Insights from a successful industry entrepreneur

Last month, Monitronics International entered into an agreement to acquire Florida-based alarm dealer Security Networks for more than $500 million. The transaction, which was finalized earlier this month, gives Monitronics more than one million accounts and a network of over 600 dealers.

At the time of the sale, Security Networks had grown to become the 14th largest security firm in the U.S. In fact, the company has placed in the top 10 of Security Dealer & Integrator magazine’s Fast 50 list of America’s fastest growing systems integrators in each of the last two years.

Richard Perry founded the company in 2000 and served as its’ president and CEO throughout the company’s 13-year history. SIW recently caught up with Perry, a 27-year veteran of the security industry, to discuss how the industry has changed, how he was able to grow his business during lean economic times and what the future holds for him as an entrepreneur.

SIW: How did you build Security Networks into a half-billion dollar enterprise?

Perry: I started Security Networks in 2000 and really what I was trying to do at that time was exploit what I thought were market opportunities that were based on the fact that the industry was coming out of a period of a lot of consolidation. ADT had been a big acquirer in the 90s and I just felt like there was a new opportunity to grow a significant business in the industry. We really started our growth spurt around 2005 when I raised some private equity and decided to take the business on a much larger scale and beyond just the South Florida region and that’s when I launched the affiliate program. The affiliate program really allowed us to grow rapidly because it employed the model where we didn’t have to invest in brick and mortar (locations). I partnered with independent alarm companies around the country that sold security systems on our behalf, so it was a very clean business model and one that allowed us to grow rapidly. Others have done similar dealer programs, but I do certainly think we improved upon the companies that did it prior to us and created a version of it that was very attractive and attracted a lot of affiliates over and allowed us to grow very rapidly from that point forward.

SIW: How have you seen the alarm industry grow and evolve through the years? How has the competitive landscape changed?

Perry: It has really changed a lot. When I think several years back, it was a much smaller industry and more off-the-radar in terms of the financial world and large corporations. Even today it is still a very fragmented industry… but because of the way it grows and the fact that it has been a very recession-resistant business, it has certainly caught the attention of telcos, cable companies, large private equity firms and all of the firms that you see in it today have, over the last 10 to 20 years, slowly started to recognize the fact that this is a (profitable) business. I think I’ve seen it morph over that period of time into a larger business with a lot more visibility. Of course today you can’t turn on the TV without seeing an ad for an alarm system – whether it’s ADT, Comcast or whomever. It is much more high-profile today that it was 25 years ago.

SIW: What kind of advice would you give other dealers about growing their own businesses?

Perry: First of all, it is a very capital-intensive business. Because it is based on a recurring revenue model, most companies invest in their customers and that requires a lot of capital. What I’ve always said is whatever you think you need in terms of capital; it’s probably going to be four times that because everyone always underestimates the capital requirements in the business. That’s something that I’ve certainly lived through in my career and something I’ve learned. It is also a very service-oriented, labor intensive business. We’re service companies – it’s life safety and so it’s a service that’s emotional for the customer and I think that’s one of the reasons why it has always been dominated by small companies because small companies typically can provide very high levels of service and be very responsive to their customers. This is an industry that really demands that, so I think that’s something any operator has to really focus hard on.

SIW: How did you manage to grow Security Networks through the economic downturn?

Perry: It was almost surreal because when we were going through what was such a dramatic recession a few years ago, our business was hiring and growing at a 38 percent pace every year. I will say that most of our affiliates, the folks that were out selling on our behalf, their direct sales model - they don’t wait for the phone to ring, they go out and get the customers, so I think that’s part of it. If they have to work a little bit harder to meet their quota they would just work harder, but they certainly don’t wait for the phone to ring. It’s another testament to the fact that our industry tends to be very resistant to downturns in the economy. I’ve been through maybe three or four them since I’ve been in the business and that’s always been the case.

SIW: How big of an impact has the move towards home automation and other functionality beyond security had on the market?

Perry: I think the impact has yet to be fully realized. I think we’re all on the leading edge or frontline of that wave right now. Certainly, the impact it should have and the Holy Grail is that it will transform the security systems that we’ve all been selling for years from a product that’s a passive product on the wall to a product that is being actively interacted with by customers every day; a product that they can’t live without and that will change the dynamic because it will change the attrition curve, the cancellation curves dramatically and of course that would have a huge financial impact on all of our businesses.

SIW: How would characterize the effect that recent market entrants such as telcos and cable companies have had on traditional alarm dealers?

Perry: So far, it’s a positive impact because those larger companies add a lot of credibility to the industry in general. They spend a lot of dollars on advertising and they really create awareness in the business. We’ve seen a lot of television (ads) and we’ve seen a lot of impact and what I think that’s done so far is helped the industry at large because it creates opportunities for everyone to get more business. Their impact in the long term, I think those large companies are a little bit like an elephant in a parking lot. They’re big and a little clumsy, but they can crush a lot of people before you can get them under control. I think they certainly have the potential to do a lot of damage (competitively), but we haven’t seen that yet. They operate on different metrics than most of us in the alarm industry in terms of what they can live with regards to customer acquisition costs and those types of things, so they have a different way of approaching the business and a different way of looking at and measuring success.

SIW: What do you think it is going to take to increase the penetration rate for residential alarm systems?

Perry: I think part of it will be adding products and services that appeal to a lot of people. Right now, we’re at the point where we’re trading customers. There’s a lot that going on out there where one carrier takes over the account from another carrier and it gets a little bit predatory, so I think the extent that we can really simplify and mass market these home automation-type services in a way that really creates a valuable service to the customer… that’s what will make a huge change and that’s what I think would increase the potential market out there.

SIW: Now that you’ve built and sold Security Networks, what are your plans for the future within the industry?

Perry: Security Networks was my second start-up, so I’ve done that and wouldn’t be opposed to doing a third. I feel like I still have the energy and interest in the business to do that, so my intention is to stay involved in the industry. There are so many changes going on right now that it remains a very interesting and exciting business to be involved in. I had a partner in Security Networks in Oak Hill Capital, a very well-respected private equity firm, and they had a great outcome in this transaction. We have a mutual interest in looking for another platform to possibly acquire and get involved with back in the industry. There are a number of ways that I could approach re-entering the business, but I’m certainly interested in doing that if the right opportunity presents itself.

SIW: Where do you see the biggest opportunity for growth within the industry?

Perry: There is more than one area, but one in particular of course is the residential business and the deployment of all of these enhanced services in the merging of IP and Wi-FI and broadband with security and lifestyle-type services. I think that presents a huge opportunity in the in the industry and I think there are similar opportunities on the commercial side.