5 Essentials to Selling Your Security Firm at a Premium
Consumer spending and niche markets are giving alarm business owners a rare advantage.
The security and alarm services industry is one of the most profitable and growth driven industries to own a business in right now. With many economic factors such as consumer spending and aging populations tied directly to sales and revenues, the future of this sector is very positive. Due to our growing economy and financial comeback from the 2009 recession, a variety of buyers are entering the market looking for a successful security services firm to invest in. The massive pool of interested buyers coupled with forecasted growth has created a “seller’s market” and as the owner of a security services firm, gives you a very rare advantage.
The security services industry in the United States is massive and as Baby Boomers continue age out of the workplace and consumer spending increases, the value of this industry is only going to increase. Right now, the security service market is worth $350 billion, with dozens of independently owned security companies landing on the Inc. 5000 every year. Industry growth is projected at 4% for this year and employment is expected to grow 11% by 2022. Profit margins are around 5% and with only about 17,000 firms in existence, competition isn’t too severe. The security services industry also offers a wide array of products and services, varying from home security systems to pool movement monitors, smoke detectors, closed-circuit TV systems and guards. Niches like public school security are growing rapidly, with the HIS predicting an increase to almost $5 billion in spending by 2017. With such growth and opportunity approaching, it may feel counter-intuitive to sell your business but good financials and a profitable industry actually makes the timing perfect. The first step in selling a security services firm is getting a valuation. While only a professional intermediary can tell you the true value of your security services firm, these formulas can give you an idea of what factors matter in a valuation.
- 50% of annual sales includes inventory
- 3x SDE includes inventory
- 3x EBIT, 4x EBITDA
As the business owner of a security services firm, you may not be ready to sell quite yet, but these formulas and industry trends definitely give you something to think about. The best time to sell a business is when your financials are up and industry is growing and while you may be 6-12 months away from selling, this is the perfect time to begin taking steps to maximize the value of your business. These tips can help increase the listing price of your business and make your firm more attractive to buyers.
For firms offering a variety of services, the first step to making your business more salable is diversifying your accounts. The goal is to create an even mix of customers and revenue streams and avoid having a significant amount of business linked to one account. Businesses that have over 30% of their revenues tied to one customer are a huge red flag for buyers. Take the time now to work on bringing in smaller clients to even out your customer concentrations. Same concept can be applied on a larger scale in relation to your products and types of clients you work with. If 70% of your service work is with commercial clients, market your business to public schools or residential clients to balance that number out. If most of your sales are related to home security systems, try offering packages that include weather monitoring systems or smoke detectors to increase sales in those areas. An evenly balanced client and service concentration shows a buyer stability and during the course of working on this issue, you’ll bump up your revenue and increase your cash flow.
Cash flow is a major component of EBIT and EBITDA, which as you can see in the above formulas, are heavily weighted during the valuation process. Staying on top of your receivables is a critical factor to any successful business, but in the security services sector, efficiently managing your receivables can do wonders for your bottom line. Having a dedicated accounting staff that devotes time to chasing receivables will significantly help with your cash flow and balanced monthly revenues. Standard terms in the industry are net 30, but clients who surpass the 90-day mark without making a payment should probably be dropped. Keep your receivables current is a key factor in producing steady financials for potential buyers and no buyer wants to discover a consistent problem with getting paid.
Monthly service contracts are not a new concept to service businesses but they are a great tool to secure consistent revenues and repeat customers. If you have not implemented a strategy to actively obtain more monthly service contracts, this is something you need to look in to. For every security system you sell, replace or install, explain to the customer the value of entering a service contract with you. Security system contracts can come with additional services such as smoke detectors or medical monitoring and can also guarantee better pricing – all things that create value to clients. They are many ways to sell an annual contract to a client, and your technicians and sales people can pitch these benefits to customers. By building up your annual service contracts, you are increasing your recurring revenues and upfront cash flow which shows buyers financial stability and an established customer base.
Expand Your Products/Services
One of the benefits of working in the security services industry is that new opportunities are always presenting themselves as our society advances through technology. As our Baby Boomers age into retirement and begin to spend more time in their homes, they want to feel safe leading the industry into a more holistic approach to security. Home security systems now come with remote access and closed-circuit TV to make it easier to protect ourselves. Baby Boomers’ health is also contributing to a niche in the industry – medical monitoring. Security services firms can now offer ways for people to communicate an emergency by the touch of a button. These trends combined with others such as public school safety, commercial protection services, and online security opens the door to several new streams of revenue for a security firm. If you think you’re a year or so out from selling your business, consider adding a new product or service to boost your financials and start current with market trends.
Special credentials and licenses can really help with increasing sales and building a reputation in your community. Licenses build credibility with your clients and prospects searching for a protective service business are more likely to choose one with credentials. Licenses and credentials are a good marketing tool that shows your audience that you are an ethical company that values learning and respects organizational recognition. For a security services firm that provides an array of offerings, obtaining licenses in each individual department will give your business that extra edge. Licenses and credentials vary by state but we have listed a few options for firms in the Carolina’s below.
- UL Listing & Certification
- CSAA Five Diamond Certification Program
- IQ Certification
- Security Industry Association
- Electronic Security Association (ESA)
- False Alarm Reduction Agency
While owners of security firms need to carry a Class C & D license of their own, these additional options for accreditations that can help separate your firm from the rest.
For the owner of a security services firm, the next couple years are going to be a perfect time to sell your business. The Southeast is packed with buyers actively looking in the security industry for a prosperous firm that has shown consistent growth and if that sounds like you, the time to start preparing is now. At some point, every business owner needs to think about their exit and hopefully, these tips will help you prepare. Viking Mergers & Acquisitions can help you to understand where you stand today and how far you need to go. Our no-cost, no-obligation valuation is a priceless tool that all business owners should equip themselves with. The forecast of the security industry is incredibly bright; prepare yourself for the next step and start thinking about your future today.