By Wendy Carlisle
Leonard, Street and Deinard
In the past 10 years, advances in technology have led to innovations that impact every aspect of our lives. Now more than ever, we rely on the Internet for almost everything we do -- from watching TV and reading books, to social interactions, to keeping abreast of around-the-clock news.
This dependence on the Internet became even more solidified in 2007 when the first iPhone went on sale. Apps for the iPhone and its competitors have forever changed the way we interact with one another. They control every aspect of our lives, allowing us to find just about any source of entertainment, and conduct any life-management-task, on-the-go using our smart-phones.
Now POTS (Plain Old Telephone Service) lines are disappearing at an alarming rate as people switch to Internet phone service or just use their cellular phones. One large telephone provider estimates that people are abandoning POTS lines at a rate of 700,000 each month.
This cellular and Internet revolution has also changed the way people interact with, and what they expect from, their alarm system. Customers now demand more – from Internet access and apps that review the system’s status and openings and closings, to remotely watching live video feed from security cameras, to cloud storage of all security videos and alarm data, to total home connectivity. In short, customers want and expect instant information from, and control of, an alarm system at their fingertips.
In order to stay competitive as an alarm company today, you must stay abreast of, and offer the latest technology to your customers. And when the time comes for you to sell your business, or merge with another business, how tech-savvy your business is – or not – could affect its value. This could mean more money in your pocket – or less.
But what is value? And what you can do to position your company to get the best value if you decide to sell? It’s as easy as choosing the appropriate technology for your business, tailoring your contracts to reflect that technology and limit your liability, and implementing a business valuation technique that nets the most value for your tech-savvy business.
What is Value?
Value is what a willing buyer and a willing seller have agreed upon for a product or service that will enable its transfer from the seller to the buyer. While there are fair amounts of economic policy, accounting, and legal concepts involved, valuing a business is really more an art than science given the many different ways that can be used to arrive at a value, and the many factors that go into value. In the end, it’s a process of negotiation between the seller and the buyer, and it’s important to find a valuation method that the seller and the buyer both accept.
What Can You Do To Ensure You Get the Most Value for Your Business?
First, adopt the right technology. Does anyone remember back in the 1970s when both Beta and VHS formats were offered for video recording? For a time, it looked an awful lot like Beta would come out as the market leader. But, in the end, VHS won the day, and early adopters of Beta were left with worthless technology.
The moral of this story: Be an early adopter, but not too early. Your business should be cutting edge, but not to its detriment. So do your research and a bit of waiting to see who offers the best, sustainable technology for your business. Look for market leaders with established products, a strong customer base, great customer service, and training and support for the technology.
Adopting the right technology also means knowing what your customers want. For example, if your business is in Personal Emergency Response Systems (PERS), your target market is probably mostly people in their 70s and 80s. By and large, this demographic has not adopted smartphones or whole-house connectivity. So for this market, investing in the latest Internet and remote connectivity may not be necessary.
On the other hand, if it’s adult children buying PERS to monitor their aging parents, they may want this technology. It all comes down to paying attention to who your customers are, asking how they want to use your service, and then adopting proven technology that will help you to meet your customer’s needs.
The importance of contracts
Anyone interested in buying or merging with your business also will need to know that you have the right contracts in place to shield you from liability in the event of litigation. This means getting all of your customers under contract. I am astonished to hear that some alarm companies are still not doing this.
You need a contract with your customers, tailored to your business, which complies with your state’s laws and limits your liability and recoverable damages if you are sued, as well as waiving any right of subrogation.
The contract should also be tailored to the technology you are using, passing through the costs of the technology to your customer as appropriate, and specifically addressing liabilities that could arise from it (for example, cloud-based services being compromised or data being irretrievable).
Having up-to-date contracts will increase the value of your business because you’ll have an accurate count of your customers and your revenue for each contract, and also because the business’ potential liability won’t be a big red flag for a potential buyer.
Finally, when it comes time to sell your business, you will want to value it in such a way that takes into account the technology you have adopted; how it has increased your customer base and revenue; how it has increased intangibles such as goodwill; and how it has decreased your customer attrition.
What is the best valuation method for your business?
There are many different valuation methods available that are arguably appropriate to value an alarm business. Here are two widely used approaches:
Asset Valuation: In this approach, a dollar value is placed on all of the assets on a company’s balance sheet, and then added up. This includes all of the physical assets (including office furniture, computers and inventory) and any intellectual property, such as copyrights, trademarks, and patents. The value of the owners and employees should also be included.
Finally – and this is a biggie for an alarm business – add up the value of each customer’s contract, particularly the recurring revenues, even those still in negotiation. You can assign probabilities to sales efforts.
The Market Approach: This method estimates a company’s earning potential based on market demand, starting by estimating the size and growth of your actual and potential market. The bigger the market, and the higher the growth projections, the more value your business may bring.
Next, assess the competition – the more competition you have, the lower your valuation will be. But if your company can show it has an edge over its challengers (based on factors such as contracts with customers, location, first-in business, name recognition, and so on), this can edge the valuation higher.
Perhaps the best indicator of value under either of these approaches – of particular assets or market demand – is to look at similar companies that have sold. Every company is different, but this will give you a good comparison for your business.
What role does technology play?
Your adoption of new technology can be factored into either of these valuation approaches as an asset or as a factor in market demand.
Remember, this is more of an art than science. What is most important to how you arrive at the value is your ability to defend – when you are negotiating the price of your business with a potential buyer – how you’ve come up with the price you are asking for. If you can defend your methodology with logic, as well as records that support that logic, you are more likely to gain the buyer’s acceptance of your value.
Thus, at a minimum, you (along with your attorney/business broker/accountant) should back up the data in your calculations with detailed records of not only your current assets and liabilities, but also past data about how your business has grown, and projections for future growth based on that data.
To make the most of the technology you have adopted, show how your technology offerings have affected your business. Keep records of how many customers are using the technology you offer.
Also document how your business changes when you roll out new technology. Can you attribute any gain to the technology, either through new customers, more revenue from your existing customers, or less attrition? For example, once you started to offer an app for remotely controlling an alarm system, did you see an uptick in new customers? How many existing customers signed on? How much more were you able to charge per month for this service?
Advanced technology benefits goodwill
Also, don’t forget about your goodwill—intangibles that can greatly affect the value of your business, such as your reputation in the community, your stellar employees, your brand recognition, the broad territory you serve, or other factors.
Your adoption of new technology can make a big impact on goodwill. If you are the only company offering a particular service, or can argue you are the most skilled at using it, were the first to use it, or you’ve gained a reputation for generally being savvy with the latest technology, that is worth something. It should be included in the valuation.
I can’t wait to see what the next 10 years has to offer in technological advances. I can usually be found glued to my iPhone, so perhaps I shouldn’t be so eager for more distractions. But I am excited about the potential to use new technology for business advancement – particularly in the security and fire alarm industries.
For the good of your business – and its future value – I hope you are too. And I hope you take full advantage of your tech-savvy business acumen when it comes time to sell.
© 2013 Wendy Carlisle. Wendy is an attorney who represents alarm companies as part of the Minneapolis-based firm of Leonard, Street and Deinard. She can be reached at Wendy.Carlisle@leonard.com.