Newsletter · December 1, 2024

Newsletter Fall/Winter 2024

By Victor Harding

Our Mission Statement at Harding Security

Harding Security was formed in 2009 to make it easier for buyers and sellers in all sectors of the Canadian security industry including owners of alarm, PERS, integration, fire, guard, audio-visual, and equipment distributors to get acquisition deals done. We focus mostly on the security industry in Canada because that is what we know best. We believe Canadian owners need someone “in their corner” when it comes time to sell. At the same time, we want to make it easier for buyers to get the information they need from sellers to complete a deal. Directly linked with this M & A help, we realize owners of security companies, particularly those with recurring monthly revenue, need someone to value their company accurately because other valuators were at times not getting the valuation right.

The services we offer:

All our services listed below are now being offered to owners of Alarm, PERS, Integration, Fire, Guard, Audio-Visual, and Security Equipment Distribution businesses across Canada including Quebec.

In the last year, we have started providing these services to selected companies outside of the security industry, particularly those with recurring monthly revenue.

Selling your company? If you have decided to sell and want help through the entire process, we can look after you. This is what we are best at. We work mainly for Sellers.
Selling your company and already have a buyer in mind? We can provide an opinion on the Buyer and their offer, and help you close the deal.
Need a valuation done? We are performing more valuations every year. Although we are not Chartered Business Valuators, we are often more accurate when valuing the Recurring Monthly Revenue (RMR) in security companies. We are also almost always less expensive. Moreover, unlike many valuation firms, we have the experience of actually selling the companies we value.
Expert Opinion We have been retained several times by dealers and their law firms to provide an expert opinion on various security industry issues or disputes.
Looking for a company to buy? We can help you perform the search and close the deal. We charge a one-time small monthly retainer to do the search and a success fee if we close a deal.
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.
Are you 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.
Looking for acquisition financing? In certain circumstances, we can help a dealer obtain financing for acquisitions of small to mid-sized alarm companies through either a particular Chartered Bank connection or a Canadian-based alarm finance company.
Post-acquisition Investment Advice? This is particularly useful to Sellers after they have sold, i.e. how to invest their purchase price. We have a relationship with a well-known Canadian chartered bank that can offer you different types of good investment advice and even an investment advisor.

Update on M&A Activity in the Canadian Security Industry –

An important development in regards to all M & A activity in Canada for all companies is the planned increase in the inclusion rate for capital gains up to 66.6% from 50% for all asset sales. This increased inclusion rate will increase the capital gains taxes on the sale of all assets including monitored accounts sold in an asset deal. I am told the average extra tax on an asset deal with go up by 9%. In the security industry, this will affect sellers of alarm accounts the most because buyers in that vertical tend to like do asset deals only. Please note that although this new rule is to be effective June 24/24 it has not yet been passed into law as yet.
By far the biggest driver of deals being done in the security industry is owners retiring. I have found owners in the security industryretire starting from age 60 and up. Most of my business is working on the sell-side for these owners.
As far as M & A is concerned in almost any industry, it is hard to find any pattern as to why one year is busier for deals than others. An example is 2021 which was a very good year for me for deals despite being right in the middle of the Covid pandemic 2024 has been fairly busy for me.
There are still more deals being done for alarm companies than for fire or guard companies. The alarm industry has 3 or 4 big buyers that will look at most opportunities to buy alarm accounts. This is not the case in the fire and guard industry with the possible exception of Garda in the guard industry and Classic Fire in the fire industry.
Most of my deals are done with existing industry players as buyers and some private equity. That is the market I work in as compared to general business brokers who don’t tend to know the buyers in the industry and resort to having to advertise to individual buyers. Existing Industry buyers are called “strategic” buyers and are to be contrasted to “financial buyers” such as individual investors or Private Equity.
The security industry continues to be a very attractive industry to both existing industry players and outsiders. There is growth happening in most parts of the industry. New companies are forming in most segments of the industry every year. I continue to get calls from private equity groups and search funds asking me about the industry.
I am told that, although getting financing to do deals still is somewhat more difficult than it was pre-covid, it is better than it was 12-18 months ago. As a sideline comment to those looking to sell, many of the bigger existing buyers have their financing in place already. Sellers need to be aware that if your buyer does not have their financing in place, the deal could take at least 3 months longer to do to secure to financing.
Most brokers will tell you it is almost always easier doing a deal with a buyer who has experience buying and has done deals. I tend to favor doing a deal with a buyer who has done deals.
We have every reason to believe that the worst of inflation is behind us in Canada. There have been 4 different interest rate reductions from the Bank of Canada in the last 6 months. Lower interest rates improve economic activity in general, raise the values of most companies and generally increase M & A activity.
As I review the deals I have done in the last couple of years, I still believe using a good broker to help you sell is worth the fee you pay as long as the fee does not get up above 7% or so which is usually my upper limit. I would never pay a broker 10-12% to sell my security company which is what some general business brokers charge.
Finally, I always keep track at where the stock market is at as I believe people will spend more when their portfolio is doing well. Currently, both the TSX and Dow Jones are doing well.

The Alarm Industry - What’s Happening with Deals here

My sense is that although there is still a number of alarm accounts deals being done each year but not as many as 10 years ago.. Part of this trend is owners retiring but I think part is due to dealers spending less time building up their alarm account bases, spending much more time doing access control and cameras, and are opting to sell the accounts but still stay in business.
As an aside I see very few alarm dealers whose account bases are growing like they might have been 10 years ago.
For account bases with 1000 accounts or more, multiples are still good (38X +). Having signed contracts and accounts on a call-forward line are still important as is having average monitoring rates above $30/mth.
However, there are 2 concerns with the alarm account market. Firstly, we need more well-financed buyers for alarm accounts. Both Telus and SecurTek have become much more selective in what they will buy. Secondly as noted above, the increase in the federal capital gains tax instituted as of June 2024 will make asset deals even less attractive in terms of take-home pay. If market forces work properly in regards to this capital gains tax increase, either the multiple offered to buy accounts in an asset deal has to go up or more buyers will have to agree to buy shares.

When I reflect back on deals I have done recently, here is how I have helped owners as a broker:

At the outset, I give the owner an assessment of what his business is worth. This is important in setting expectations.
In marketing a deal, I try to make sure that most of the better buyers are contacted. Without contacting these buyers, the owner will never know if he got the best deal.
In some cases, I have had to work to get the buyer to either improve their price or switch their offer to a share deal
Most importantly I take the owner through the entire selling process, what information buyers are going to want to see, and what terms they should expect to see in their purchase agreement.
With me there, the owner had someone in his corner the whole way. Let’s remember that most buyers have a team of people working for the buyer.
Hopefully with me there, any roadblocks to getting the deal done can be eliminated and the deal can get done faster.

Here are some of the deals I have done over the last year. :

I sold 1400 accounts in eastern Ontario in an asset deal for 41X RMR in May/2024.
I sold a video monitoring station based in BC to a large Canadian buyer in an asset deal
I sold a small guard company in the GTA for 3.5x average earnings
I am currently closing a deal for 350 accounts in Niagara Ontario for 35 X RMR in an asset deal
I have a signed LOI for the sale of a small integrator in southwestern Ontario in a share deal.
I continue to do valuations of different alarm companies each and every year.
I have been called twice in the past year alone to act as an expert witness on alarm company disputes. This makes 4 times that I have acted in this capacity.

Deals in the Guard Industry

For me as a broker, the guard industry in Canada is not as well organized as the electronic security industry. There is no one main industry organization like Canasa in the alarm industry with membership lists. This makes it harder for me to find and market my services to guard companies. I have often thought Canasa should “spread its wings” and try to bring the guard industry into its fold.
New guard companies in Canada seem to form every month. Guarding appears to be a very popular form of work for the ever-increasing South Asian population coming to Canada and settling in Brampton and Mississauga ON and the lower mainland of BC.
As mentioned in previous newsletters, guard companies are generally valued as a multiple of adjusted earnings. Like alarm companies, larger guard companies ($8 – $10+ million in annual revenue) are easier to sell and sell at higher multiples than smaller ones.
I have discovered that guard company buyers can be particular about what type of end-customer they want to buy. Many buyers don’t like event guarding as it can be cumbersome to manage. Others stay away from condo guard companies because the margins in that segment can be thin.
Average billing rates are important when it comes to selling a guard company. Companies with contracted rates below $25/hour are more difficult to sell.
Other factors beyond the overall annual revenue, the company’s billing rates, and the type of customer include the expiry dates on guard contracts, whether there is a good management team in place, how much unbilled overtime the guard company typically produces, and what % of your annual revenue on signed contracts helps.

Fire Service Companies

For me the market the fire services market is divided into those many companies in Canada that do fire inspections and install and service fire panels (mostly members in the CFAA) and the fewer companies that install and service sprinkler systems (who are mostly CASA members).
As mentioned in previous newsletters, even though there are hundreds of fire companies in Canada, there appear to be fewer deals done in the industry. Consolidation is just starting. Fewer bigger players are acting as consolidators as in the alarm industry.
One major type of buyer in this market is private equity. I believe they are the driving force behind Onyx Fire and Forest City Fire, currently two of the bigger companies in the industry. Private equity likes the recurring revenue the inspection revenue generates and also that most fire work is now mandated by law.
The good news at least for the present It appears much easier to get a share deal done in the fire industry than in the alarm industry.
For the most part, fire companies, like guard companies (but unlike alarm companies) are valued using the Multiple of Adjusted Earnings method of valuation. However, this can be adjusted by the amount of recurring revenue the fire company has in its inspection business.
Fire inspection revenue tends to trade at lower multiples of RMR than alarm accounts. This is probably because it tends to be a lower margin.

Integration Companies

I define an integration company as a company that gets the bulk of its revenue from large, multi-faceted installations that could have a combination of access control, CCTV, intrusion, and fire, all combined in one. The truth is there are not that many large integration companies in Canada. i.e. companies doing more than $7–$10 million in annual revenue.

Similar to guard and fire companies, integration companies are valued as a multiple of average adjusted earnings. In addition, there are not nearly as many buyers for integration companies In Canada as compared to the US where both Convergint and what used to be the commercial side of ADT are actively doing deals. It has been surprising to me that the bigger integration companies in Canada like Johnson Controls, Siemens, and Chubb Fire do not seem to be interested in buying smaller Canadian integration companies. The bottom line is it is tougher to sell an integration company in Canada and it takes much longer.

Monitoring Stations

Harding Security has been part of 6 different deals to buy or sell different monitoring stations in Canada over the last 10 years. It helps to know what issues can arise when selling or buying a monitoring station. Also, in terms of experience, I used to own a small ULC station in Cambridge Ontario.
A major issue for several smaller stations in Canada this coming Jan 1/25 will be establishing a fully redundant backup station to be able to meet the 2025 ULC requirements. Based on what I know, there are still several smaller Canadian ULC stations that do not currently meet this new requirement. My understanding is that ULC is serious about establishing this new mandate.
One trend the new ULC requirements seem to have prompted is several dealers own their stations and are currently closing their stations down and moving to a larger wholesale station.
Most people reading these newsletters know by now that I think there are still far too many small monitoring stations in Canada. i.e. stations with 40,000 accounts or less. Many of these small stations are even ULC-approved. Experienced, monitoring station people and common sense tell us you can’t make a ULC-approved monitoring station really profitable today with less than a minimum of 50,000 accounts. Owners of these small stations will tell you that they provide better quality monitoring to their dealers and their accounts. That may be so, but at what cost? The dealers supporting these small stations could probably get better rates from a bigger wholesale station and access to new and better services. And will these owners be able to afford to continually update their stations with the new technology required or offer the services that large wholesale stations are providing today? I don’t think so. The facts are there is a decided movement in North America towards bigger monitoring stations. Also, it is likely that when a dealer with their own station sells their retail accounts, the station will be dissolved.
We currently have buyers for wholesale stations in Canada. Monitoring stations sell for a multiple of their recurring monthly revenue with multiples ranging from 15 to 25 X RMR for small to medium-sized stations, depending on size and their average rates, amongst other variables. However, it should be noted that not much if anything is usually paid for the monitoring equipment in a monitoring station deal.
We noted in our winter of 2024 newsletter that video monitoring (VM) is fast becoming the go-to service looked for in the industry. VM comes in both “live” and “alert” forms. “Alert” video monitoring is focused on the operator responding to an alert the station gets when there is an issue, while “live” monitoring has operators watching the cameras 24/7. Most of the VM stations in North America are focused on pop-up or alert video monitoring as it is generally easier and less expensive to do. It is very difficult to run a live video monitoring company on North American salaries which explains why most of these stations are in offshore places like the Philippines or Eastern Europe.
I just finished selling a Canadian video monitoring station to another Canadian monitoring station with operations based in Albania.
There have been several video monitoring stations sold in the last 6-12 months in Canada and the US including Stealth Monitoring, North America’s largest, to Garda World.
The multiples for video monitoring stations have not yet been well-established, but they currently tend to be slightly lower than for digital monitoring.

Recently Completed Deals

As of November 2024

SOLD – A successful alarm dealer in eastern Ontario with 1400 accounts in May 2024
SOLD – a Canadian-based video monitoring company based in BC to a large Canadian alarm company
SOLD – a small GTA-based guard company to another GTA-based guard company
SOLD – a Niagara-based alarm company with 350 accounts to another Canadian alarm company.
ACTED - as an expert witness in a lawsuit brought by a major alarm company in Canada against another alarm company.

HSSI is currently working on the following

As of November 2024

We are working on the sale of a GTA-based alarm company with 700 alarm accounts.
We are working on the sale of a successful alarm and lock company based in north-western Ontario.
We have a signed LOI to sell a medical alert/PERS company in Eastern Ontario.
We have a signed LOI to sell a small integrator based in southwestern Ontario in a share deal.
We are working on getting our contract signed to sell 170 commercial accounts located in Western Canada.
We will be selling a GTA-based guard company with about $1.3 million in annual revenue.

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

What else you should know about Harding Security (HSSI)

We are a fully independent M & A Advisory firm based in Toronto, Ontario.
We work across the country and have been in business now for 16 years.
Before starting Harding Security, Victor Harding worked for VOXCOM and Protectron, two of the major alarm companies in Canada at the time, helping them buy small alarm companies.
Before that, Victor owned the security firm Alliance Security with a partner, which was a security franchise network.
Victor is a CPA by training and had many years of large and small company experience before getting into the security industry in 1994.
Harding Security is the only M & A advisory firm doing deals across Canada in all sectors of the security industry.
We also do valuations of all types of security companies.
Harding Security has aligned itself with a larger M & A Advisory firm, Norton McMullen Corporate Finance, based in Markham ON to help us.
We will pay a Finder’s Fee of 10% of the Success Fee we get from a sale to anyone who refers a lead to us that we did not already have.
Although HSSI is primarily focused on the security industry (alarm, integration, fire and guard companies), recently we have been taking deals in other industries.
To see more details on Harding Security go to our website at www.hardingsecurity.ca or visit our LinkedIn page at https://www.linkedin.com/in/cmvharding.

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), and CASA (Canadian Automatic Sprinkler Association).
We are also members of the following M&A-related organizations – ACG (Association for Corporate Growth) and the M & A Club. We constantly attend seminars put on by these organizations.
We usually attend at least 2 of the Annual Security Trade Shows in Canada and the US including the various regional Canasa Shows and ISC West.
We usually attend 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 write a regular bi-monthly article for SPT News on M & A issues in the security industry.
We have been the moderator and the main speaker on several webinars connected to M & A deals in the security industry in Canada sponsored mainly by SPT.

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 may have connected through LinkedIn or you are a member of one of the following organizations: Canasa, CFAA, CASA, SIA 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