The year ahead in M&A and valuations
The pandemic, the economy, demographics and low interest rates will all play a role in 2021
By Victor Harding
We should all count our blessings that we are in this industry. Not only is security generally less vulnerable to yearly economic ups and downs but we seem to have weathered the COVID-19 virus and the accompanying shutdown better than most.
Although we don’t have Canadian statistics available, I think M&A in general was down in the security industry, like most others, in 2020. I heard of very few integration and fire companies changing hands. Interestingly enough, I have read that although volume was down, valuations generally held. Based on what I hear from my contacts, some owners in the fire and integration sectors have been reluctant to put their company up for sale because they feared getting low-balled on price — a perfectly natural reaction. However, the alarm account market for M&A has been quite active throughout the pandemic. I am working on several alarm account deals now.
So what can we expect from 2021 in terms of M&A and valuations in general? Here are some early predictions:
M&A will come bouncing back: There almost has to be pent-up demand in the security M&A market just like many others. Owners who were worried about selling in 2020 will likely put their company on the market starting in the second or third quarter of 2021. I have potential clients who have told me they are waiting until the virus is past us before selling. Everything you read says there is a great deal of private equity money on the sidelines looking to be invested. By the end of 2021, M&A could be very busy. If it is a seller’s market right now, in nine months’ time the pendulum will swing back to buyers.
Acquisitions will be justified because organic growth is difficult. The shutdowns have made organic growth tough in various parts of the security industry. It is still very difficult to get into homes at all. Businesses that have been hit hard by the virus are not likely to pick 2021 to do a major security upgrade. Acquisitions in these situations may be replacing organic growth.Sellers will have to illustrate the effect of the virus to buyers. If a seller has been affected by the virus, they will need to show the buyer exactly what that effect has been and that they are recovering. Buyers look at the past, but buy the future, so sellers are going to have to “normalize” their 2020 earnings to show the effect of the virus and take even greater care in preparing their forecasts for buyers to review.
M&A is going digital: Zoom will replace on-site visits in deals, even after the virus leaves us, and why not! Zoom saves us all an enormous amount of time and money. More and more, entire deals will close without the buyer actually meeting the seller in person. Due diligence will be done remotely and online using Dropbox. Security companies that have proven themselves in the online world will be in greater demand. If a security company can’t sell online as well as in person, it will be at a disadvantage.
Some buyers will remain cautious: Economic slow-downs, like what we have seen with the virus, will make some buyers cautious. Setting up financing may be more difficult and time-consuming through 2021. We will likely see longer pay-outs, bigger hold-backs and more earn-outs. One buyer told me he actually dropped his recent offer because he was worried about the third wave! The virus has made revenue forecasts much more important.
There will be a flight to quality: In 2020, buyers snapped up the top notch companies quickly, but the less desirable were left behind. This trend will likely continue through 2021. You don’t want to put a company with problems on the market now.
The Baby Boom Exit is speeding up: The Boomer generation, born between 1946 and 1964, is a large bubble in Canadian demographics. I am a Boomer. Someone born in 1955 is now at least 65 years old. If they own a security business, they will soon be talking about an exit. I truly believe that we will be experiencing a higher number of owners wanting to exit their security businesses over the next five years. Three of the deals I am working on right now are happening because the owners are in their 60s or 70s and want to retire.
Extra government stimulus, low interest rates and a buoyant stock market will help make deals happen: Our federal and provincial governments are dumping vast amounts of extra money into the economy. Some of this stimulus will make deals happen. Secondly, we have been promised by the central banks that our ultra-low interest rates will be with us for at least the next two years. This helps deals to happen. Finally, our buoyant stock market propels people to spend and helps in those deals where equity is part of the purchase price.
All in all, 2021 should be a very active year for M&A in the security industry in Canada with the second half of the year probably being better than the first.
Victor Harding is the principal of Harding Security Services (email@example.com).