PE Firms in Fire Protection, Security & Integration: Their Role in the Market
Image courtesy of AFS.
The fire protection, security, and integration market has undergone a lot of changes in the last few years. One trend that has significantly impacted business sales is the rush of private equity money into the industry as investment firms have recognized there are profitable opportunities to leverage.
Owners of fire protection or security integration businesses need to understand the role of private equity firms in the industry. If you’re planning on selling your business, a deal with a private equity company may seem like the best option and there’s a good chance that it is. However, you need to review aspects of the deal beyond the dollar amount carefully. That’s where guidance from an experienced broker can you find the best buyer and most advantageous terms.
How do Private Equity Firms Work & Impact the M&A Market?
Private equity firms are investment management companies that partner with big groups of investors to make money by flipping businesses. They do this by pooling money from these investors to acquire, manage, and ultimately sell companies that generate solid profits.
Once PE firms have ownership in a company, they make strategic changes to improve the business’s profitability. Their goal is to exit after a few years either by selling or through an initial public offering (IPO), making a profit for their investors.
The activity of private equity firms in mergers and acquisitions can intensify competition, drive up prices, and shorten deal timelines. With more money available for investments, they can outbid strategic buyers or competitors, leading to an increase in M&A activity.
Pros & Cons of Selling to PE Firms
Looking for quick answers on security topics? Try Ask SDM, our new smart AI search tool. Ask SDM →
Private equity firms in fire protection, security, and integration, just as any other industry, have both success and horror stories. An experienced broker would advise you to not just look at the highest price, but consider many other factors so that the business will continue to grow.
Potential cons to consider: Post acquisition, some PE firms launch aggressive cost-cutting plans where they consolidate or outsource back-office functions, accounting, payroll, and even sales. They sometimes also reduce staffing, merge offices and close smaller field offices, and make techs use their own vehicles — all to shrink overhead costs.
These firms may also try to increase pricing for long-term customers and even change from reliable product lines to get procurement savings.
Some PE firms try to trim equipment budgets by making every office buy from HQ — designated suppliers — which sometimes violates existing distributor agreements and ruins relationships with OEMs.
These actions can destroy a successful business, and sellers may lose loyal employees and long-time customers.
It’s a shame to see these working relationships destroyed because the seller took the highest bid without considering how the private equity firm would handle the business post-acquisition.
Potential pros to consider: Good PE firms invest in employees by implementing competitive, merit-based compensation plans and recognition programs for high performers. They also provide skills training where workers are paid while they study.
They build the company’s infrastructure by hiring salespeople, buying new service trucks, upgrading offices, and making targeted investments such as installing new enterprise resource planning (ERP) systems.
Forward-thinking PE firms put a premium on providing recruiting and training resources that make it easier to hire and retain skilled workers.
Proactive PE firms look to the long-term future by building up service offerings to boost recurring revenue and make the business recession tolerant. They also actively expand into other lines of business to create broader service offerings for customers.
While many PE firms assign money managers or M&A types to run the business and focus on profits, other better-run PE companies are managed by people with years of industry experience in building businesses.
This is a key reason why sellers should be more concerned about who is taking over their business, not just the final sales price.
Be Aware of the Impact of Deal Structure
Sellers want a fair price for their business, but they also want to ensure their employees and customers will be taken care of once the deal is complete. That’s why deal structure is so important.
Here are some of the key deal structure terms used by PE firms:
- Some PE firms will want to change management staff — others want to keep the present managers and even have a role for the owner going forward.
- In many deals, PE firms pay the seller, and that closes the transaction. Others give the seller an option to roll over part of the purchasing price into stock in the acquiring company and may even offer stock options to key employees.
- Some buyers make a high offer, but the payment is tied to measurable events such as year-end bookings, cash flow, and key employees staying with the company. This creates risk for the seller because someone else is running their business.
At AFS, we aim to help sellers find the right buyer, not just the highest offer. Our business philosophy is that it’s better for sellers to find a buyer who will preserve their years of hard work, protect their employees and professional reputation, and keep the business going strong.
