11 Ways to Maximize the Value of Your Security Company
From focusing on a vertical market to treating your competitors fairly, financial experts offer advice on what really matters to potential buyers.
The owner or owners of almost every security dealer consider selling their company at some time. Although the buying and selling process has gotten more complex in recent years, many dealers are getting strong value for their companies, according to people who buy and sell security companies.
Values of security dealers have traditionally been expressed as a multiplier of their recurring monthly revenues (RMR). Multipliers can be as low as the 20 range or as high as 50 or even more, but in general tend to cluster between the 30s and the 40s.
Whether a dealer is valued near the low end or high end of that range depends, in large part, on the size of the company, according to experts in this area.
“If you have 1,000 accounts, the multiples have been in the mid- to upper 30s,” explains Ron Davis, managing partner for Davis Mergers & Acquisitions Group of Long Grove, Ill. “If you have 100,000, you can break the 40-times multiple.”
Buyers look at more than just the number of accounts or RMR dollars, however. Key metrics include creation costs (what it costs to gain an account), attrition rate (how long accounts stay with the company) and margins, notes John E. Mack III, executive vice president and managing director of Los Angeles-based Imperial Capital.
“The best way to present an alarm company to the market for a sale is by showing you have optimized those three variables as much as possible,” Mack advises.
That has become more challenging as RMR becomes more diversified, including additional fees for remote control capability, video monitoring and the like. While RMR has increased, the margins on that RMR are decreasing because dealers are paying for cloud services to support some of these additional capabilities.
Some buyers may break a business into multiple categories and collect separate metrics for each category. The upshot, as Jim Wooster Jr., president of Alarm Financial Services, Corte Madera, Calif., explains, is that valuations are calculated on much more than RMR but continue to be expressed as a multiple of RMR.
The sources interviewed for this article offered some excellent advice about maximizing the value of a security dealer. Here are 11 of their most interesting ideas.
- Show strong growth. “If the industry is growing at x percent and you can show that you’re growing at x plus 10 percent, you can definitely get a premium value,” comments John Robuck, managing director and head of security finance for McLean, Va.-based Capital One.
- Boost RMR. Considering the importance of RMR, dealers may want to bill more services on an RMR basis, Wooster suggests. “Test and inspection is a good example. You could bill it as time and materials or put it in a contract and bill monthly.” Or for cameras, instead of saying, “Here’s the price per camera to buy it,” dealers may consider saying, “Here’s the price per camera per month for the camera and maintenance and remote video control and storage and response,” Wooster notes.
- Clean up past-due accounts. Buyers generally don’t pay for monthly recurring revenue on accounts that are 90 days past due, observes Barry Epstein, president of Dallas-based Vertex Capital. “You want to clean up your late payers,” he says. “Either get them to pay or cancel them.”
- Attention: dealers with their own central stations. Most buyers of security dealers’ assets aren’t willing to pay for the central station, Epstein notes. Sellers are best suited to understand the additional EBITDA, or cash flow, that will result once the monitoring is either outsourced or folded into the buyer’s central station, he notes. The additional cash flow can result in a significant increase in purchase price. “A lot of dealers don’t know they have this hidden gem in their business,” Epstein observes.
- Attention: dealers that use third-party central stations. These dealers should have their own phone line to the central station, advises Ron Stennes, owner of Buckley, Wash.-based Sierra Consulting. Otherwise those lines will have to be reprogrammed when the buyer takes over the accounts — and that cost could be reflected in a reduced price paid.
- Commercial accounts are valued more highly. Some buyers are concerned about the future direction of the residential security and home control business as new players such as Google and Amazon move into home control and security, observes Mark Sandler, managing director for SPP Advisors, Charleston, S.C. As a result, “There is a clear bias with buyers toward commercially oriented alarm companies,” he says.
- Don’t poach your competitor’s accounts. “You need to operate your business in a competitive but fair manner within the market where you operate,” adds Sandler. “If you’re poaching accounts, when it comes time to sell, if you call [your competitor] to buy you, if you don’t think [your past actions] will be reflected in your price, you’re crazy.... Nobody likes to pay for accounts that you stole from them.”
- Specialties can be valuable. “If you have a strong market niche, you may get a premium valuation,” comments Mark Melendes, managing director and head of the security industry group at Toronto-based CIBC Bank U.S. He has seen premiums paid for companies focusing on video monitoring, perimeter fencing, access control and do-it-yourself systems.
- “If you go deep into a vertical, you can offer tailored solutions that are more highly valued by end customers and buyers are willing to pay a bit more,” Robuck adds.
- Offer unique products. Offering uncommon products also can help a dealer stand out from the pack and get a higher valuation, advises R. Anthony Smith, president of Security Funding Associates, Tujunga, Calif. One idea, he says, would be to install in-home elevators — a product for which he sees growing demand as the population ages.
- Use industry-standard contracts. Considering how important RMR is, the wording of your contracts is critical. “If they’re not recognized as the norm, sometimes [dealers are] forced to re-sign everyone,” Stennes observes.
- Work with a broker. Brokers can help dealers get the most money for their companies. “We organize the bidding process,” Sandler explains.
- Good brokers can help dealers compile the financial information that buyers want to see and should be familiar with potential buyers, including those most likely to pay top dollar for the company — and when multiple potential buyers are interested, a bidding war may ensue.
- “Get multiple buyers on board,” Stennes advises. “With the proper broker, [they will] get into a bidding process. I always bring in three to four buyers; that’s how you drive the multiple up.”
Not Thinking of Selling?
Even dealers who are not thinking of selling their company at this time should keep these tips in mind. Doing so will make it that much easier when the time does come to sell, sources advise.
“You need to run your company today like you’re selling it today,” Smith believes.