************************
COMMENT ON SELLING ACCOUNTS OR BUSINESS FROM MARCH 19, 2016 ARTICLE
***********************
Ken,
    Rick asked the question as to what the difference is between selling accounts only and selling the business.  This is basically a multiple choice question, as there are multiple scenarios at hand.  Some are:
 
1.  Selling the account base only
2.  Selling the business by valuing the assets
3.  Selling the business by selling the stock of the company
4.  Selling as a multiple of EBITDA
 
1.  Selling the account base only-  This is where a multiple is paid for the RMR only.  This is usually a smaller base of accounts and the dealer is either looking to get out completely or the dealer would like to sell a portion of his account base.  Selling a portion of the account base usually only works if those specific accounts are on a segregated line.
 
2.  Selling the business by valuing the assets-  Here we add other assets beyond the RMR to the sale.  In addition to getting a multiple times the RMR, the most frequent assets sold are accounts receivable, inventory and vehicles (as the seller keeps his cash).  The accounts receivable can be purchased outright, the purchase can exclude A/R over 90 days, it can have a declining percentage paid as the age of the A/R increases, etc.  The inventory also has a number of ways to be valued, such as all inventory, inventory still in the box, inventory purchased in the last 12 months, etc.  Finally, vehicles can be valued in more than one manner, including Blue Book value, assuming the leases, and more.
 
3.  Selling the business by selling the stock of the company-  This is where the buyer buys the stock of the company.   He purchases not only the assets but also the liabilities.  This is rare in our industry and generally only applies when the seller is a C Corp.  and is selling to avoid the double taxation.  The risk to the buyer is that he can caught paying for liabilities he didn’t know about, such as a tax audit for past years, an open lawsuit, etc.  The same valuation method as in #2 above generally applies.  The main difference is the additional holdback for liabilities not seen in an asset sale.
 
4.  Selling as a multiple of EBITDA-  In the monitoring side of the life safety business, well over 95% of the transactions are based on the value of the assets and not on a multiple of EBITDA (cash flow).  The reason is that when both ways of valuing are calculated, the asset valuation is almost always much higher than the EBITDA valuation.   EBITDA valuations are the main method used to value integration companies, who don’t have the RMR to make an asset valuation.
 
    There are many ways to sell your assets or business and the seller should work with someone who has worked through all the permutations above.  Most dealers only sell once and each should utilize the opportunity to maximize all facets of the sale.  I am available to discuss this further with any potential sellers.
     
Barry Epstein
972-740-2740
bepstein4@sbcglobal.net 
************************
RESPONSE
************************
    Barry and competent brokers specializing in the alarm industry can be found on The Alarm Exchange.  Their participation and sharing their knowledge on this forum is much appreciated.
*************************
WHAT ENTITY FOR START UP BUSINESS
*************************
Ken
    I have a question that requires expertise regarding IRS and a new alarm company.  I  have ordered the All in One thankfully,  but back to the business type.  After some research on your forum articles I found some references stating that filing corporation S status would normally best option.  Would this apply for a new start up as well?  Why and why not.  My accountant thinks LLC (sole) is only necessary to get started and I would prefer not to make a regretted mistake from the start.
Andrew
************************
RESPONSE
************************
    Your concern is well founded.  Changing entities is time consuming and often costly.  A little thought when you're getting started can save you lots of trouble and money later.  Initially, you're on the right track because you recognize that you have to create a legal entity to conduct your alarm business.  Doing business in your own name or a trade or assumed name is a terrible mistake.  It exposes you to liability that can be shielded with a corporate entity.
    You do have 3 choices, one of which you should not consider as a start up.  These are
corporation electing C status - this one should be rejected
corporation electing S status
Limited Liability Company
    Using the corp S or the LLC will achieve essentially the same goal, creating a legal entity to own operate the business.  Personal liability for contract debt will be shielded.  Personal liability for acts of others in your employ will be shielded.  Personal liability for your own negligence will not be shielded.  Both Corp S and LLC have pass through liability [under current law, which may change if the Republicans win the presidential election]. This means that the legal entity does not pay taxes because its profit or loss passes through to the stockholders of the corporation and to the members of the limited liability company.  
    A corporation, even a Sub S, will have to file it's own tax return, but pays not tax other than perhaps a de minimis filing fee.  A limited liability company with only one member does not file it's own tax return but reports it's income and expenses on the single member's personal tax return.  The tax consequence is the same as the profit or loss is taxed on the single owner's personal tax return.  
    Thus, for your start up you can consider either the corporation sub S or the limited liability company.  I am not surprised that your accountant favors the LLC.  However, I favor the corporation sub S.  It's cheaper to form, does not require an operating agreement or publication [forming requirements may be different state by state] and it keeps your personal return a bit cleaner because the business operation is reported on its own tax return.
    My office can form your corporate or LLC entity [tell your accountant to stick to accounting work] and you can give Jesse Kirschenbaum,Esq. a call to get started.  516 747 6700 x 317 or Jesse@Kirschenbaumesq.com