Private equity firms, fire protection, and the market today

The fire protection market has changed a lot in the last few decades. Although investors are not new to fire protection, recent years have seen a new rush of attention and outside money boost the industry. Private equity firms, in particular, noticed how profitable commercial fire protection companies are and started adding them to their portfolio of companies.

If you own a fire protection or security integration business today, it’s important to understand the role of private equity firms in the industry. Whether you plan to sell your business or not, this market change has likely already started to impact it and will continue to as time passes. So, here’s a quick overview of what you need to know:

What Private Equity Firms Do and How They Impact the M&A Market

Private equity firms are investment management companies that partner with large groups of investors to make money by flipping businesses. They pool money from these investors to buy and sell businesses, often improving their operations and profitability before selling them. They aim to acquire, manage, and sell businesses that generate a decent return.

Private equity firms operate in a few primary ways. They raise funds from institutional investors and high-net-worth individuals and use these funds to acquire companies. Once they own a company, these firms make strategic changes to improve the business's profitability. This may include streamlining operations, improving management, or adding services. Or, they may simply provide the extra resources the business needs to keep growing. Their goal is to exit after a few years by selling or through an initial public offering (IPO), making a profit for their investors.

The role of private equity firms in the mergers and acquisitions (M&A) market is significant. Their involvement can intensify competition, drive prices, and shorten deal timelines. With more money available for investments, they can outbid strategic buyers or competitors, leading to an overall increase in M&A activity. When a private equity firm decides to exit its investment, that business is typically put back on the M&A market, creating a continuous cycle of acquisition and sale.

Fire Protection and Private Equity: The Latest Match Made in Heaven

This pattern has been obvious over the last decade in the fire protection space. As more big players entered the space, owners of fire protection companies went from receiving a letter or two every few months to having stacks of offer letters on their desks. Fire protection services are recurring, generating a steady stream of revenue that is very attractive to investors. They are required and were deemed “essential” even during the pandemic.

They are also constantly evolving. As new regulations are passed or existing ones are updated, fire protection companies must keep businesses in compliance. Hence, the biggest obstacle they face isn’t a lack of demand. Apart from hiring needs, the biggest issue is how expensive it is to expand into new areas or services. Warehouses and service vehicles are neither cheap nor the new equipment needed to add a service.

That is why private equity firms are the perfect partner for fire protection companies. They can provide the funding the companies need to allow their growth to continue. The firms stabilize their investment portfolio by investing in an industry with recurring revenue. In return, they typically receive a majority stake in the company, which allows them to have some control over the final decision of when and how to exit their investment. Meanwhile, the fire protection company can reach new levels of success.

What’s Ahead for Fire Protection Companies and Private Equity Firms?

The increasing competition in the fire protection acquisitions space means the industry will evolve significantly over the next few years. The amount of small to mid-level investors will slowly decrease as the biggest players continue to grow and acquire larger and larger targets. Areas previously not impacted by these bigger players will have to contend with them once they acquire a regional company. Small fire protection companies will still succeed, but their ability to pick up larger accounts may decrease as more national providers enter the market.

This means that owners within the fire protection space should start thinking about how they want to handle this shift. If you own a fire protection company of any size, you will start to feel the impact of this transformation if you haven’t already. Talking with your fellow owners or managers about this and planning to handle the increased competition or shifts in demand in your area will help you weather the changes.