Security Solutions Mergers and Acquisitions Flourish in 2023, Poised for Growth in 2024

Security solutions sector’s resilience and the evolving economic landscape have contributed to a flurry of consolidation activities.

Security Solutions Mergers and Acquisitions Flourish in 2023, Poised for Growth in 2024

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The security solutions mergers and acquisitions (M&A) market experienced robust growth in 2023, surpassing the previous year’s performance.

The sector’s resilience and the evolving economic landscape have contributed to a flurry of consolidation activities, with private equity-backed buyers driving much of the momentum. As the industry gears up in 2024, experts anticipate continued growth, and stakeholders are advised to strategize their exit plans carefully.

The M&A market witnessed a surge in consolidation activities, particularly in the systems integrator (security and fire/life safety) segment, driven by private equity-backed buyers. Residential end market participants attracted significant interest, fueled by strong demand from homeowners.

In the commercial end market, rising construction values heightened acquirer appetite for targets with robust industrial surveillance capabilities.

Improving Outlook for Several Security Sectors

Despite an unpredictable macroeconomic environment, the Security Solutions M&A market is poised to build on the growth experienced in 2023. Inflation cooling and favorable equity market returns have contributed to the optimistic outlook for strategic buyers in 2024.

Simultaneously, escalating package theft incidents have driven demand for smart home surveillance and IoT-integrated products. Leading players have capitalized on this trend, achieving substantial revenue growth through subscription-based models.

According to Tom McConnell of Capstone Partners, the Security Solutions sector experienced a 5% YoY increase in M&A transactions in 2023, with 190 deals announced or completed. Private equity add-on acquisitions represented a significant portion, accounting for 48.0% of all deals and 88.3% of acquisitions by financial buyers.

Private equity-backed companies targeted the fire and life safety segment, with 38.9% of total transactions focusing on this area. Fragmentation in this segment made it ripe for consolidation, with many companies pursuing tuck-in acquisitions to enhance market share.

New Opportunities for Private Equity Buyers

With ramp-up in the broader M&A market, there is a pent-up demand from private equity companies, which are the biggest potential buyers in this space.

According to Kurt Takahashi, CEO at Netwatch Group, who has more than 17 years’ experience in the electronic security and integration space driving North American business through proactive channel programs, strong partner-driven relationships, and regional sales teams for physical identity and access management software, PE companies are looking for revenue, margin and KPIs.

“Watching margins and key performance indicators, with a big push for topline annual recurring revenue (ARR) growth, we foresee traditional security dealers/integrators with limited low growth in recurring monthly revenue (RMR) may trade as low as 5-6X EBITDA, whereas, fast growing dealers/integrators with high value RMR could trade from 18-20X EBITDA,” says Takahashi.

Jon Handy, Founder and CEO of LensLock, Inc., sees M&A interest increasing in wearable security/monitoring devices for police and fire departments.

Geolocation-equipped wearables, smart watches and body cameras that are equipped with GPS can record the exact location of police or firefighters, making it easier to track their movements and enhance situational awareness, especially in emergency situations.

“There’s a noticeable uptick in public safety organizations expressing interest in outfitting their personnel with wearable technology. This move aims to enhance the efficiency of emergency response while meeting the growing demand for transparency,” says Handy.

“Our company, LensLock, offers body-worn cameras and other digital surveillance solutions to aid customers in mitigating liability risks, improving response efficiency, and ultimately saving money for both public safety agencies and taxpayers,” he says.

“The potential for business growth is significant, yet it comes with the crucial responsibility of providing cost-effective solutions,” says Handy. “Companies like ours must leverage technology and automation, alongside lower overheads than larger vendors, to remain competitive in the market.”

As with most technology-based products, AI will play a big role in security solutions, including video monitoring to help detect threats in crowds or theft as it occurs in retail stores, casinos and hotels, and potentially, facial recognition and behavior/movement analysis to reduce human trafficking.

Trevor Outman, co-founder of Active Insights, sees a solid future for companies deploying advanced technologies that allow security companies to protect people, businesses, and brand reputations by mitigating, or even preventing, harmful events.

“We’re leveraging AI to transform surveillance systems in the hospitality, entertainment, and education industries, shifting from passive recording to active intervention, by combining artificial intelligence, machine learning, and behavioral analysis, and proactively identifying nefarious activities and sending real-time alerts that empower incident prevention throughout these complex environments,” he says.

“Our goal is to enable one million surveillance cameras, working in unison across the nation, to find missing children, save lives, and even prevent children from becoming trafficked in the first place,” says Outman.

Security solutions sector valuations averaged 13x EV/EBITDA in 2023, a substantial improvement over 2022. Median disclosed enterprise value for M&A deals amounted to $61.5 million, showcasing a 105% year-over-year increase.

A combination of pent-up investor demand, companies’ revenue growth, and the advent of new technologies – with interest rates possibly being cut this year – could mean higher multiples for acquisitions than we have seen before. In 2024, we may see several transactions in the 18-20x EBITDA range and beyond as more private money flows into this sector.

Be Ready When the Timing is Right

Business owners contemplating a sale or merger should prioritize an exit strategy by building a team of trusted advisors, including CPAs, tax and estate planning attorneys, wealth managers, M&A attorneys, and an investment banking team.

The goal of executing a successful exit strategy, liquidity event or succession plan involves a deep dive into tax, estate, and wealth planning strategies. Engaging financial advisors and legal experts can help owners navigate complexities and ensure a seamless transition.

It will be important to look at the corporate structure of the business to assess the most beneficial tax treatments.

C-corporations may be entitled to QSBS (Qualified Small Business Stock) treatment of their stock, per Section 1202 of the federal tax code, which allows any shareholder in business five years or greater, with an initial company valuation under $50 million, to access the first $10 million of the sale federally tax free.

QSBS “stacking” may allow even further tax reductions by gifting or transferring shares of the company to a spouse or into an irrevocable trust for kids – each person is eligible for the same $10 mm tax exemption benefit. Two other tax strategies for business owners include charitable remainder trusts, and donor-advised funds, which also can be used to help offset part of the tax burden.

For those who are inclined to give back by building businesses in their greater metropolitan communities, a qualified opportunity zone (QOZ) strategy is gaining in popularity. By reinvesting some capital gains in underserved communities to help revitalize them, sellers may gain a delay in taxes owed and tax-free status of the underlying asset if it has been held for 10 years or longer.

As the security solutions industry continues to evolve, stakeholders are advised to stay vigilant, adapt to market dynamics, and work with seasoned professionals to carefully plan their exit strategies to maximize value in this thriving M&A landscape.

Matt Hansen, CFP, CEPA, is a financial advisor and senior vice president with UBS Financial Services Inc., a subsidiary of UBS Group AG.

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