KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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careful who you sell your alarm business to / mergers and acquisitions topic
April 26, 2018
careful who you sell your business to
Selling your business [in this industry that typically means selling your subscriber contracts with RMR] is often a once in a lifetime opportunity, and except for the sale of your home, the largest financial transaction many of you are likely to engage in. If you have built a small or large business your only choices are transitioning the business to family or friend, or selling it. Of course you need a lawyer in either case. You want the process to be clean, friendly and as simple as possible. You also want to minimize your legal and other expenses so your net proceeds is a much as it can be. But selling your business is not always the experience you are hoping for. And, that's the topic of today's article.
If you are lucky enough to get a 100% cash on closing deal then your risk is reduced. But that kind of deal is unlikely. More likely you are either going to self-finance the purchase by allowing a payoff over a number of years, or you're going to have a cash at closing with a percentage of "hold-back" which is typically payable after a year. That percentage can range from 10% to 20% or more of the gross purchase price before common adjustments. Whatever that hold-back number is, you should feel that it's substantial, and should be hopeful that you're going to get it or most of it after your guarantee period expires.
There are two important factors that influence your chances of getting the hold-back,
your contract with the buyer, and
your buyer's character and penchant for litigation
Your lawyer is responsible for the first issue; you are responsible for the second issue. In a sense you are responsible for both issues, because you are responsible for engaging the right lawyer to represent you on the transaction.
What difference does the lawyer make? All the difference. There is nothing routine about selling your alarm business. How could it be routine? The number of people in the alarm industry who have sold more than one, more than five, alarm businesses in their career can be counted on one hand. Now, routine for the buyer is another matter. Some buyers have engaged in many acquisitions and many are very set in their way how they purchase the accounts. Some use a lawyer who uses the identical form over and over with minor modification for each deal, and others don't bother using a lawyer because they have the "lawyer's form" and they think they can do the deal themselves. And you know what, some can, because they won't make any changes to their form. It's their deal and that's it. Some minor concessions to you and you may think they were flexible, but they are making the deal they want, for the most part. That doesn't mean you won't get a good deal, by the way, because you might get lucky and deal with a reputable industry buyer. Your lawyer will make a big difference in how smooth the transaction goes and how comfortable you will be with the transaction. Not being sure that you or your lawyer know all you need to know about the transaction could be unsettling. Whether you plan on a small or large transaction you can count on the Merger and Acquisition attorneys at K&K to protect you. We've done a few of these deals; a few hundred in fact. Small, medium and large. For our regular clients and those that engage us just for the transaction. For information, call me [you should have my number on speed dial by now] or Jennifer Kirschenbaum,Esq. at 516 747 6700 x 302.
Even your lawyer may not be able to help you the way you can help yourself when it comes to determining the character of your buyer. By character I mean integrity, honesty and someone who believes in treating people - particularly you - fairly. It's important because you are going to be "loaning money" to this buyer and the buyer is going to be able to reduce that indebtedness during your guarantee period. A less credible buyer may use that time to shake out your customer base. Worse, some buyers may have no intention of paying you the hold-back. They may come up with reasons why they don't have to pay you, or they may just not pay you, leaving you to whatever remedy your contract calls for. If your lawyer doesn't have litigation experience then he or she may not really understand what can go wrong and what may be involved in enforcing the contract. When the dispute arises, usually a year after the deal closed, the "transactional" lawyer is long gone. I've had to step in and clean up the mess. A contract that takes these risks and remedies seriously can often avoid a problem later. Another reason to call K&K for your transaction. Sure, I'll help you when you have a problem with your deal, but cleaning up someone else's mess is almost always more costly.
Fortunately you do have some influence over the two factors discussed. You can choose your lawyer carefully. Be leery of a broker recommendation unless you know the attorney's reputation. Peer recommendations is another option. [of course best option is calling me]. As for your buyer, that's your job. You can start by asking [even getting representations in the contract] whether your buyer has had any disputes regarding the hold-back or any other disputes with prior sellers. Any litigation with prior sellers? Ask for list of prior sellers and call them for their experience with this buyer. You don't want to deal with a buyer who is going to look for trouble when the hold-back is due. Keep in mind that most of you will be out of the business once you sell, hardly in a position to take back accounts or happy about litigating over the hold-back [and if you are not careful being exposed beyond the hold-back]. Better to deal with a buyer who has had no adverse issues, someone you would be comfortable making a loan to, because that's what you're doing.
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Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301
516 747 6700