How to Build the Value of Your Security Company
A private equity expert shares what three aspects are key to growing the enterprise value of a company.
The business of commercial security and building management has never been more robust. Inc. Magazine estimates the global security market is on pace to exceed $100 billion by 2020. Drivers for this growth include advances in technology and increased consumer safety concerns for their person and property.
According to research site Statista, the U.S. alone has approximately 20% of the worldwide market. This is fueled by commercial building and business owners seeking cost-efficient, upgraded access control systems, as well as consumer curiosity in integrated smart home and smart-office solutions.
But does all this opportunity and market momentum translate to sales, profits and increased business value? As an owner of a business, are you as confident in your company and its value as you are in securing someone else’s?
In our experience, having invested in approximately 150 companies – including several in the building services, security and fire detection markets – growing the enterprise value of a company comes down to people, process and profit.
As a leader, you have come to appreciate the value of your team, but how deep are your management ranks? Do you have a succession plan or an identified group of leaders-in-waiting ready to take over the reins of your company? Your organization’s leadership team depth, their continuity and track record of working together through different cycles, and yes even their ability to lead without you, are all positive value drivers.
Likewise, if you’re preparing to sell your company, you should choose the buyer with the best people assets to maximize your valuation. Regardless of their percentage stake in your business or the acquirer, any investor in your business will want to grow your company and the value of their investment. Their ability to do so alongside you can directly affect your own long-term returns.
When our firm, Huron Capital, first identifies favorable investment themes, such as those that exist in the security market, we work with proven industry leaders, to launch an ExecFactor (executive backed) strategy. In our experience, people are the most important factor in company performance, regardless of the industry.
So, as we acquire companies through our ExecFactor strategy, we stress the importance of having an established industry veteran to help them grow and realize even greater value for their companies in the future as continuing investors. (We affectionately refer to this as taking a “second bite of the apple” when owners co-invest with us as the buyer and create the chance to get a second payday, as we collectively work to create equity value.)
Execution is everything in delivering sales, customer retention and profits but how you achieve these outcomes and its sustainability is critical to boosting the value of your business. Look at your operations and consider ways to improve, such as building a structured sales organization led by a strong leader and with the compensation system to reward not just new business, but also retention. Do you have a sales pipeline and what is the process to convert prospects into paying customers?
Other process considerations that build sustainability and, thus value, include your track record and methodology for cross-selling services to your clients, capturing a larger share of their security spend; your training and development programs that impact both employee retention and client execution; or implementing a feedback system such as a customer survey or post-project audit to remedy issues, but also capitalize on satisfied customers.
Of course, when Huron Capital looks to invest in a business, we assess the company’s ability to generate consistent and predictable growth in cashflow. Nearly every buyer — whether a strategic player looking to add your complementary business and service to their offering or a private equity firm looking to grow your business as a platform investment over the long-term – uses both a financial formula and an intrinsic assessment to value the business.
This is most often based on EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) times a multiplier. After taking a trailing twelve-month (“TTM”) picture of historical EBITDA (financial component) times a multiple (intrinsic component), most buyers can arrive at a valuation range for the enterprise value of the business.
While the financial component (TTM EBITDA) is a determinable figure, the intrinsic component (the multiple of the TTM EBITDA) in this value assessment is more subjective and influenced by several factors that may lead one to conclude a business has the ability to generate consistent and predictable growth in cashflow.
These subjective factors that can increase or decrease enterprise value include, among others, your customer concentration — the more of your business tied up with one or two customers, the more risk and less predictable your business may be, resulting in a reduction in enterprise value.
Conversely, a diverse customer base, breadth of services or products offered and/or geography are additive to your enterprise value as they provide more predictability in your future EBITDA and profits. Likewise, long-term customer tenure and contracts give buyers more confidence in your projections and financial outlook and positively impact enterprise value, as do specialized expertise or market segments that allow for price increases, better margins and longer-term agreements.
So, if you’re considering selling to a strategic buyer or private equity partner, or just looking to manage your business to maximize its value today and over the long-term, think of the three P’s that deliver consistent and predictable growth in cashflow — People, Process and Profit — to boost your company’s enterprise value.
James Mahoney joined Huron Capital over a decade ago and has more than 17 years of private equity experience. He plays a key role with several of the firm’s ExecFactor investment initiatives, such as Sciens Building Solutions, Albireo Energy and Valentus Specialty Chemicals. Mahoney holds a Bachelor of Arts in economics and political science from Villanova University and a Master of Business Administration with a concentration in finance and accounting from The University of Chicago.
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