What Is The Going Sale Price For Security Integration Companies?

I understand that RMR is an important factor, but let's say there are none to make it simple. By what factor do you multiply profit to figure out a fair sale price?


Are you more focused on intrusion, with service / monitoring contracts or more focused on video / access new installs?

The company that we are looking to buy is focused on video/access new install.

A rough rule of thumb for valuation is 1x annual sales or less.

In general, companies that focus on video / access new installs get relatively low / poor valuations. The key concerns / reasons are:

  • Limited ongoing / committed sales to existing customers. Somebody buys today may not buy again for years. The next time they do it could easily be to a rival.
  • Minimal brand recognition (often).
  • Propensity for deals / accounts to be 'stolen' / 'snagged' by former employees.
  • Low margins because of the above and ongoing 'commoditization' of the market.

Of course, it depends on the specific company that you are looking to acquire:

  • Do they have some special niche / reputation / expertise that is defensible?
  • Do you trust the key person / people in that company to stay with you long term?
  • Are they growing fast because of some special factor or generating abnormally high profits?

Alternative to buying the company, hire their top sales guy away :)

The method most used is looking at ebitda of a business. The range is 3 to 4x. If the business is growing it would be 4x. There is an exercise to normalize the earnings. This is nevessary, for example where owners are either over or under drawing salaries from business. This means restating earnings where fairmarket costs for a manager is applied. The normalizing is done for other items that might increase or decrease ebitda, like personal expenses that are paid by company. Check google out. crazy evaluations where there is not enough ebitda to warrant the purchase price then it may be done for strategic purposes and the acquirer is either from outside the market area or from a different industry.

To give some context to EBITDA valuations, here are the Enterprise Value / EBITDA ratios for a few well known companies in security:

I do believe that 3x to 4x EBITDA is common for valuating integrators. And, at 3x to 4x EBITDA, typically this results in a valuation of 1x annual sales or less. Also, this is generally much lower than the valuation of manufacturers or service providers with RMR (as the examples above show).

In the case of most small integration companies, the real value is often in the people rather than the hard assets. Over the years, I have seen many integration companies purchased by outside parties and then soon collapse when key people start to leave.

Robert also makes some great points. When considering EBITDA, you must be sure that the company owner is getting paid a fair salary before calculating profits. Often, when you take a hard look at a small integration company, you see that it really just provides a salary for its owner, and is worth little or nothing as a stand-alone business to an outside buyer.

Thanks all for the feedback. One more question, What is the industry average for net profit on this type of companies (video/access)?

Well, as both Robert and Michael discuss, often after the owner's compensation is fairly factored in, there is no net profit at all.

Net margins are typically low for integrators, in the ~5% range (of course, there are outliers). Integrators typically have lower margins than manufacturers, another reason why they get lower valuations. For example, Tyco's integrator side operations margins are 10% but their product side is 17% (both are quite good relative to peers).

There are few security integrators that are currently publicly traded so not a lot of audited numbers but here is Henry Brothers before they were acquired, excerpt of income statement highlights:

As it shows, they never made much profit at all. Surely, there are more profitable integrators (TycoIS is one) but there are many integrators who struggle to break even / pay owners.