Selling the integrator
I have recently become involved in selling more small “integration” businesses. I characterize an integration company as one where 60-70 per cent of the annual revenues of the business are non-recurring revenue items, in particular installation and service revenue.
December 9, 2014 By Victor Harding
The owner here is not chasing the monitoring revenue as much as the installation revenue. Accordingly, the recurring monitoring revenue (RMR) is a much smaller piece of the business. They exist partly because relying on selling alarm systems alone does not make financial sense any more and partly because commercial jobs can produce good margins. The challenge comes when the owner wants to sell such a business. The owners rightly think their business is worth more than just the alarm accounts in it but getting buyers to pay full value for installation and service revenue is very tough.
If you break down the company’s total revenues into its various divisions (i.e. installation, service and monitoring) and apply all the relevant operating costs to each division including the overhead, the monitoring division often comes up as the division making money. Why would a buyer pay good money for a section of the business that is not making money? I recommend that owners get their accountants to do such a divisional breakdown to see how the different elements of their business are really doing.
Secondly, installation revenue by its nature is not recurring and depends in many cases on the connections and skills of the owner (not on any key salesman). This is one reason why it is easier for the seller of a small integration company to sell the business if they are prepared to stay on for a couple of years.
My experience is that the big national players will not attribute value to the integration or installation part of a business. Buyers for smaller integration firms are usually other small, integration firms looking to grow or a regional or national commercial player that is looking for a new office location. The problem is there are fewer of these buyers, they are harder to find and there is still a valuation to be agreed upon.
Integration businesses do sell, and sometimes at good prices, but the ones that we hear most about are the larger commercial businesses. Securadyne and Convergint in the U.S. have recently bought other integration businesses but the businesses they buy are substantial — $10 million of annual revenue and up.
Here are some tips I would give to owners of smaller integration businesses:
• Try to do business in a market niche that the buyer can exploit further after he buys the company.
• Get help — a broker or advisor. There is valuation expertise required and knowledge of who the buyers in this market are.
• Be prepared to end up selling to one of your competitors.
• Be prepared to be paid out over two to three years after you sell.
• Give yourself lots of time (eight to 10 months) to sell the business. It will take time.
Victor Harding is the principal of Harding Security Services (www.hardingsecurity.ca).
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