Companies buy companies to reach new markets and grow revenues and earnings. A merge is often considered as expanding two companies’ marketing and distribution, giving them new sales opportunities. A merger can also improve a company’s standing in the investment community: bigger firms often have an easier time raising capital than smaller ones. Investors must determine whether the purchase will be beneficial. In order to do so, they must ask themselves how much the company being considered is really worth.
Under the Microscope
When looking at your independent alarm company business, factors such as total revenue, recurring monthly revenue, internal growth rate, your location of accounts, staff (especially the owner and management), attrition (how much it costs to attain new customers) and debt are some of the many factors investors consider. Your inventory is looked at along with the status of your central station and company history.
It’s hard for you to know when a deal is worthwhile. If you are looking to merge with another security installing company, the first consideration is finding one with a healthy grasp of reality. Working with financial advisors and investment bankers, you will arrive at an overall price that you are willing to pay for that company. If everyone agrees, you go ahead with the deal. If not, you attempt to negotiate until all parties agree and the deal can be executed.
No matter which side of the table you’re on, or simply to grow your business, an important part of the equation is capital. Capital can be financial assets or the financial value of assets, such as cash and equipment owned by a business. In this sense, capital refers to financial resources available for use.
On the other hand, capital can mean the money you want to borrow. It is a good idea when seeking capital to secure financing from sources that are knowledgeable about, and specifically interested in, investing in the security industry. Here again, the cyclical nature of the security industry is at play. Where there once were many lenders interested in the industry, now it is fragmented and underserved, according to Gretchen Gordon, business development officer at CapitalSource. Gordon was part of a panel presentation at the conference, “New Players in the Alarm Industry.”
Capital Source acquired SLP Capital in April 2004. The company is focused on security, says Gordon, including traditional alarm companies, mass marketers and systems integrators. She also indicated that the company is expanding into new sectors and redefining security into new technology and markets.
“We are back” was another term heard throughout the event—be it companies or multiples. Richard Ginsburg, president and CEO of Protection One, discussed the problems and lessons the company learned over the last few years. Now that it is on the road to recovery, the company will be identifying and evaluating acquisition opportunities.
With increasing interest from investors and some of the largest companies in the industry looking to acquire, it’s likely that multiples for alarm companies will start moving upwards. Another presenter, Jim Covert, president Honeywell Security Protection, suggested that acquisitions in the 50X or even 60X RMR range might be possible.
Of course, lawyers are involved in all these dealings, representing parties concerned. Buchanan Ingersoll PC is a law firm with over 340 lawyers. Also one of the conference sponsors, the firm’s Security Alarm Group of more than a dozen lawyers in Pittsburgh, New York , Philadelphia and Miami, extends counseling to both start-up and established companies in acquisitions, dispositions, financing, tax planning, licensing, litigation, employment law, customer contracts and other day to day concerns.