have a good deal of finance invested. You don’t want them walking away when there is the first hint of a problem and finding a job elsewhere as that’s easy for them to do. What you need to know is that it will hurt them to walk away and, while there is the carrot of them owning a business for little initial outlay, there must also be the stick of losing some funds they have previously invested in the business.

The best advice is not to consider Vendor Finance unless each of the new owners has put their hand in their pocket. It doesn’t need to be a lot of money in itself, but it does need to be a lot of money to the individual concerned. This ‘Hurt Money’ demonstrates their commitment. If they don’t feel confident in their ability to run the business then why should you?

Not for the faint-hearted

Clearly, the Vendor Finance part of any deal has great risks attached to it, and will not be for the faint-hearted. You would probably only consider it if (a) you have confidence in your team and (b) no better deal is available. You would also have to have the safeguard that any default in you being paid would result in the business reverting back to your ownership. You may not want the business back – after all, you are supposed to be ‘retired’ – but it does give you the option and some control over your own (and your family’s) financial security.

If you don’t already have people in the business that are up to owning and running the company independently of yourself then you could try and recruit such a person with the firm intention of them eventually becoming the outright owner.