Building a PI Practice to Sell

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Author: Pierre McLean

Most private investigative practices are first generation businesses which are established post law enforcement retirement for the practitioner to remain active, creative, and productive to supplement his/ her retirement. Whenever that tenure expires the business becomes obsolete, dormant and ends without realizing any profit for its owner beyond the cash flow generated in the business’s life cycle. The client base, reputation, brand identity, recognition and innovation are not capitalized and leveraged for a consummate payday at the end of the owner’s involvement in the business.

A private investigative business is a viable entity that has value which can be sold by the private investigator to current management, business competitors or unrelated entrepreneurs looking to enter the industry or expansion of their operation already grounded in it. This will provide resources for the practitioner to supplement retirement, embark on other entrepreneurial endeavors or invest in stocks, bonds, etc., utilizing the interest generated to supplement the lifestyle envisioned post retirement. The determining factor of sale price captured when it is time to sell is dependent on the business operation way before a business is marketed for sale. It may be prudent to structure the entire operation from inception to make it attractive as an acquisition candidate and also structure all expansions, specializations, branding, etc. with the objective of converting the value created into cash from selling the business. This does not negate the selection process of choosing a business entity structure for liability minimization, taxation, specialization dependent on experience, knowledge, aptitude or interest, demographics, but creates a paradigm to create an enterprise which will fulfill the exit strategy of selling the business and capitalizing on the equity both tangible and intangible that was created.

A private investigative business is considered a going concern when it is a viable enterprise satisfying the demands and requirements of current clients and poised for expansion to accommodate future clients. The more attractive its balance sheet, income statement, client roster, tenure of current clients, industry growth potential, innovative acumen and branding, the better the possibility to capture an exit price which the private investigator is satisfied justly compensates the magnitude of risk, effort and sacrifice required to build an investigative practice into a viable business entity worthy of being acquired by others who see its value as an income generating enterprise. However, this value is not static as market and industry conditions are constantly shifting which can have an impact on the ultimate strike price that a business is sold. Tax consequences notwithstanding, most business owners would like to sell their companies for all cash at closing. However, that may not be possible and the owner may have to be flexible in the way the sale is structured to facilitate its consummation by providing seller financing. Below there are a few prerequisite preparations that make a private investigative business attractive for sale.

1. Do establish an area of specialization and competency. This will help to establish your agency as an expert, determine your company’s client roster and company’s acquisition value. The buyer maybe looking to supplement its other areas of expertise and calculate that it is more cost and time effective to acquire a company already excelling in specialization than to allocate time and resources to develop competency.

2. Do not leave your business vulnerable to liability due to lack of general liability insurance. This can undermine the business you have built and erode its value as a result of litigation and the resources necessary for defense representation.

3. Do keep excellent records of contract and retainer agreements with clients, income statements, balance sheets, tax returns, licensing agreements, etc.

4. Do not cut your prices in a recessionary environment; it creates the image of being a discount operation which will affect the cashflow generated, valuation index and ability to recalibrate prices upward when the industry or market recovers.

5. Do reinvest as much as possible of your cashflow into the business to accelerate growth, this may take the form of adding personnel, equipment, knowledge base, etc.

6. Do consider utilizing adjunct specialized staff to create depth and breadth establishment in specializations, while higher level of competency is being developed internally.

7. Do not skim on marketing at any stage of the business cycle.

8. Do make sure your business is operated in compliance with state licensing and industry standards.

9. When you are ready to sell become knowledgeable of the sale process by consulting a competent attorney who specializing in selling and buying businesses, books on the subject, websites, a business brokers and get an independent appraisal from a reputable third party appraiser.

10. List your business with a reputable Regional or National Business Broker, classified advertisement in PI Magazine to a captive audience or www.bizbuysell.com, online prominent website which offers high exposure. If possible utilize all three for maximum market visibility.

Private Investigators are in the unique position to be able to facilitate the selling of their businesses by utilizing their investigative knowledge of background checks, asset searches, fraud investigations, due diligence, interviewing, etc. You are able to assess and evaluate the buyer’s capacity and intent to consummate the purchase and conduct your own investigation tangent to your legal counsel if necessary to mitigate any potential problems by using good old fashion gumshoe techniques.

Pierre A. McLean is the owner of Peace of Mind Private Investigators located in Forked River, New Jersey, an investigative consulting firm which offers a boutique of services. He can be contacted at Peace of Mind Private Investigators, P O Box 1004, Forked River, NJ 08731, Tel: (609)971-0356, Fax: (609)971-3999, email: macself@aol.com, website:Peace of Mind Private Investigators

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