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Buying the integrator

In an earlier article, I wrote about how difficult it is to sell installation and service revenue in the alarm market today. I tried to explain why this is the case — the fact that installation and service revenue is “one-time revenue” and not recurring. However, recently I did sell the shares of what I would call a small integrator — a security company where the bulk of the revenue and value in the company was not in the monitored accounts but in installation and service revenue.


November 3, 2014
By Victor Harding

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The deal unfolded much as you might expect. The seller got most of the value for his monitored accounts up front but the majority of the purchase price (for the installation and service revenue) will be paid to him over two years after the deal closed, assuming that his company brings in a certain amount of business. What was key about this deal is that the owner is staying on with the buyer after the sale.

There are dozens of companies in Canada like the one I just sold and many of these will come up for sale over the next few years. So allow me to make a few points to the owners of those companies and to potential buyers as well.

First, if you are the owner of a small integration company, don’t expect to get any interest in your installation and service revenue from the national alarm companies. As far as smaller buyers are concerned, first they can be more difficult to find, and second, many of them are not as familiar with acquisition values and come back with low bids. Also, many smaller buyers are simply capital constrained. The seller often has just enough RMR to add another $150,000-$200,000 to the final purchase price and the small buyer can’t handle this and the down payment for the installation revenue as well.

(As an important aside, there is a big hole in the Canadian security market in terms of companies that will provide financing to security companies that want to buy RMR in bulk to expand. If the smaller or mid-sized companies could find financing to buy the RMR portion of these small integrators, many more deals could be done and small and medium-sized companies could expand. The U.S. has this type of financing available. I know of only one company in Canada willing to lend against RMR. We need more. Happily, I have been talking to another company new to the security space that is looking at financing bulk acquisitions of alarm accounts.)

Where does this leave us? I think there is a great opportunity for a mid-sized alarm company that has capital to systematically buy up some of these smaller integration companies. They will not have to pay too much up front. They will pick up a block of monitored accounts and additional installation and service revenue brought in by the seller executing on his “earn-out.” They will be adding an experienced player to their team and almost always bring with them much needed technicians with extra capacity and expertise. I can see how this can work. I just need to find the “consolidator.”

Victor Harding is the principal of Harding Security Services (www.hardingsecurity.ca).

 


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