Bigger Is Better: Roll-Ups & Consolidations
Businesses in the security and smart home industries are joining to become stronger. The goals of these mergers and acquisitions are to provide increased revenues and better growth opportunities — local, national and international. Change in business has always been happening. In the 21st century, and specifically in our industry, it is happening with unprecedented velocity. How might these changes impact your business and is it time to join in?
Transformation is happening in the security industry and service offerings. For example, Johnson Controls, a global multi-industrial company, and Tyco, a global fire and security provider, merged in 2016. Convergint Technologies made over 20 acquisitions around the world since 2016, and then Convergint itself was acquired last year by a private equity group, Ares Management. ADT’s aggressive expansion through acquisition was started by its merger with Protection 1 in 2016, followed by its purchase of Red Hawk in 2018, and continues with other strategic investments and mergers in both physical and cyber security over the past two years.
Take a look at the smart home industry; the same thing is happening. Starting in 2018, privately held SnapAV, leading provider of A/V, surveillance, networking and remote management products for professionals, purchased regional distribution companies Allnet (Midwest), Volutone (Southwest), MRI (Northeast) and Custom Plus Distribution (West coast). Recently, in a $680 million deal, SnapAV merged/acquired publicly held Control4 Corp., leading global provider of smart home solutions. This single organization combines the talent of more than 1,200 employees, supports global distribution and offers a unified and trusted, end-to-end partner for professionals around the world.
In the dealer landscape, a group of 15 independent smart home design-build firms providing luxury smart home systems have been working together for several years to standardize processes, streamline business practices, and reduce costs through economies of scale. Establishing uniform procedures, sharing resources, and lowering overhead expenses, individual company performance improved with annual profit margins increasing from 12 percent to 25 percent. Late this summer, they combined to create a new entity, Bravas LLC, with a $75 million investment by private equity firm Presidio. This merger united these 15 companies to achieve greater efficiencies of scale and productivity — the whole greater than its parts. With investment, Bravas will enhance their programs and expand with new companies joining in.
Right now, many security dealers see their golden egg as RMR. No doubt, it is valuable. But there is an opportunity to get an additional return based on delivering large revenue projects with profit. This can lead to acquisition or merger. What can be done today to prepare a company for this?
First and foremost, get “your house” in order with an industry-standardized chart of accounts, correct revenue (partial payments) recognition and accurate inventory accounting. Follow disciplined project management processes. Track labor hours, pricing and reconciliation.
Monitor your labor margin; it should be higher than what is made on products.
Define goals and motivations for transitioning the business. Keep the management team informed, involved and on board. Have a compelling and credible story to garner interest and inspire confidence among employees. Seek support and alignment among key stakeholders through transparency and communication. Consider key clients and partners that are critical for a successful transition and plan for their continued relationship and support. Be prepared for due diligence.
Remember, change is constant; preparing for it steers the boat in the desired direction.