Buy the business
Companies can grow organically or by acquisition.
November 8, 2017 By Victor Harding
Each method has its own advantages and disadvantages. I would argue really successful companies tend to use both methods to grow and this maxim applies to companies of all sizes.
Generally, growing organically is a less risky, less expensive way to grow. Organic growth allows you to bring on customers one by one. These customers generally fit into your existing company processes better than with acquisition customers. Also the Cost to Create a new organic customer is usually less than what it would cost “to buy” that customer. In the alarm industry there can be a difference of 10X the RMR in terms of Cost to Create. My view is that every successful security company has to first develop a method of growing organically.
By the way I treat the authorized dealer programs that companies like ADT, Securtek and Counterforce have in Canada as a very good form of organic growth. These programs represent a low fixed cost way of bringing on new customers one by one. Each customer is vetted as they come on and must conform to certain parameters. Too bad other branches of the security industry cannot come up with a similar model.
But I think on balance organic growth only gets you so far. The successful security companies I run into have almost all done an acquisition of some size at some point. Their owners inherently realize that they are never going to really grow their business by relying on organic growth alone. Why is this? When I compare the security industry to other industries I think it is because of the lack of size of many of the companies-— they can’t afford salespeople and face the difficulty of finding good salespeople in the first place. It is too bad that more graduates, male and female, don’t look at the security industry as a prosperous career choice in terms of sales and marketing.
It is not by accident that most of the big security companies operating in the Canadian & U.S. security market today whether they be manufacturers (Tyco buying DSC), distributors (Anixter buying Tri-Ed), integration companies (Tyco buying Simplex Grinnell) or alarm companies (ADT buying Protectron) got to where they are partly because of acquisitions. It is difficult to imagine companies can really produce the kind of growth their shareholders want without doing an acquisition. This is not to say that all acquisitions are successful.
Right now is a good time to at least consider an acquisition particularly in Canada. Values are not stupidly high as a carry-over from the recession eight years ago. Certain regions in Canada are still suffering economically, which tempers price expectations on deals. If you can find money to borrow, borrowing costs are low. There is lots of private money on the sidelines looking to buy. The security industry is considered an attractive industry to buy into as the industry is characterized as somewhat recession proof and it continues to grow at good rates.
But the biggest factor favouring buying now is the lack of active buyers. Too many buyers tend to inflate the price of deals. On the alarm side the number of large active buyers is lower than it has been for the last 20 years. Several of the bigger buyers have been bought up, like VOXCOM and Protectron.
On the integration side, several of the bigger players that you would think would be buyers are for various reasons just not buying. Thankfully, others like Convergint and some regional players have stepped up. However, overall when I look at the pace of acquisitions south of the border and who is buying, Canada just not have the same sort of activity going on and it is disappointing.
Growing by acquisition is not mandatory for everyone. It presents more risk than growing organically and is generally more expensive than growing organically. You have to know what you are doing. It is a skill set on its own. It is best to pull together an acquisition team and develop processes for completing a deal from the search through the Letter of Intent to the Purchase and Sale Agreement and, most importantly, to the integration of the target. You cannot over pay. Finally, the more often you acquire, the better you get at it. All sizes of companies are capable of an acquisition— not just the big guys. If done correctly, they can be a much faster way to take your company to the next level.
Victor Harding is the principal of Harding Security Services (firstname.lastname@example.org).
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