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.”


Still Building Your Business? Here’s the Latest on Lending

Not every dealer is thinking about selling any time soon. Instead, some are focused primarily on growing their business and may feel they can grow it more quickly if they can get a cash infusion via a loan, perhaps to expand into a new line of business or a new geography, or to make their own acquisition.

Those dealers who seek a loan will quickly find that lending to security dealers is a specialty, as not everyone understands the economics of the security business.

“Specialized lenders are better sources than a normal bank down the street because the bank down the street doesn’t value customer accounts,” observes Bill Larrabee, president of Sherman Oaks, Calif.-based Larrabee Ventures Inc.

Lenders who understand the security business tend to favor larger companies, however.

As R. Anthony Smith of Security Funding Associates explains, lenders “get more income from a large account than a small one for the same amount of paperwork.”

Dealers need to have RMR of at least $250,000 to be of interest to the investment banks that have specialists focused on the security dealer business, notes John E. Mack III of Imperial Capital. 

Below that, dealers may be able to get loans from specialty lenders, but they also have a cut-off point.

Alarm Financial Services, for example, will make loans of between $150,000 and $1 million. “The average loan we do is about $350,000,” comments Jim Wooster of Alarm Financial Services.

Those looking for smaller amounts in loans may want to consider a local bank, but should recognize that, unlike the specialty lenders, those banks may not recognize RMR customer contracts as collateral. 

“If you have other collateral — cars, land, etc. — go with someone local,” advises David Stang, president of Chicago-based Stang Capital Advisory LLC. 

Before borrowing money, dealers should recognize that loans may only get them so far. 

“It’s hard to finance more than 10 percent growth,” Mack cautions. “The cost to create new customers is quite high and you have to make it up with cash flow.”

On the plus side, John Robuck of Capital One notes that the specialty lenders that focus on the security industry can be more than just a source of funding. “In this industry, there has been a track record of a true partnership with our borrowers. A lender can do more than just provide capital. They can be a sounding board or matchmaker. They can introduce [dealers] to advisors, lawyers and acquisition targets,” he says.

Another piece of good news comes from Mark Sandler at SPP Advisors, who notes that people who specialize in lending to the security industry have started similar lending units at other financial institutions, broadening the pool of potential lenders.

“The lending landscape to the security industry is the most competitive it’s been for the last 30 years,” Sandler observes. “There are lots of lenders looking to make loans to the industry. Competition amongst lenders has led to more favorable terms and conditions for the borrower.”


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.


Interest Rates on the Rise

The financial community is expecting interest rates to increase soon. 

“For years, the prime was stuck at 3.25,” observes Jim Wooster Jr., Alarm Financial Services, in a reference to the prime rate that banks charge their most credit-worthy customers. “Now it’s at 5 and it will probably be at 5.25 before the year end.” 

Increased interest rates won’t impact security dealers as severely as it will impact some borrowers, however. The reason is that security dealer loans are typically for about five years. When it comes to monthly payments, “so much is principal anyway that the interest rate will have less impact [in comparison with longer-term borrowers],” Wooster says.

He notes that even though interest rates have increased almost 2 percentage points since 2015, dealers’ monthly loan payments have only gone up about 4 percent.  



Maximizing Value

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.

  1. 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.
  2. 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.
  3. 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.”
  4. 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.
  5. 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.
  6. 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.
  7. 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.”
  8. 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.
  9. “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.
  10. 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.
  11. 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.
  12. Work with a broker. Brokers can help dealers get the most money for their companies. “We organize the bidding process,” Sandler explains.
  13. 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.
  14. “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. 


More Online

For more on financial services, visit SDM’s website where you’ll find the following articles and a webinar.


Free Webinar: “How to Sell Your Security Business for Maximum Profit”


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“Financial Services: What’s Changed, What Hasn’t”


“Dynamark Offers Funding Program for Alarm Dealers”


“Security Partners Announces New Dealer Funding Program”