Savvy Execs Shop Strategic Buys

Economic turbulence has caused many installing security companies to take a conservative approach to M&A. A select few, however, remain active in pursuing strategic growth initiatives. Four executives explain why their businesses continue to acquire…

Petrow: We are optimistic that 2011 will be another successful year for our acquisition successes. We will continue to look for acquisition candidates that make sense in terms of talent, quality of the customer base and geography. We have specific growth expectations for our existing locations based on their markets. We overlay an acquisition plan on the organic growth based on numerous factors, including growth into new markets, areas we want to increase our density and acquisition opportunities we think may be available.

Tolliver: We will continue implementing our strategic five-year growth plan, which laid out what we wanted to achieve internally for organic growth. It is really based on an RMR amount. We also incorporated a particular amount of acquisition growth. The economy to an extent has created some opportunities from an acquisition perspective. This is especially true with smaller dealers who have been concerned with uncertainties about health-care plans and capital gains tax.

As part of our strategic growth plan, the ideal acquisitions are within our footprint that we roll into our existing operations. It makes us that much more efficient and ultimately the RMR drives margin. We are able to manage our expenses that way and take advantage of the additional RMR through the acquisition. We target a variety of accounts or potential acquisitions doing mailings and so forth. Sometimes you get some nice surprises.

W
hat advice can you offer a security dealer who may be exploring an exit strategy?

Mahler: Be sure to have good contracts that are assignable and have the necessary liability protection for the dealer. You will also want to be sure to have detailed financial reporting with an accurate picture of gross and net — after resigning moves — plus, cancellation rates and A/R [accounts receivable] aging. Detailed information concerning their organic growth will need to be documented, such as average RMR per installation, profit margin on both commercial and residential installations, and number of installations for each of the past three years. Also, draft a complete organization chart with titles, time with the company and current compensation.

Nuccio: The most important thing to think about is what you would want to see if you were the one acquiring. Then you start to begin to get all your information in a format that is easily available. Having contracts with all the main clauses, such as limitation of liability, third-party indemnification, contract term and assignability, is important as most acquirers will have guidelines in order to get the deal through their process.

Next, it’s important you know how much RMR you have and have it reconciled against new sales and attrition. If you do not have a central station you must make sure you own all the lines and they are not commingled on any other receiver. If so, you would need to reprogram them onto clean lines. The more documentation you have, the smoother the process goes and, in turn, produces the highest valuations.

It is important you be able to give someone a comfort level of all your assets you are including in the sale. If residential, you need to have good credit scores or history of payment to ensure the customers are solid. In addition, your A/R needs to be very clean; anything over 90 is not going to be considered qualified so you must make sure you have good, clean receivables. Before you go to market do this audit on yourself to see how well you meet the criteria. The highest valuations are always for the companies that demonstrate best practices on contracts and customer support payment history with attrition information.

Petrow: Many sellers are very hands-on and don’t get an opportunity to step back and really look at their business objectively. My advice would be to set aside some time and really understand what you have. How much rate are you billing? Do you have contracts for this rate? Do you own the phone lines that are programmed in your control panels? Are your vendor bills accurate for monitoring services, etc.? To get the best value for your business, taking some time to audit your business is important because over time changes happen, mistakes occur, personnel leave and procedures aren’t always passed on accurately.

From a personal perspective the seller needs to determine if they are looking purely for a financial transaction or looking to continue in the industry. If it is a financial transaction, you want to make sure whoever you are selling to has a culture of customer service so that your customer base remains satisfied and attrition rates stay low. If the seller is looking to continue, they need to take time to understand the buyer’s culture, expectation and what their role will be post acquisition. Ultimately, you should look to work with someone you can trust. If you trust the people you are working with, you can work through all the details that will come up throughout the acquisition process and the result will be a positive experience.

Tolliver: I would first look at a quality regional company to sell to that knows your market and would focus on quality service for your hard-earned customer base. The other key has to do with old-fashioned trust and people you can work with and trust after the closing. Regardless of the initial thoughts and contract language, you will have ongoing contact with the company that acquires your customer base, and you want them to invest in the market and make decisions for the long-term benefit of the customers and company. It’s a partnership you want to be proud of in your community.

Do your homework and talk to other former owners who sold to the proposed company. Find out what level of trust they have in the company and ask for a reference list of sellers to contact. I would visit the company and talk to the employees, see if they are long-term and if they appear to be happy with the company. This is a good indicator of how they will treat your employees and customer base. What does the company’s strategic growth plan look like? Are they financially solid and viable for the future of your customer base? You do not want your customers to have multiple acquisitions moving forward that create ill feelings and chaos in the market.

If you enjoyed this article and want to receive more valuable industry content like this, click here to sign up for our FREE digital newsletters!

About the Author

Contact:

Although Bosch’s name is quite familiar to those in the security industry, his previous experience has been in daily newspaper journalism. Prior to joining SECURITY SALES & INTEGRATION in 2006, he spent 15 years with the Los Angeles Times, where he performed a wide assortment of editorial responsibilities, including feature and metro department assignments as well as content producing for latimes.com. Bosch is a graduate of California State University, Fresno with a degree in Mass Communication & Journalism. In 2007, he successfully completed the National Burglar and Fire Alarm Association’s National Training School coursework to become a Certified Level I Alarm Technician.

Security Is Our Business, Too

For professionals who recommend, buy and install all types of electronic security equipment, a free subscription to Commercial Integrator + Security Sales & Integration is like having a consultant on call. You’ll find an ideal balance of technology and business coverage, with installation tips and techniques for products and updates on how to add to your bottom line.

A FREE subscription to the top resource for security and integration industry will prove to be invaluable.

Subscribe Today!

Get Our Newsletters