This article originally appeared in the May 2023 issue of Security Business magazine. When sharing, don’t forget to mention Security Business magazine on LinkedIn and @SecBusinessMag on Twitter.
If you don’t think the security integrator M&A market is busy and booming, spend an hour with Rory Russell. The 33-plus-year security industry veteran, who for the past 28 years has been the owner of Acquisition and Funding Services – a business broker and financer specific to the security industry – barely has time to think between phone calls.
During our one-hour interview his phone rang no less than four different times, and two of them he had to pause to answer, assuring a worried security business seller that he was about to make him rich.
He isn’t wrong. The security M&A market is currently enjoying a massive infusion of private equity dollars, and there are many a security business owner making
themselves – and their staked family members – quite wealthy.
He smiled as he told me how he brokered the sale of The Hartline Company of Florida to Pye-Barker Fire & Safety. “We are finalizing it today or tomorrow,” he said. “We closed it two weeks ago at [ISC West], and today they are [informing and transitioning] all the employees.”
What does it take to achieve a quality sale? I sat down with Rory to find out just that:
Security Business: Just how are things going right now with mergers and acquisitions from the integrator perspective in our market?
Russell: Obviously it is doing very well. Multiples are strong. As far as residential and commercial goes, I do find it is a little weaker in the residential arm of the industry. Buyers are looking for more commercial, and more buckets of different revenue, such as service revenue – testing and inspection, and sales – than just residential.
Residential can still be good – if the company has good payment history and all those particulars, it is still worth money; but finding the buyer for residential is more difficult today.
Is that a shift? Historically, residential has tended to be the leader in what buyers were looking for, I assume because of the monitoring revenue.
The monitoring revenue has been strong and consistent, but we are finding out that buyers are looking for more of a blend of residential and commercial customers – like 60-70% commercial and 30-40% residential. It seems to be less risk. The attrition rate is a little higher on residential than on commercial, from my understanding.
Do you think that attrition rate is due to DIY? Or is there another attributable reason?
I think it’s everything. It’s DYI. The door-knockers are not as prevalent as they used to be, but people are upgrading their systems, and they will go with another company that comes with a better widget or a better system. If a dealer is not prepared to upgrade them – to put in something that makes their home a little bit more comfortable – you might have a problem with your customer going to another provider of service. In residential, attrition has affected buyers’ willingness to put good money on the table for the accounts.
I think attrition [may be attributable] to not staying in touch with a customer. They are not communicating with a customer on a quarterly basis, by newsletter or email. You just can’t sit back and wait for the person to call. You should be in contact with those customers on an ongoing basis. You don’t want to bother them weekly or monthly. But a bi-annual or quarterly newsletter that says, ‘I’m here, hello.’
I think the best thing is to keep a customer as sticky as possible. It shouldn’t be just a security system. Give it more of an everyday use, and you’ll keep the customers.
When an owner comes to you or another business broker, do you recommend residential companies expand into SMBs before they do a sale? When you evaluate a company and you see maybe they have too much attrition, or they’re too focused in residential, what would you tell them?
Often, that die is already cast, and there’s not too that can be done in the near future. It would be a long-term effort to turn the ship around.
What are you seeing in M&A on the commercial side?
It is strong. We’re dealing with the baby boomers who are looking to get some or all of their chips off the table. There’s a plethora of buyers out there right now. You’ve got some regional buyers, but more so you’ve got a lot of national buyers that are private equity companies looking to get into the industry. They find it very profitable. Security is recession proof; it’s stable.
We’ve gotten through the roughest times in our industry – we’ve been through 2008, the cellular sunsets, we’ve dealt with COVID, and through all that it remains a very strong industry. There’s a lot of money out there in the world, and they’re looking to invest in our industry, especially in security, fire and integration. Again, the more buckets, the better. The different revenue buckets make it very attractive for private equity.
There’s been a rise in buy-and-build operations powered by private equity, like a Sciens or even Pye-Barker – they are buying to build a larger business. Is this a new way of going to market, as opposed to say, ADT in the 1990s?
I think the model the buy-and-build firms have learned a lot from mistakes made in the past, such as buying a company and not bringing the management or owners on board. When [these buyers] buy a company, they keep it business as usual. The phone number won’t be redirected to an 800 number or a switchboard. I think the secret sauce now is to keep everything the same; keep a local presence. Let’s keep the same people answering the phone, and not send calls to somebody in the middle of the country who doesn’t understand the culture of the area.
Successful companies like Sciens, Rapid Fire, Pye-Barker – there’s quite a few of them out there – they have learned from the mistakes of others.
Does keeping it business as usual apply to management as well?
Yeah, keep management in place, even take the owners who are able and willing, and keep them on board; keep them doing what they’ve been doing; keeping the ship going forward. They have built a profitable business, let’s not change it up.
Are you finding that many are staying? You mentioned the boomers, and those are they people who are trying to retire.
I can tell you that most of us will probably die at our desk. Not literally, but what I’m trying to say is if they cut their hours back from 60 a week to 40, that would basically be retirement for them. The new buyers like to have the owners at least do a transition a little longer than usual. I think you’re going to see that.
For most of those sellers, really, the business is a hobby. They don’t play three rounds of golf a week. I’m generalizing, but these people want to continue somewhat in the business that they sold.
When somebody who’s ready to sell their business reaches out to you or another broker, what happens next?
First of all, we have to get to know each other and I will send them a confidentiality agreement. I want to understand their business and what they are looking to achieve. Then after that, they will fill out a questionnaire, and get financial statements. A profit/loss and balance sheet is a good start. That shows the different buckets of revenue.
One of the things I strongly recommend is communication with a broker. It’s imperative that you communicate with each other on a regular basis. It can be every day, it can be every other day. But open communication is very important.
Once you’ve established this communication, and you’ve got your head around the business, how do you shop it around?
I don’t like to use the word shop. I don’t use shotgun approach or shopping. I’ve been doing this long enough to know what buyers fit with what sellers, and which sellers fit with buyers. There’s no sense in taking it out to the world. The fewer people who know, the better. In all my years of doing this, I’ve never had a situation where a seller's confidentiality was compromised.
I’ve noticed in the industry that there seems to be a lot more business brokers out there. As an integrator ready to sell, how do you go about choosing one?
The one thing I could say about the brokers in our industry is that we all play in the same sandbox. We play well together because it behooves us to work together. When there’s a situation, I get stuck or another broker gets stuck on a deal, I’ll talk to [another broker]. All of us have worked well together.
As far as choosing, I’m more of a boutique broker. I do not take everybody as a client. I’ll refer customers to other brokers. I can’t represent more than 10 companies at a time – I think to be comfortable and give value to my clients, I have to give them 100%. That means my cell phone is in my hand in the morning at six o’clock, and I’m available till eight, nine o’clock at night.
If you are selling your company, go with the broker who you think will give you the best service. When you have a question, when things start going off the rails, someone who is going to be there – not two hours later, not 10 hours later, not three days later. Because in all these transactions, they always have a tendency of going off the rails at some point, and [your broker] will be the one to put the train back on the tracks.
On our State of the Industry survey last year, I had an open-ended question: What multiple would it take to get you to sell right now? The responses were all over the board. What do you think the answer is?
There are certain companies where you just can’t get than the traditional valuation. Again, there’s a lot of variables there – the contracts, the payment history, the attrition rate, the stickiness of the customers. Each case is different. You can’t ask for 55 or 60 times for a company that only has $20,000 of RMR. It’s just not going to happen. Cash flow is another part of it.
Do you focus on profit multiples, or RMR multiples or both?
It’s a combination of both. The blend of the residential and commercial, how much RMR there is, and then the revenue. Revenue is a big factor. The bigger the company is, we’re looking at multiples of EBITDA.
Where do you think multiples are now? Have they gone up or down?
They are stable. They say interest rates affected buyers, and that the banks have tightened up a little bit as interest rates have gone up. Multiples have gone down maybe one or two, but I don’t see any big changes.
With so many acquisitions happening, it seems like the number of security businesses that need to come to a broker like you is rapidly declining. Am I wrong?
You’re wrong. Yes, some of the very large ones are getting picked off, and there’s only so many of those. But there are a lot of small to mid-size companies that still haven’t come to the table yet. There’s always going to be new blood coming into the business. I see a lot of young owners coming into the business. There’s plenty out there.
What other advice would you give to security business owners out there?
Typical business brokers charge 10%. National business brokers often ask for a retainer, sometimes as much as $50,000. I don’t advise anybody to use a retainer when they’re selling their security integration business…it’s not necessary. When the seller gets paid, only then do I get paid. I highly recommend coming to a short-term agreement between the potential seller and the broker consultant. I don’t like doing long-term agreements. If I can’t help the person in 30, 60, 90 days, we can take a look at it again.
All that said, even if you are not looking to sell now, at least open up dialogue with a broker, and get to know that broker, develop a relationship. So sometime down the road when the time comes, you’re not starting from scratch. I’ve got one customer who has been with me 10 years, and just now is a deal coming to fruition.
But to be honest, it’s a feeding frenzy right now. There’s so much money out there. If you are thinking about a deal, reach out sooner rather than later. There’s a plethora of well-qualified buyers with money.
Paul Rothman is Editor-in-Chief of Security Business magazine, a printed partner publication of SecurityInfoWatch.com. Access the current issue, archives and subscribe at www.securitybusinessmag.com.
