Features Lessons Learned Opinion
So you want to grow by acquisition

I don’t see the residential market growing that much with the possible exception of those selling interactive services. In Canada, we are stuck at somewhere below 20 per cent market penetration — not a great statement about alarm systems. Secondly, if you are in the residential market today, you are competing against the likes of Rogers and ADT dealers who have financing and can offer more free equipment than you can on an ongoing basis. It seems only those with financing can compete full time in the residential market.

In addition, with the introduction of interactive panels, the Cost to Create a new residential account has gone up considerably in absolute dollars terms. As a result of all this, I don’t run into many ordinary alarm companies concentrating on selling and installing alarm systems.

Security dealers seem to be spending their time selling and installing mostly cameras and some access control systems of one kind or another. Despite the ever increasing number of cameras being installed in Canada every year, many companies express a desire to want to grow by some other means. I think these companies consider it a sign that they have “grown up.” Now they can look at building a dealer program or doing an acquisition.

I have said before that if you have a) the financing, b) a good brand and c) the ability to scale a program nationally, a dealer program is relatively risk free and more predictable way to grow. A dealer program can take two years to really get some traction and there is competition out there (ADT, SecurTek, Counterforce, Fluent Home and now Alarmforce) but with a competitive offer and a good “hunter” out finding new dealers, there is still room for another dealer program to succeed. After all, the residential market is only 20 per cent penetrated and independent dealers without financing can’t really compete.

The other standard way to grow is through acquisitions. In fact, most of the national security companies in North America — whether they are alarm or integration companies — have used acquisitions to grow a lot. Fold-in acquisitions of alarm accounts have been done in Canada for at least 25 years. They do work and can be done successfully.

Here, in a nutshell, is what I tell people who want to grow by acquisition:

• It is a risky way to grow that can cause you financial grief if you don’t know what you are doing. Only 25 per cent of acquisitions in all industries succeed.
• If you have not done deals before, consider getting an outside advisor to help you price and structure the deal.
• Analyze what you can pay using an Internal Rate of Return or a Forecasted Cash Flow calculation and pay accordingly. Never overpay unless there are real, tangible benefits for doing so.  
• Take more time integrating the accounts you buy than you took getting the deal done in the first place.
• Know that the more acquisitions you do, generally the better you will get at it.

Most of us know about the large alarm account buyers. With low interest rates today and a stable account base as an acquisition target, these buyers can pay anywhere from 30-40X the RMR on “fold-in” acquisitions (in their existing footprint) and make them pay. The higher multiples assume a bigger account base and usually require higher average monitoring rates.

If the alarm account acquisition is to open up a new geographical market for the buyer, my experience is that the account base has to be at least 2,500 accounts — enough to justify opening a branch. By the way, in general I don’t think that any of the big buyers do a very good job of integrating a new account base.

One problem for the medium sized and small players in the alarm industry trying to buy is very few can get access to capital in Canada. This is mostly the fault of our banking system. In the U.S., where there are 50 times the number of banks, banks have to compete and as a result have found a way to lend using RMR as collateral. Not so in Canada. This lack of capital has stunted the growth of the security industry in Canada.

What do you do if you are a small player and want to buy? I get asked all the time by smaller dealers across the country whether I can help them find a company or some accounts to buy.

I will tell you what I tell them:

• All the same rules about acquisitions in general apply to the small players as well, perhaps even more so. Doing any acquisition is risky. You need to take it slowly and not be afraid to get some outside help to coach you.
• At any one time there are not many companies or alarm account bases for sale in Canada.
• If I get a company or some accounts to sell, my obligation is to solicit bids from several buyers including some of the big buyers who are likely to pay more than the smaller player can afford.
• As a result, often the best way often for a smaller player to find and complete a deal is to try to find the acquisition target themselves.  Make a list of the smaller competitors around you and starting calling them to tell them you are interested in buying should they want to sell — and keep calling them every six months. I can help you value the deal if you should get a “live one on the hook.”

I will tackle the market and process for buying an integration company in my next column.  

Victor Harding is the principal of Harding Security Services