Long Time Industry Exec Leads New Security Franchise Offering

How many million dollar integrators have enough net margins to write a check for20% of their revenue?

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Brian Karas

In reply to Undisclosed Integrator #1

IPVM

You raise a good point. The argument the franchisors would make is along the lines of "can you grow your integration business to millions of dollars on your own, without making any costly mistakes along the way?".

If you have built and (profitably) sold integration companies on your own before, you might be less likely to see the benefits in franchising. However, I can see the type of person who has been the top sales person at a regional integrator who feels like the management team is holding them back seeing these franchises as a good opportunity. They know the basic business well, but have not had to deal with back-office stuff, starting a business, etc. on their own and the behind the scenes support you get as a franchise location can help get you up and running with much more of a "recipe".

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Undisclosed Integrator #1

In reply to Brian Karas

which brings up my original question... what percentage of revenue do those people think they get to keep?

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Undisclosed Integrator #1

In reply to Undisclosed Integrator #1

I'm serious here... Is everyone else seeing 20%+ net profit? That's where you would need to be for this to make any sense whatsoever.

If everyone else is seeing 20%+ net on a real company with real overhead and actually growing I need to rethink my strategies.

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Undisclosed Integrator #8

•Oct 26, 2017

In reply to Undisclosed Integrator #1

We consistently do 20% net operating profit for our organization. But we're not a struggling million dollar revenue integrator and I really don't think you see a lot of margin expansion until you're over the 50 employee mark. A couple keys to this. We have multiple locations, several enterprise accounts, have our own UL central station and have been in business 50 years so we have no long term debt that couldn't be paid off immediately with our cash on hand. Unless you own your own central station and have a lot of monitored RMR or licensing that rolls over I don't see how it is possible to hit that benchmark. In fact I would argue it's impossible on straight install/service alone unless you are concentrated with like one giant enterprise customer and a staff of a couple guys and no other overhead.

From looking at other integrator's balance sheets for m&a deals there are a ton of integrators that do 3 million in revenue but make anywhere from -(insert your negative %) to 12%. I think the average would probably be firmly in that 9-11%.

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Undisclosed Integrator #1

•Oct 26, 2017

In reply to Undisclosed Integrator #8

Makes perfect sense. So where is the franchise fee coming from? because last I checked none of these franchise offerings include an in-house central station with no markup... or 50 years of earned repeat business, or anything else that would move Net Profits up to the high performing level that only comes from many many years of making good decisions.

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Undisclosed Integrator #2

The concept is interesting but appears at first glance to be very expensive. The other problem I have with a franchise arrangement in the security industry is that none of the product lines/solutions included in the purchasing agreement are exclusive to this franchise arrangement. Kind of like investing in a McDonald's franchise but then possibly competing with other outlets like a Starbucks and a 7-11 down the street that can also sell a limited array of McDonalds items under some different deal.

Overly simplified, I agree ... and I get the economies and convenience of being able to purchase products under all these different manufacturer brands without having to be a direct dealer for any/all of them (especially in cases where there's be no other way to gain access to say, Software House products).

The availability of easier financing is certainly attractive too, but still seems pricey to buy most of your products from a franchise entity that also needs to take a piece in order to survive .. like the independently-owned Domino's stores being required to buy all of their ingredients from a quasi-separate entity that is actually owned by Domino's corporate, i.e. Domino's mother ship makes recurring revenues off of the on-going royalties and fees AND they make money on all of the food and sundry supplies that franchisees are required to buy from a wholesaler that Domino's also owns under a different name. It works in retail because no one other than a Domino's store can sell you a Domino's pizza (if that's what you want).

Anyone have any input on what similar products cost buying through a Security 101 franchise versus buying through other means, such as direct dealer channels or through the big distributors? Axis for example doesn't offer much discount on the cameras unless you're at a premium reseller level .... however, the ScanSource's, ADI's, Anixter's of the world all can sell an Axis camera at pretty low margins to soften the pain a bit, but what would a similar Axis camera cost under a Security 101 or CGL arrangement?

Lastly, would it be wise to continue marketing this security franchise with the CGL moniker? I can see the combination of letters getting flipped all around, is it CLG or CGL??

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Undisclosed #3

IPVMU Certified

CGL Electronic Security, the originating company behind this franchise offering, was established in 1998 and does ~$15M in revenue...

Is that annually, or monthly?

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Brian Karas

In reply to Undisclosed #3

IPVM

Annually. I added that in for clarification.

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Undisclosed #4

Are franchisees supposed to be drawn to this brand/reputation? I have never heard of this company before, never seen their trucks around Boston/Westwood. $15M since 1998... is that good?

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Brian Karas

In reply to Undisclosed #4

IPVM

The $15m is an annual revenue number. I clarified that in the report text.

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John Honovich

IPVM

I know neither this exec nor that company, so I am genuinely asking a question: Given the exec's background, why did he partner with an integrator with such low revenue? That seems to diminish the appeal. Am I missing something or?

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Brian Karas

In reply to John Honovich

IPVM

CGL hired Nemerofsky because they wanted to grow their business, and they felt his background with various integrators and as a consultant would be a good fit for them.

They explored common approaches such as acquiring other integrators, opening new remote offices, expanding their local operation significantly and felt that none of these fit what they were looking for. I did not ask for specifics on each of these approaches and why they felt they were not worth pursuing since we were primarily discussion the final decision, which was to offer franchises.

CGL has been profitable for a number of years, and the business had amassed some cash, which is part of what led to the "how can we use our resources/position to expand" thinking in the first place.

I believe the franchise approach was settled on as a way they could both expand their core company, and also essentially help startup integrators, by giving them access to the collective talent/experience of the CGL management team (both the core company and the franchise unit) and also providing capital. In this approach though, the startup/franchise location also has their own skin in the game, giving them more incentive (and potential for long-term earnings) than if CGL just opened some remote offices and hired people as standard salaried employees.

For Nemerofsky, in terms of partnering with an integrator with low revenue, I would wager he views that more as a "challenge" than a "limitation" (somewhat to a previous recent comment about many salespeople being (overly?) optimistic by nature). CGL gave him an opportunity, and the funding, to pursue something he had not done before with the franchise establishment, and that is most likely a better combination of challenge/excitement than other options he could have pursued.

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Undisclosed #3

IPVMU Certified

In reply to Brian Karas

For Nemerofsky, in terms of partnering with an integrator with low revenue, I would wager he views that more as a "challenge" than a "limitation" (somewhat to a previous recent comment about many salespeople being (overly?) optimistic by nature). CGL gave him an opportunity, and the funding, to pursue something he had not done before with the franchise establishment, and that is most likely a better combination of challenge/excitement than other options he could have pursued.

What happened at Nemerosky's last gig, Xentry?

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Brian Karas

In reply to Undisclosed #3

IPVM

I believe the owners behind Xentry and Matrix (the access control product) decided to combine the two companies back together.

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Undisclosed Integrator #5

I dabbled in the business model some 30 years ago when I was in the Computer business, and the IBM PC was just beginning to take off. The thinking then was that it would be marketed through a retail niche and many franchise chains began to explode: Computerland, Entree Computer Centers, MicroAge, etc. These were all royalty based models, and consolidated distribution and volume purchasing through the parent companies.

Many of us at the "pre-integrator" level realized that the money was in the business/corporate community, and attempted to tailor our structure to support it. These models did not require a retail presence, but rather low corporate pricing and technical expertise at the local level. Expertise at the home office level was nice but difficult to claim as a competitive advantage. ADI, for example has their system solutions guys to help with configurations, but I wouldn't take on a difficult project with only them to rely on.

Over time the industry matured to consumers and DIY'ers ordering from Dell, or Best Buy, and our counterparts evolving into true system integrators taking on lines like Cisco and various software products and these franchise chains just faded away.

The comments about the Royalties above are spot on. I served on the Dealer advisory council for our chain for many years and the biggest points of contention were the royalty fees for "gross sales" especially when we were integrating products from multiple sources, and our labor, which could be a large part of the deal (even more so these days). We eventually were successful in getting our parent company to switch to a distribution model and just charge a markup on what we purchased from them.

For example, if I installed a $37,500 access control system that was say 15 doors @ $2500 per door, with hardware/software net costs of about $15k, and rough labor costs of around $10k, that would leave about $12k profit, and the check to CGL would be about $2650 (7% of $37.5k). That's a big chunk of the bottom line and a tough one to write at the end of the month. The integrator begins really hard thinking "how much are they bringing to the table?" to justify these kind of fees. The royalty on the labor and profit alone on this job would be about $1575.00, something that the franchisor didn't assist in, yet gets paid for. Generally the true value add is perceived to be at the local level and the relationship can begin to sour.

That's why I'm not a big fan of the franchise model in tech industries.

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Undisclosed Manufacturer #6

None of the products that they offer the franchisee would be hard to secure on their own.. I can't imagine that a company with an overall revenue of $15mil would enjoy any major pricing level discount with any of these vendors so I doubt the franchisee is really benefiting at all in a scheme billed as "Consolidated Buying Power".

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Undisclosed Distributor #7

•Oct 16, 2017

The advantages of joining a franchise is to be part of a group with a big footprint that can offer a higher profile (branding), the ability to service national accounts, and greater purchasing power. It doesn't appear that CGI offers any of these. I'm skeptical about greater purchasing power because I'm not sure the reduced product costs are great enough to offset the royalties. So by joining you are basically paying for expertise. Seems like very expensive consulting. A lot of risk being one of the first to join and very little skin in the game for CLG. Also franchises in other industries usually offer a turnkey type business which offers some kind of proprietary methodology and/or unique product set that would be very difficult and expensive to replicate on your own. I don't see this here.

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Brian McCarthy

•Oct 17, 2017

I wonder "if" there is a non-compete clause that prohibits CGL from coming after the franchisee customer base. The ERP will have all the end user's details......even if there is a contract dispute or the franchise does not renew.

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Undisclosed Integrator #9

In reply to Brian McCarthy

As is the case with most franchise agreements, the non-compete clause runs in the opposite direction. In other words, all of the customers of the franchisee are really owned by the franchisor.

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Undisclosed Integrator #9

Branding is a key asset that is typically leveraged in a franchise relationship. The stronger the brand, the more valuable the franchise. In this case, "CGL" is a fairly weak brand as it is not recognizable outside of the Boston area...at best. The fact that it is followed by "Electronic Security" adds some value to the brand.

The fact that CGL is not a market leader in their own Boston area doesn't necessarily mean the franchise will not perform well. Many franchises were born out of businesses that were not a market leader. That noted, much like Ray Kroc took the McDonald brothers far beyond their initial markets, perhaps CGL will do the same in the security industry.

The question is, does a high-end commercial systems integrator like CGL have an "assembly line" method and, can they teach franchisees to ask, "do you want fries with that card reader."

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Undisclosed #4

John is no Ray and CGL is no McDonalds.

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Undisclosed Integrator #9