Newsletter Summer 2020

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. Although we are not Chartered Business Valuators, we are almost always less expensive and more accurate when valuing the recurring monthly revenue in security companies. Also, unlike most valuations firms, we have the experience of actually having to close deals on our valuations.
4. Expert Opinion We have been retained to provide an expert opinion on security industry valuation issues.
5. 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.
6. 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.
7. 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. .
8. Designing or redesigning 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.
9. 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.
10. Looking for acquisition financing? In certain circumstances, we can help a dealer obtain financing for acquisitions of mid to large sized alarm companies.

M & A Activity in the Canadian Security Industry under Covid 19

Many of the points I talk about here are mentioned in my most recent article in SP and T News.

Although the security industry was deemed an “essential service”, most security businesses have been adversely affected by the virus shut down whether they are an alarm, integration, fire, or guard business.

Alarm companies lost the ability to install new accounts for at least 3 months. Summer door-knocking companies are functioning at a small fraction of their normal volume. All but the most essential service work in all sectors of the industry was deferred. Fire businesses had most of their work deferred, thankfully not lost. Integration companies were affected more or less depending on where they who their customers were If it was from commercial clients, revenue was likely lost; if from government, mostly just delayed. It will be interesting to see what future government integration projects are affected by cut backs as a result of the enormous government spending from the virus.

As we at Harding Security are focused on M & A, let’s examine how the virus shut down has affected M & A deals in the security industry. Are deals still happening and if so, in what sectors of the industry? And are the deals happening at the same values?

In terms of doing deals this is a time of greater financial uncertainty and risk for both buyers and sellers. In such times, past experience and common sense suggest deals in many cases will be harder to get done. In fact, we know that some deals in other industries have collapsed completely. Having listened to many Zoom meetings over the last 3 months, I have heard that some deals have taken longer to do. As for valuations, the jury is out on that issue. My sense is those deals that got done during the pandemic so far are not seeing large devaluations.

So far the security industry is doing much better than other industries on the M & A front. You can see this by reading the acquisitions announced in security magazines. Just yesterday a US Private Equity firm bought a major US wholesale station and sister PERS company. My own business has been reasonably active through the pandemic. I have several decent sized deals on the go. It seems those wanting to sell or buy are working around the virus. If you ask how this is possible, please keep in mind the following:

• The security industry was not affected as much as some other industries.
• The recurring monthly revenue in the industry – monitoring RMR and fire inspection RMR – have both held up fairly well during this crisis.
• Private equity money is playing a bigger role in M & A transactions in the industry and they have a great deal of “dry powder” on the sidelines looking to be placed.
• Buyers in those parts of the industry that value their targets using a multiple of adjusted EBITDA are in many cases just factoring in one more variable – the “C “ for corona virus – as an add back to earnings and valuing the target that way..
• Those buyers that are well capitalized are saying that in times like this there are deals to be had.

Let’s look at details in different sectors of the security industry

Most alarm companies have been adversely affected mainly on the installation and service side but their monitored accounts have held up. There have been account cancellations but not as many as first thought. There are alarm account deals being done, and amazingly enough, mostly under normal terms and multiples. For example, I closed 2 small deals right in the midst of the pandemic without any discounts or abnormal terms. I am also currently working on 2 larger alarm account deals which should close in the next month or so on fairly normal terms. Interestingly enough, some alarm accounts buyers are telling me they are looking to buy because they can’t grow organically right now. So they are resorting to acquisitions.

Fire service companies have been affected by the shut down but their inspection revenue will most likely be delayed, and not lost completely. After all, inspections have to be done by law. In March, only essential fire service work was being done but that has loosened up a lot and owners tell me their technicians are now back at work full time. I suspect some of the larger fire installation jobs may be delayed or cancelled forever. However, I have talked to two private equity buyers of fire companies and got the same message from both. They are still actively looking for fire deals. In assessing value they will likely treat the virus shut down period mostly as an aberration and pay more attention to future forecasts of EBITDA than they have in the past. The key thing they will be looking for is that there was no long term damage done to the company. I.e. technicians or customers being lost.

Some guard companies have been hurt by the pandemic. Others have actually benefited by the shutdown as guards are now being used to protect empty buildings and to manage traffic in and out of grocery and drug stores. Reflecting this picture, I am in the midst of selling a guard company that has benefited from the shut down and the deal’s valuation and terms have not been adversely affected much at all. Perhaps it is too early to tell if this is an exception.

This leaves integration businesses where the main source of their revenue is larger installation jobs. They are perhaps the most vulnerable to the shut down but even this depends on who their customers are. If the installation work was for commercial customers then the jobs could well have been delayed or cancelled. On the other hand, I am selling an integration in eastern Canada business which is focused on doing gov’t work and their work was mostly just delayed. My guess is selling integration businesses may be more difficult than other parts of the industry.

There are some tips in trying to do deals which all buyers and sellers should be aware of that have developed in the last 4 months of the pandemic.

• Although the pandemic was a severe blow, we should keep in mind buyers are buying the future, not the past. If Sellers can convince the buyer that their future is completely intact, a deal can be done.
• There is no doubt forecasting revenues, the lynch pin of all valuations, has become more difficult to do. This adds risk to most deals and may well lower some valuations.
• In the deal business, a new term has been coined – EBITDAC –where C stands for the add-back to earnings as a result of the corona virus (if such an add back can be clearly identified). In short, some buyers are treating the virus shut-down as a short term aberration.
• Due diligence on deals will likely become more important and take longer to do.
• More deals today may come with earn-outs because valuations have become more difficult to do.,.
• Hold backs on deals may increase in size and their length of time.
• In these days where cash is king, purchasers will be paying much more attention to make-up and amount of working capital that a target company needs going forward.
• It may potentially be more difficult to get financing from a bank in the next 6-12 months. Buyers with capital will have an advantage.
• Everybody will be paying more attention to the reps and warranties in purchase and sale agreements.
• The “material adverse condition” clause in most purchase agreements now becomes a more important clause because of the virus.
• Be ready for more post closing disputes to occur even on deals that closed before the virus struck as the buyer realize that they might not get getting what they bargained for.

In summary, my feeling is that deals in most sectors of the security industry will continue to get done. Sellers will simply have to be patient and accept that, although the overall valuation of their company may not be affected too much, it will take longer to get the deal done.

Deals recently Completed

• SOLD Nuforce Electrical based in GTA sold their alarm accounts to Smart 4U in April 2020.
• SOLD All Protect Systems A fire services company based in Waterloo, Ontario to a private equity based in ON late in 2019.
• SOLD W.B. Cross Based in Schomberg, Ontario sold their accounts to Allfine Security based in Vaughan in March 2020.

HSSI worked on the following in the last year

• Valuations This past 12 months we performed valuations on 2 alarm companies, 1 commercial integration businesses, 1 fire companies and 2 guard companies.
• Acted as an Expert Witness We were called as an “expert witness” in an ongoing alarm company court case in Western Canada.

Businesses for SALE

as of July 2020

• Security Company in north western Ontario with a sizable block of monitored accounts along with integrated systems capability.
• Blocks of 225 alarm accounts based in GTA.
• Well established integrator based in Eastern Canada with deep expertise in health care and educations verticals.
• 1400 alarm accounts based in GTA.

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

Tips for Buyers under Covid 19 Conditions

1. Know the stats showed those who were actively doing deals in the 2008-2009 recession usually got above average returns on what they bought...
2. Deals in the security industry are still being done under Covid 19 conditions.
3. Even due diligence is being done remotely.
4. In assessing a target’s value, ask them to produce a normalized EBITDA but with adjustments for C (the corona virus).
5. Also ask for a forecasted EBITDA for the next 12 months..
6. Try to assess whether the target company’s business has been permanently affected by the virus.
7. Also look to see how the target business pivoted to handle the virus. It is a good sign if they pivoted quickly.
8. Ask yourself whether the virus has “ changed the future” for the target company. Don’t just assume it will be business as usual.
9. Know that alarm account values have not been hurt that much by covid 19. Alarm account deals are proceeding almost normally.
10. Don’t count on getting fast access to bank loans in these times.

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), CASA (Canadian Automatic Sprinkler Association), ASIS International, SIA (Security Industry Association) ACG (Association for Corporate Growth) and the M & A Club . We attend seminars put on by many of these organizations.
• We usually attend at least 2 of the major Annual Trade Shows in Canada and the US each year including the various regional Canasa Shows, ISC West or East, ESX or ASIS.
• We usually 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 have been writing a regular monthly article for SPT News for the last 6 years.

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