Lessons learned: One hot market
By Victor Harding
Recently I have been doing more and more work in the fire industry in Canada, either valuing fire companies or selling them. For me and others in the intermediary/broker/investment banker world, fire companies are slowly replacing alarm companies as the hot commodity in the mergers and acquisition business. Most of this interest is coming from private equity (PE) firms — not from the larger fire companies; they don’t seem to have the same interest in aggressively “rolling up” these smaller fire companies. In the last month alone, two major fire companies in Canada have been bought by private equity groups. What do these PE firms know that the rest of us have not yet figured out?
When shifts in buyer interest (to fire companies) and buyer type (private equity) like this happen I am virtually forced to adapt in a hurry. Often you do this by trial and error. Fire companies, as compared to alarm companies, are valued in a much more conventional way using a multiple of normalized earnings. And so far, I like dealing with PE firms.
By fire companies I mean what is generally referred to as fire service companies— companies whose most basic service is the annual inspection of all kinds of premises in their market area. Sometimes the inspection includes the sprinkler system in the building. These inspections are mandated by law in the fire code. The fire code is the bible. These same companies also often replace and re-charge fire extinguishers on a regular basis, install and service emergency lighting, in some cases do fire suppression work in restaurants and retrofit fire panels into various types of premises. The common characteristic to most fire work is that it is almost all mandated by law. This is one big feature that PE firms like about fire companies.
I am guessing there are close to 1,500-2,000 of these fire service companies in Canada. The majority vary in size from as small as $300,000 in annual revenue up to $5 million. Then there are the national players like Chubb, Simplex Grinnell, Vipond, Mircom, Troy and Viking. The majority of the smaller players employ three to 10 people, most of whom are technicians with some kind of fire certification. Note to anyone trying to get into this business: Finding CFAA-certified technicans is difficult, maybe even more difficult that finding a good tech for security work.
PE firms can be a broker’s dream! They generally know what they are looking for and will tell you quickly whether they are interested in what you have for sale. And they are not afraid to buy shares. They buy companies all the time so they have the buying process down pat. They know how to value a company and are often not afraid to pay a full price when you have a good company for sale. As an added bonus, if you pay attention, you can also learn about the industry from PE players by the way they analyze the business. Finally, they mostly always have the money on hand to do the deal. No need to talk to banks, which can add weeks to your deal.
So why are PE firms shifting their focus over to fire businesses? It is partly that their business is mandated by law. But I think it is also the fact that fire companies almost always make money and in some cases lots of it. I have had at least eight different fire companies as clients over the last five years and every single one of them made good money, i.e. 15 per cent of revenue dropping to the bottom line each year. For example, I recently did some work for a Canadian fire company doing $2.3 million of business annually that produced $580,000 per year of EBITDA or earnings. That is a 25 per cent return on sales. You won’t find alarm, integration or guard companies making that kind of money.
And guess what? Fire companies also produce recurring revenue. Today, fire inspection revenue and even the service revenue that comes after is treated and valued as a form of recurring revenue. It may not produce the same margins as monitoring revenue (55-70 per cent) but in many cases the attrition rate on fire inspection accounts is lower than with alarm accounts. Moreover, fire companies don’t tend to discount their installation or service work nearly as much as alarm companies.
Finally, fire monitoring revenue is much sought after because it tends to be higher margin, less active in terms of signal traffic, and “stickier.” Fire monitoring accounts cancel less. Amazingly enough, many fire service companies don’t search this fire monitoring revenue out.
The fire industry is hot right now and for good reason. Too bad the PE firms seem to be the only ones realizing this.
Victor Harding is the principal of Harding Security Services (firstname.lastname@example.org).
This story was featured in the October 2019 edition of SP&T News magazine.