Now may be the time to sell the company

Private equity interest is here to stay
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Monday, November 2, 2015

SCOTTSDALE, Ariz.—The financial environment for selling a security company is good and stable right now, according to Barry Epstein, president of Vertex Capital.

According to Epstein, there’s “More money chasing the sellers than there are sellers out there. Why? Private equity.” He does not foresee private equity groups withdrawing interest in the near future.

Epstein presented “Timing Your Exit: An Update on Multiples and the Multiple Threats to Your Account Base” at Honeywell CONNECT 2015, held here in late October. Epstein advises on acquisitions in the life safety industry, recently working with Per Mar Security Services in its acquisition of Northern Safety and Security.

Many top security companies are privately owned, Epstein noted, listing Vivint, Protection 1, CSG Security and Alarm Capital Alliance.

“Why do [private equity groups] like our industry so much? ... It's easy to get in, it's diversified, and it's easy to get out," he said. Diversified bases of many accounts are safer for private equity groups than companies with fewer sources of revenue. Private equity groups mainly look to grow the acquired business to sell it several years later to get a return on investment.

Current low interest rates play a role in a company’s price. “If interest rates rise, buyers will pay less,” he said. An auction process tends to yield a higher price and better terms than a negotiated deal because of the competition, he said.

Epstein also addressed the types of groups not looking to buy, such as large cable companies, telecoms and phone companies. One reason could be that acquiring a security company means inheriting problems with legacy accounts, he said.

There are differences between the sale of an alarm monitoring company and an integration company, he said. The number of buyers and location are additional factors in the sale of a monitoring company and more RMR makes an integration company more attractive, Epstein said.

DIY, non-traditional alarm providers and summer sales companies are among threats to RMR base. “Add DIY, that’s one of the best ways to cope,” Epstein told the audience. Add commercial as a “hedge,” Epstein advised; summer companies and cable companies don’t pursue commercial accounts.

The “jury is out” on DIY, Epstein said; some believe it’s separate from the alarm industry’s possible customers while others think it could steal potential accounts.

Companies need to own their phone lines and have contracts, Epstein emphasized. If a company doesn't, that makes them harder to sell, he said. The size of the company matters, too; larger companies generally get larger multiples.

For attrition rates, around 8 percent is “sellable,” nearing 15 percent is bad, and in between is negotiable, according to Epstein.