Newsletter Fall 2016

What we do – Our Mission Statement!

Our mission is to service the security industry in Canada - alarm, integration, fire, guard and locksmith companies - with the best possible advice in three major areas. Our primary focus is to act as an intermediary to help owners of security companies to sell their business. Connected to this, we also do valuations of all kinds of security companies. Thirdly, we provide consulting advice to companies regarding the design of authorized dealer programs mainly in the security alarm field.

Recent Developments in the Industry

All of us working in the security industry should count our blessings because our industry continues to grow in almost all its sectors – monitoring and service, installation, fire and even the guard side of things. Some tell-tale signs of this growth are a) the ongoing interest of private equity in the industry b) building automation companies like Johnson Controls buying into the security industry with their purchase of Tyco c) multi-purpose distributor Anixter buying straight security distributor Tri-Ed d) new entrants into the industry both large and small e) new buyers of alarm accounts popping up all the time and f) huge growth in the sale of cameras worldwide.

The challenge for all of us is to find a niche that produces good ongoing margins. The residential market served by regular digital dialers is not likely to be one of these niches. Today this market appears to be only for those with deep pockets or financing, and those that can do volume.

The one side of the residential business that seems to be active for many is the one that sells and installs interactive panels and the extra services attached to these panels. Consumers seem to love being able to turn their system on and off from their smart phones, look at cameras both inside and outside their premises and control items like their locks and lights. The early indications are these systems have lower attrition rates. If you are in the residential business and don’t offer this service, you really should consider doing so. I believe interactive panels will become the gold standard for alarm systems.

Today, most dealers I run across are surviving by doing endless small and medium-sized camera installations at margins between 25%-35%. This earns them a living while they are active but is unlikely to create lasting value when they eventually sell.

After selling several fire companies, I am surprised more security dealers don’t get into the fire side of the business. There is RMR in both fire inspection and fire monitoring. Most fire companies I see generate lots of cash. The fire industry, unlike the security side, is supported by legislation dictating buildings must have fire panels and yearly inspections. Similarly, I am surprised that many fire companies seem to ignore the RMR behind fire monitoring.

Enough of the generalities – let’s look at some specific companies. There are lots of good things happening. While there do not appear to be any shocking changes to ADT in Canada since it was taken private more than six months ago, I predict this event will eventually be a positive change for its customers and an unfavourable one for all those other independent dealers that have made a living off taking ADT accounts. I think it is a huge improvement that ADT Canada has its own President in Andrea Martin as compared to the years when it was a division of the US. If past experience is any indication, Tim Whall will lower ADT’s overall attrition rate and build ADT into a commercial and residential power house.

In the same vein, my sense is that Counterforce/Chubb Edwards is also getting its act together. Diane Herren and her team have designed and are curerently selling a new, quite slick Chubb-branded Dealer Program which should be a hit if they can get out there and really sell it.

Good things are also happening with Alarmforce which is going through a much-needed makeover and new branding. Before their new CEO Graham Badin came along, you might have thought that Alarmforce was more a marketing company than a serious security company. Among the many changes Graham has engineered is that Alarmforce has broadened its approach to the market by adding a Dealer Program. With the Alarmforce brand and some proper execution, it should be successful.

Securtek has also made some good changes by adding dealer reps in the markets where they want dealers and introducing some attractive new bundles for their dealer network. I like the fact that Stanley is actively trying to build the Microtec division they purchased 5-6 years ago. They tell me they are open to buying across Canada. Rogers is still plugging away with Smart Home Monitoring. Given that they have lost their CEO and will not have a new one for another few months; I doubt we will see much significant change there for the foreseeable future.

Bell Canada will own another block of alarm accounts when their purchase of MTS is completed. Finally, My Fluent Home, a door-knocking company based in Canada formerly called Titan, now has independent financing and a new dealer program which is getting traction.

Regarding the bigger players in Canada, on the integration side, the company to watch right now is Convergint. It is growing in leaps and bounds both organically and by acquisition. My guess, regarding future acquisitions, is that Tyco will be tied up for the next year or so getting integrated with Johnson Controls. This may offer an opportunity for those of you competing against them. G4S is showing some determination to grow the electronic security side of their business. Paladin, until recently predominantly a guard company, is making its presence felt in certain markets on the electronic side. Finally, I sense Diebold in Canada will benefit very positively from the merger with Securitas.

One niche I like for the future is video both monitored and non-monitored. I have run into several new entrants to the industry. Right now, there seems to be a never-ending demand for people wanting to look into their homes or businesses remotely. That seems to be the “low hanging fruit” of the video market. Video monitoring I am told is much more difficult to do whether it is the ongoing viewing of cameras over a period of time or video verification of certain events. Storage rates for video are going down. The success of HIK Vision alone has significantly dropped the price of cameras. Video analytics are improving every day. Very soon the police across the country will only be responding to verified alarms. This will put enormous pressure on all of the monitoring stations to be able to offer effective, well priced video verification services.

Available DEALS

• A successful integration company doing $5 million annually located in south-western Ontario
• A ULC approved monitoring station located outside Montreal QC with adjoining retail account
• A small security company based in SE Saskatchewan.
• A good sized security and fire services company located in the GTA
• A profitable fire and security company located in eastern Ontario
• A small integrator based in northern Ontario
• A major player in the fire services market in Central Alberta
• A well established integration and fire services company based in the Maritimes
• A profitable security and fire services company also based in north western Ontario
• A small fire services company based in the north east end of the GTA

Recent Tax ruling on sale of Goodwill

Effective Jan 1 2017, Canada Revenue Agency is changing the taxation of what they call Eligible Capital Property or what you and I would call Goodwill. Goodwill for most of you means your customer list or base. Prior to Jan 1 2017, if you sold “assets”, as a Shareholder you could get 50% of the proceeds from the sale of Goodwill tax-free into your hands and the other 50% taxed as active business income inside your company the small business rate of approx 15%. You still have had to pay tax personally when you move the remaining proceeds out of the company into your own hands. After Jan 1 2017, 50% of the value stemming from the of Goodwill will still go tax-free into the shareholder’s hands. However, the other 50% will now be taxed as a capital gain whereby half of the capital gain will be taxed at approx 48%. So you will pay more tax at the time of the transaction. That said, you do get most of the capital gains tax back through the benefit of the refundable dividend tax credit, if and when you pay yourself a dividend. So this change is mainly a timing issue. I suggest you talk to your accountant.

Business Value: High Level Concepts and Components

is an easy to read discussion of the difference between the standalone value of a business and the price the business might fetch from an arm’s length strategic purchaser. The article also explains the importance of long-term viability of a business to its current value. Every business owner should read this.

Written by Canadian valuation expert Ian R. Campbell, this article is reproduced with his permission. You can subscribe to his free Newsletter, the Business Transition and Valuation Review.

Tips to keep in mind when selling your business!

• Plan your sale well in advance of when you want to sell.
• Talk to your accountant ahead of time about the tax angles of any deal.
• For the sale of most businesses, it pays to use an intermediary who knows values and the buyers.
• Generally, the more buyers that see your business, the better the chances of getting the best deal.
• Selling recurring monthly monitoring is easier than selling one-time installation revenue.
• Count on the sale taking 6-12 months. Plan to stick around for at least 3 months after the deal closes.

Overall, the security industry is a growing industry in Canada when many are not and is an attractive industry to buy into.

Victor Harding – President

Harding Security Services Inc.

Toronto, ON M4T 1A3 CANADA

P: (416) 925-7474

E: victor@hardingsecurity.ca

If you are getting this newsletter . . . .

You are receiving this newsletter because you are in a senior position of a security company in Canada and I have talked to you or we have conducted business in the past. Alternatively, we could have Linked in together or, like me, you are a member of one of the following organizations: Canasa, CFAA, ESA or ASIS.

If you would like this newsletter delivered to another email address or if there is someone else in your organization who should be receiving this newsletter, please email me at victor@hardingsecurity.ca.

If you seller or a buyer of a security company . . . please contact Victor Harding at (416) 925-7474 or email: victor@hardingsecurity.ca.