KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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Can seller boost multiple by financing the deal
July 9,  2024
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Can seller boost multiple by financing the deal

            While many sellers express concern for their employees and customers, which is genuine, the bottom line usually boils down to what’s the multiple?
            For the uninitiated, multiple refers to the number that is used to multiply the RMR, which is the recurring monthly revenue.  It could be expressed in years, but the custom in the alarm industry is to use monthly.
            Alarm owners like to keep their finger on the pulse of the current multiple in the industry, even though that multiple really doesn’t change all that much.  The multiple can be low, 15 to 25 times RMR, for accounts with no or poorly drafted or executed contracts, archaic systems that will require upgrades, overly risky or difficult to service customer base [lots of reasons for this], or other reasons.  The multiple can also be at the higher range, 35 to 45 times RMR, usually because the contracts are up to date, customer base diverse and stable, RMR reliable, and other reasons.
            The typical deal is structured with cash at closing, between 80 to 90%, a one year guarantee with part of the purchase price held back, the infamous Hold Back.  The hold back is sometimes funded by buyer and held in escrow by one of the attorneys on the deal, or simply not paid at the closing and paid once the guarantee is over and a final calculation of the purchase price is made.
            How much a seller gets paid, how much the buyer pays [yes, it’s the same number], depends on so many factors each deal really has to be evaluated independently from others.  The buyers out there who have “their way of doing it” are probably not bothering to do a deep dive evaluation.  That’s fine; they can afford to make mistakes, but most alarm companies want to be careful deciding on what they will buy and how much they will pay for it.
            Buyers come in a few verities; those that have the money, those that use other people’s money, those that borrow the money from banks or lenders in the alarm industry, and those who borrow from the seller.
            How does seller financing work and why do buyers love it?  Couple of reasons:
            Seller financing basically means that the seller does not require the customary cash at closing ; rather the seller permits the buyer to pay the purchase price over a fixed period of time, usually three to five years. If there is a guarantee the purchase price is adjusted post closing. What’s in it for the seller?  Well the seller will typically get more money for the purchase price; the multiple will be higher.  Also, the payout will carry interest; it has to and it will, so don’t even think about a payout with no interest – IRS insists on it.  The interest on the payout will more than likely be more than the seller will be able to get if it received the money and then invested it in a safe investment [T-bills are paying 4.5%, same for CDs, municipal bonds 3.4% or so and higher risk investments in equity more, depending on the liquidity and risk factors].  Buyers who have to borrow like seller financing because the interest rate will likely be less than a lender will charge, so the interest rate sort of benefits both parties.
            Sellers need to assess the risk in the investment, which is the assets of the buyer.  While a seller may not need to ask whether it would be willing to make a loan to a buyer if there wasn’t a deal, sellers do need to be careful evaluating the buyer.  Risky buyers may include those with no assets or business who want to buy into the industry, buyers who, despite their size, are in debt up to their neck and just need to keep growing and borrowing to stay on course for their model or business plan, hoping the house of cards doesn’t collapse before the mammoth operation is bundled and sold to the next master of the universe with a hedge fund behind him.  Buyers worthy of seller financing also exist, and they are financially stable and a seller can feel comfortable that the buyer will be able to make the payments on the loan.
            Seller financing permits the seller to spread the tax consequence of the sale over the time of the loan because tax is incurred in years money is received.  There may be other tax considerations that I can’t and won’t opine on; that’s what the tax guys are for.
Buyers like the seller financing because they feel more secure with the purchase because with a five year payout, for example, they are essentially paying the seller with the revenue generated by the seller’s accounts, which of course assumes buyer will retain the accounts.  Buyers are also a bit more comfortable accepting all the representations and warranties that sellers have to give in the Sale Agreement because they feel they are holding the money owed to seller for longer than a one year period.  They also feel that the seller’s representations are backed up by more than the negotiated Hold Back, which is also usually limited to the attrition guarantee [at least it will be if K&K is attorney on the deal].
Seller financing could add as much as 5 points to the multiple, so instead of getting 35X you get 40X. Seller needs to decide if the risk of lending is worth it.
There’s so much more that needs to be considered when selling your company, or buying a company.  The best advice I can leave you with is, call K&K, sooner rather than later.  We are experienced as broker or lawyer.  As broker you’ll save around 50% on the broker fee; as lawyer you’ll be represented efficiently and each and every deal is structured to meet the needs of the parties, not because “that’s the form we kick out on the computer”.
Ready to sell or ready to buy, call Ken Kirschenbaum at 516 747 6700 x 301 or email Ken@Kirschenbaumesq.com.  You can also reach out to Stacy Spector,Esq at 516 747 6700 x 304 or SSpector@Kirschenbaumesq.com or Kathleen Lampert at 516 7476700 319 or KLampert@Kirschenbaumesq.com.

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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301
ken@kirschenbaumesq.com
www.KirschenbaumEsq.com