Newsletter Fall 2019

The Services we offer:

Harding Security has expanded its services over the years. All our services below are now being offered to owners of alarm, integration,fire, guard and distribution businesses across Canada including Quebec.

1. Selling your company? If you have decided to sell and want help all the way through the process, we can look after you. This is our bread and butter.
2. Selling your company and already have a buyer in mind? We will provide an expert opinion on the Buyer, their offer, and help you close the deal.
3. Need a valuation done? We are performing more valuations every year. We are not Chartered Business Valuators but are often less expensive than CBVs and more accurate when valuing recurring monthly revenue. We have also been retained to provide an expert opinion in valuation disputes.
4. Looking for a company to buy? We can help you perform the search and close the deal. We charge a small monthly retainer to perform the search and a success fee if we close a deal.
5. Looking to buy and already have a company in mind? We are doing more and more of this kind of work. We can help you value the target, and structure and close the deal. We can also provide many of the required forms.
6. You are a Buyer looking for ongoing buying opportunities? In certain cases, we will enter into a Buyer’s Agreement with a big buyer to exclusively bring them deals. .
7. Designing an Authorized Dealer Program? We can help you design or re-design an authorized dealer program. We also help dealers choose the right program for them and negotiate their particular deal.
8. Post acquisition Investment Advice? This is particularly useful to Sellers after they have sold – how to invest their purchase price. We have a relationship with a Canadian chartered bank which can offer you different types of investment advice.
9. Looking for acquisition financing? In certain circumstances, we can help a dealer obtain financing for acquisitions of mid to large sized alarm companies.

Recent Industry Developments relating to Mergers and Acquisitions

Our Newsletters focus strictly on mergers and acquisitions activity in the various segments of the security industry. This is the area where we have the most experience.

The big M & A deals in the Canadian industry in the last year are headed up by TELUS’s recent deal to buy ADT Canada. The deal closed 10 days ago. It was a relatively inexpensive deal at $700 million for 500,000 accounts. We calculate this at less than 40X RMR. It is a bold move on TELUS’s part. In one stroke, they become by far the biggest alarm player in the country. One question is, do they possess the know-how to integrate all of ADT Canada with its 2 languages, 3 monitoring stations and its authorized dealer program? We should not be surprised that ADT US sold ADT Canada. It was a burden on their overall earnings and growth, and ADT Canada was experiencing larger than normal attrition. For those doing M & A deals in Canada, losing ADT Canada was not a great loss because they had done very few deals over the last 10 years in Canada. In fact, if the TELUS experience in Western Canada is any indication, TELUS may be more active than ADT Canada was.

Moving on, we note the initial deals that the newly formed electronic division of Garda has done in Quebec over the last 18 months. Daniel Demers, the former CEO of Protectron, is the CEO of this new division and seems to building Garda in Quebec as he built Protectron, growing both organically and by acquisition. We look forward to when Garda is ready to tackle Ontario and Western Canada.

Some buyers in Canada have gone quiet while others have stepped in to take their place. Chubb and its affiliate, Counterforce and Johnson Controls/Tyco, don’t seem to be as interested in doing acquisitions these days. We should be thankful that API, SecurTek, Wilsons, Avante and Stanley on the alarm side, and Convergent and some private equity firms on the integration and fire side, have taken their place.

Lately, we are doing more deals with private equity (PE) firms in Canada. For us, working with private equity buyers has generally been a good experience. PE firms are almost always on the lookout to buy. They move quickly on deals, know the M & A process, will generally buy shares and are willing to pay a full price.

An ongoing concern in the Canadian M & A security sector that we have talked about before is not enough companies have access to capital to grow. Canadian banks for the most part do not lend on the value of RMR. This is not the case in the US. As a result, Canada does not have the same number of mid-size or large security companies. An ongoing project for us at HSSI is to assist security companies in Canada to get access to capital from the banks. We have been working with one or two of the chartered banks. So far we have been successful in getting three different companies in the alarm sector access to capital. Contact us if you are interested in talking about this.

We believe the Canadian security industry, much like other industries in Canada, needs more large companies, companies that have been able to scale up.

Here are our comments on the different sectors in the M & A market.

The Alarm Account Market

Here is what we think is worth paying attention to in the alarm account market today:

• There are fewer big buyers to turn to making the market less liquid. The few remaining buyers don’t seem to be able to process deals quickly. We feel they are missing an opportunity.
• Overall, for a variety of reasons, multiples for blocks of residential accounts have retreated a little – commercial accounts not so much.
• When you add up the activities of TELUS, Bell, Rogers, Eastlink and Sasktel, the alarm sector appears to be being dominated by the telcos more and more. It is tough to compete with the telcos’ offers. We see this trend continuing.
• Today the big buyers of alarm accounts in Canada will rarely buy shares.
• Commercial accounts are more attractive to buyers than residential accounts. They have better attrition stats, are easier to service, and are more lucrative.
• It is more important than ever to have your alarm accounts on a call-forward line. Buyers simply don’t want to move accounts one at a time after a purchase.
• Signed customer contracts with a proper waiver of liability are very important today.
• Smaller blocks of accounts (<200) are becoming much more difficult to sell and are worth less than they used to be (24X or less).
• TELUS is making the residential market in Western Canada very difficult to compete with. We don’t see this changing anytime soon.
• The move to cell, interactive and home automation services for alarm systems continues to grow every month. Land-lines are disappearing.

Commercial integration market

Here is what we see happening in this market:

• The Canadian and the US M & A market currently likes good commercial integration businesses, particularly those with $5 million or more of annual revenue.
• However, it still takes longer to sell a commercial integration business in Canada than in the US. There just are not as many buyers. Sellers should allow 12 months.
• Integration businesses are being valued using a multiple of “normalized” EBITDA (Earnings before Interest Taxes Depreciation and Amortization). The multiples vary from 3-6X.
• The good news is the buyers of integration businesses will generally still buy shares.
• It is easier to sell an integration business if a) the business has a solid niche in a couple of different verticals such as healthcare or education, b) the business is located in the big cities, and c) the owner stays on after the sale.
• In some cases, buyers will ask for an earn-out in their offer for a commercial business.
• Although buyers are looking at the past in arriving at their purchase price, they are buying the future and whether the integration business can be “scaled up”.

The Man Guard Sector

A few key points to note about this sector:

• For some reason, the larger international guard companies, Garda, Securitas, and G4S are not doing as many deals in Canada recently.
• However, Avante Logixx in the GTA is active in the guard sector having bought both Intelligarde and ASAP Secured in the last year. They are aiming to become a national, multi-service security company.
• Owners of guard companies should know their companies will normally be valued as a multiple of “normalized” earnings.
• Buyers want to buy guard companies with solid, long term, profitable guard contracts, preferably documented by a written contract.
• Increased minimum wages in various provinces across Canada have made life challenging for many guard companies – i.e. having to adjust to both billing and wage rates.
• Several of the larger guard companies are continuing to diversify into electronic security.
• IP cameras and video monitoring are slowly replacing guards in various situations.
• The guard sector does not have the same strong member associations as the alarm, integration and fire sectors. This makes it more difficult to search out buyers and sellers in the sector.

Fire & Sprinkler Service Companies

Here is what we are seeing happening in this sector:

• Typically, fire and sprinkler companies are more profitable as a % of revenue than alarm and integration companies, year-in, year-out.
• Buyers from inside and outside the fire industry are gravitating to this sector because a) fire services work is mandated by law and b) the companies in the sector are profitable.
• At least two private equity firms have recently purchased fire companies in Canada with the intent of building a country-wide fire company network. Georgian Bay Fire and Security was recently sold to a US based PE firm.
• Private equity is being a lot more ambitious about acquisition growth in the fire sector than the local national players like Chubb, Vipond, or Tyco/Johnsons Controls.
• Fire inspection and service revenue is being valued these days as recurring monthly revenue, albeit at a lower multiple than monitoring revenue.
• CASA, the organization of sprinkler fitters, has recently been more aggressive about making sure sprinkler work In Canada is being performed by properly qualified and certified CASA members.
• We have sold 5 fire businesses in Canada over the last few years. All were sold at fairly attractive multiples of earnings of 4X and above.
• There is still plenty of room for consolidation in the fire sector in Canada.

The Monitoring Station Business

There has been some activity in the monitoring station sector:

• HSSI has sold 4 monitoring stations since starting their business in 2009. In 2019, we sold Consolidated Monitoring located in Edmonton, Alberta to Armstrong’s Monitoring, originally located in the Maritimes.
• There are several good reasons to buy a monitoring station. The revenue recurs year after year. Secondly, if you are an existing station, you get a back-up station – something ULC is going to demand in the near future. Also, existing stations can spread their total monitoring load out over different time zones by buying another station. Finally, you are also buying new revenue when you buy a station.
• There is no question that the monitoring industry in Canada and the US is moving away from doing your own monitoring to out-sourcing it to third party wholesale monitoring companies.
• On top of this move to wholesale monitoring, we are also seeing wholesale monitoring moving to the larger stations who can also offer better prices and more advanced technology.
• There are still too many small monitoring stations in Canada. By small we mean stations with less than 30,000 accounts. We believe that these stations will either get sold or gradually lose their accounts to bigger stations.
• As for those dealers with less than 15-20,000 owned accounts that are still doing their own monitoring, the numbers show that this makes no organizational, technological or financial sense. Larger stations can do it better and cheaper.
• We are also watching the growth of the video monitoring sector in Canada. We see an increase in the number of dealers building their businesses on video monitoring. There are also more specialized stations proving video monitoring both within and outside the country.

Security Manufacturing & Distribution Businesses

In the last year we have expanded our valuation and M & A business to include Canadian owned manufacturers and distributors of security products. Every month in the US security industry, we read of acquisitions being done on both the manufacturing and distribution side of the business. There are very few intermediaries, if any, servicing these sectors of the industry in Canada. We believe owners of these types of business in Canada need to have an exit plan just like owners of alarm, integration or fire dealers.

To date, we have provided our services to value a distributor of cameras and other security equipment.

Deals recently Completed

• SOLD Consolidated Monitoring, a ULC monitoring station based in Edmonton to Armstrong Monitoring based in the Maritimes.
• SOLD All Protect Systems, a fire services company based in Waterloo, Ontario to a private equity based in ON.
• SOLD All Security Ltd, an alarm and camera company based in Timmins, Ontario to a local guard company in Timmins.

HSSI worked on the following in the last year

• Valuations This year alone we performed valuations on 3 alarm companies, 2 commercial integration businesses, 2 fire companies, 2 guard companies, and 2 Internet Service Providers.
• Attempted to sell a western based company providing GPS tracking devices and software.
• Acted as an Expert Witness We were called as an “expert witness” in an ongoing alarm company court case in Western Canada.
• Acted for a Canadian chartered bank in helping them understand the Canadian alarm market.

Businesses for SALE

as of November 2019

• Security Company in north western Ontario in cottage country with sizable block of monitored accounts along with integrated systems capability.
• Well established integrator based in Maritimes with expertise in health care and educations verticals.
• Successful, well-run GTA based home automation and commercial security company.
• Well established alarm company with >1000 accounts based in south-western Ontario
• Smaller alarm and Lock Company located in eastern Ontario.
• 2 small blocks of alarm accounts based in GTA
• Fast growing Uniform Guard and Loss Prevention company based in GTA doing > $3 million in annual revenue
• Small batch of guard contracts based in GTA

Please contact us at 416-925-7474 or at victor@hardingsecurity.ca to discuss selling your business.

Tips for Sellers

We here at HSSI are constantly reading and learning about how to best go about selling your business.There are hundreds of tips you can pick up along the way. Based on our 20 plus years in buying and selling small businesses, here is another checklist of things to consider if you are planning to sell:

1. Ask yourself why you are selling? If it is only for the money, chances are you may not be satisfied with what you get. Multiples for small companies are never that great.
2. Before you sell, be sure to get a valuation done. It is unlikely that you will know what your business is worth. Know that alarm businesses are valued differently than fire and integration businesses. Keep in mind that some valuation firms undervalue the recurring monthly revenue in security companies.
3. Try to make yourself as redundant as possible to your business before you sell
4. Try to develop a “moat“ around your business – something proprietary that makes your stand out.
5. If possible sell when times are good not just for your company but for the economy as a whole.
6. Ask yourself what are your plans after selling. Today, people live into their 80’s and 90’s – a long time if you sell in your early 60’s.
7. Hire an intermediary or broker to help you sell. Brokers generally improve the price you get,, give the seller a better chance of getting the deal done and make the process a lot easier and quicker.
8. Be wary of business brokers that don’t have experience in your industry..
9. Talk to your tax accountant about the tax angles of selling before you start the selling process. But be aware that in general, selling assets is easier than selling shares.
10. Whenever possible, the intermediary or broker should show your business to many potential buyers, not just one or two. Stats indicate a broad-based search for sellers usually results in higher prices.
11. Make sure your financial books are completely in order before you sell. Due diligence will be far more difficult for you if they are not.
12. Be patient. Deals to sell your company take longer than you think.

Harding Security stays in touch with the security market

• We are members of the following security related organizations – Canasa (Canadian Security Association), CFAA (Canadian Fire Alarm Association), ESA (Electronic Security Association), CASA (Canadian Automatic Sprinkler Association), ASIS International and ACG (Association for Corporate Growth. We go to seminars put on by many of these organizations.
• We attend at least 2 of the Annual Trade Shows in Canada and the US each year including the various regional Canasa Shows, ISC West or East, ESX or ASIS.
• We attend at least 2 of the Annual Security Conferences each year including Barnes-Buchanan, Security New Ground, the Imperial Capital Investment Conference or SPT’s Security Summit.
• We subscribe to most of the major security magazines including Security System News, SDM, Security Sales and Integration and SPT News.
• We write a regular monthly article for SPT News.

If you are getting this newsletter . . . .

You are receiving this newsletter because you are in a senior position of a security company in Canada or 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, CASA, 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 are a seller or buyer of a security company or wish to have your business valued . . . please contact Victor Harding at (416) 925-7474 or via email: victor@hardingsecurity.ca