Selling and Valuing Security Integrators

By Brian Karas, Published on May 12, 2017

This ia a tutorial in how to (1) determine your security integrator's value and (2) to sell your security integrator. If you own an integrator, want to buy one or even are thinking of starting your own one day, this is a must read.

We spoke with an M&A advisors Final Image and Reitman Consulting, both specializing in security integrator sales, about factors that impact the valuation of security integrator businesses.

This post covers:

How much an average security integrator is worth / can get in a sale
How much the sales price is driven by RMR
How to know when it might be time to sell your business
How long it takes to get a sale completed
How much it costs to hire an M&A advisor and prep for sale
What to expect after the sale

Valuing ** *********** ********

* ***** ******** ** ********** value ***** ** *.* times ****** *****, ** 5x ******, *** ** ******* *********** business. For *******, ** ********** doing, ***, $** ******* annually **** * **% ($1,000,000) ********* ****** ***** average * $* ******* sale (* ***** $*,***,*** operating ******, ** *.* times $**,***,*** *******).

* **** ******* *********, and *** ****** ** acquiring ******* ***** **** to *** ***** ** to *** * ******** of *** ********* ****** of * ******** (** average *-** *****) **** common ********* ****** ****** being **-**% ** *******.

******* **** ***** ***** higher **********:

****** ********* ******* ******* proportion (******* ** **** detail *****)
******** ******** **** ****
**** ****** ****
****-*********** ****** ** ***** or ******** *******

** *** ********, ***** would ****** *********:

***** ** ********* *****/****** jobs ** ***********
**** ** *** ********* (even ** ******** ********* are ********** ****** *****)
********* ** ******* ********** (do *** *** ** sell **** ******** ** a ****** ** *******)
********** *** ******* (**** than ~**% ***** *******)
**** ********** ** ******* from * **** ***** number ** *********
***** ******* ** *********

RMR ****** ** *****

*********** **** ****** *** can **** *** *+ times **** ** *********** with ****** ***. *** ** contracted future ******* *** *** acquirer, *** ** ** valued **** ****** **** project sales ***** **** ******* risk ** ****** ************, since ********* *** *** contractually ********* ** *** for ****** ********.

**%-**% ** ******* ** RMR ** ********** * healthy **** ** ***** of ******** ********** ********* and **** ******** ***** valuation. ******* ** *** integrators **** *** **** 5% ** ******* **** RMR *** ** **** as * ******** ************** for *** ********.

******* ** $*,***,*** ** RMR ******** ** **** more ********* *** ***** more **** **** ******* $1,000,000 ** ******* *****, integrators *** ****** ** sell ***** ******** ** the ****** **** ** concentrate ** ******** *** years ** *******.

*** ********** *** ********** RMR *******, **** ***** Image, *** ** ******* hardware ***** ** ******* arrangements.

*** *** *** ** valued *******, *** *** high-margin/low-risk ********* **** ***** monitoring **** ** ****** higher **** *** *** lower-margin ******** **** ******** costs, **** ** ******* agreements.

Factors **** ***** *****

**** *******, **** ** declining ***** ** *** margins *** ******* *****-********, however ***** ****** **** negatively ****** ***** **** may *** ** ** apparent.

** * ***** ******* of *** *******'* ******* comes ********* **** * small ****** ** ********, this ******* **** ********** be ********, ** *** risk ** ****** *** one ** ***** ******** would **** * ***** negative ****** ** *** business. **** ** * problem **** **** ***** integrators *** **** *** or * *** ***** accounts **** ***** * significant, ** **** ****, revenue.

********* ** ********* ****** as ** *****, ******** Reitman ****** **** **** inventory ****** *** "**** problems" ** *** ********. This ** *** ** the **** **** **** excessive ********* ***** ******* chances **** * ***** portion ** **** ********* will ** *** ** date, ***-**********, *******, ** otherwise ***-********. ** ***** also ******** **** *** integrator ** *** **** to ******** **********, ** may **** ******* ********* for * ******* **** later **** *******. *** these ******* *********** ****** ensure **** **** *** not ******** ****** ** old ********* ** ***** books ** **** *** planning ** **** ***** company.

Individual ******** *** *** ******* ******

** ***** ***** *** ****** integration **** ** *** being ****, *** ** individual ******* ***** ** cash *** ***** ****** in ***** ** ****** or ****** * ********* career **** ********** **** often *** * ******* value *** ***** *****, according ** *******. *** example, ** *** ******* is ****** ** $*,***,*** and ***** ** * family ******* *******, *** one ****** ***** *** of *** ******** **** will ****** ******* * check *** **** **** $250,000. *** ******* *** this *** **** ** *** ******* ****** **-**, ***** *********** ****** that ********** **** *** "closely ****", *** ** not **** * **** investor ****** *** ********** worth **** **** **** a ******** ** *** business ** **** ***. In ***** *****, *** investors **** ** *** a ******** ***** ** a ***** *******.

When ** *** ***** **** ** ****

** **** ******** ** reaching * ******* *******, it *** ** ** indicator **** *** **** taken *** ******* ** far ** *** *** in *** ******* *************. Common ******* ****** ********* were ****** * *** million *** *** ******* ** annual *****, ****** **** can **** ** ****** or ***** ******* **** concentrating ** ********* *******.

* ******** ** ********* sales, ** ****** ********* that *** *********** *** will **** **** **** to ******** (>* ****) can **** ** ********** a ******** ********* **** and *** * ********* indicator ** ** * good **** ** **** a ****.

*********** *** **** ***** the ******* ****** *** activity **** ********* * good **** ** *** their ******* ** *** sale. ** ***** ************ are ***** ****, ****** locally ** **********, ** can ** ********* **** investors **** ****** ** capital *** ****** ************ or **** ***** ** a ***** ** ************** happening.

****** **** ** ***** to *********** *** **** indicate ** ** **** to **** *** *******, but ** **** **** more *** ******** ******* than ******** ****. ** investor *** *** ********* to ******* **** ******** with ***** ************* ********** to ****** * ******** overall *******. ****** ***** valuations ** **** ****, though ** *** ** preferable ** ****** ****** the ******* ******* **** to **** ** ******* to **** ******.

How **** ** ****

********** ** ********** **** does *** ****** *******. Final ***** *********** *********** plan * ***** *****, not **** ** **** but ** *** *** business ** *** **** possible ***** *** ******* valuation. ***** *** *** **** quicker ** *** ******* is **** ******* *** the ****** ** ******.

************ *** ******* *** start * **** ** advance ** *** *********** date ** ******* *** company ** *** ******. ********* like ***** ***** *** be ***** ** **** stage ** *********** ** ** a ***-**** *** *********. They will ******** ********* ******** **** the ******** ***** ** you **** **** ** correct **** ****** ******* to ********* *********.

*** ******* ** ******* the ******* ** *** market *** ********** * sale *** **** *-** months. **** ****** **** to **** **** ********* acquirers, **** **** **** to ******** ***** *** due ********* ******* ** go ******* ********** *** come ** **** * valuation, *** **** ********** the ****** ****.

Advising / *********** ****

** ********** ***** *** certainly **** ***** ******** on ***** ***, ********* on ***** ********* ********** and ***** ****** ** prospective ******.

***** *** *&* ********, like ***** ***** *** Reitman **** **** **** the *******. ******** **** offer:

***-**** *** ********* ******* that ******* *** ******** and **** ** **** findings *** *********** *** improving ******* ***** **** ********* cost $*,***-$**,***.
********* ** "**** ****", which ** * ***** pitch **** ** *** ******* to **** ** ********* acquirers ***** *** *******. This ******* *** ***** another $**,*** ** ***** to ********.
******* ******, ******* **** negotiations, ******* *** ****, etc. ********* ** ******* as * ********** ** company ***** ***** (******* from *-*% **** ***** on **** ***** *** larger ***********).
************ *** ********* ******* in ***** *** ********* where ** ** ********* (not ********, ********* ** Reitman).

Anyone *** ***** * ********

*********** ******* ** **** their ******** ****** ** aware **** ***** ** no ****** ********* *** individuals ** ************* **** provide ******* ********** ** most *****. ***** *** organizations, **** ** *** ******** ******* ** ********** ** *** ******** ********* ** **** **** *** ****** *********** in ******* ********** *** their ******** ** * local ****.

Post-Sale ************ / ****-**** / ***********

****** *** ********** ***** of *********** ****** ****** to ** ******** ** stay ** ***** *** sale. *** ********* *** considered ** ** * major **** ** *** value ** *** *******, and **** *** **** of **** *** ******** is "******".

** **** ***** *** business *****(*) **** *** be **** ** **** when *** **** ******, instead ******* ** ****-*** over * *-* **** time ****. ****** **** period *** *****(*) ***** get * ****** **** the ********* *******, **** their ****-*** ******* **** the **** ** ************ over **** ******-**** ****. Earn-outs *** ***** **** to *********** ******* **** continued ****** ** ************* of *** *******, *** if ***** ******* *** not *** ***** ********* and ******** **** ** adjusted **** ***********.

[****: **** *** ********** published ** **** *** updated ** **** **** expanded ******* *** ********.]

Comments (13)

Undisclosed Manufacturer #1

07/21/16 04:12am

Thanks for the info. Half profit sounds low but of course it depends on the net Profit. Don't you think a more logical formula is net profit x X?

What would you say is the average net profit for a security company after management is paid?

John Honovich

IPVM | In reply to Undisclosed Manufacturer #1 | 07/21/16 07:02am

Half profit sounds low but of course it depends on the net Profit. Don't you think a more logical formula is net profit x X?

To be clear, half revenue.

That's a good point though on profits. Final Image cited an average EBITDA range for integrators of 10-15% with an average valuation multiple of 4 - 6 times EBITDA, which is effectively 0.5x revenue. That is consistent with what we have seen as well.

EBITDA can vary more than revenue and also is impacted more by accounting choices (e.g., how much and how the owner and their family take payments / profits).

Also, a revenue multiple is easier for more people to understand than an EBITDA one. But, to your point, an acquirer will typically carefully check profits and adjust valuation accordingly.

Undisclosed Manufacturer #1

07/21/16 08:38am

"In many cases the business owner(s) will not be paid in full when the deal closes, instead getting an earn-out over a 2-3 year time span. During this period the owner(s) would get a salary from the acquiring company, plus their earn-out amounts from the sale in installments over some agreed-upon term"

That sounds like a bad deal. Let's say we have a company that does $10M in gross and nets 15% profit with a $200k owner salary.Company sells for 5X profit at $7.5M. owners stays with the deal for 3 years and gets paid $200K. After 3 years, the company would have made $4.5M to the owner if he didn't sell (that's if the company is not growing), leaving the owner with only 3M and no lumpsum advantage since he is getting his money in payment. What am I missing here? Would the owners salary be considered as $1.7M if he was asked to stay?

Brian Karas

IPVM | In reply to Undisclosed Manufacturer #1 | 07/21/16 06:27pm

I sent your question to Final Image, and this was their reply regarding your scenario:

The part missing is that at the date of the sale - the owner would have realized on a base amount of the purchase price - say $5 million in this case - which he can use to generate another return. In additon - the decision to sell would be a function of wanting to exit - and he is crystalizing his value under this structure. Also 3 years would be a long earnout - we would typically see a shorter earnout period of 1 or 2 years which mitigates the risk.

Another way to look at it is that the earnout concept is generally used to bridge to a potential higher number for sellor. Ie - buyer feels company is worth 4 x = $6 million. Sellor wants 6 times = 9 million. Deal is structured as 6 million up front plus a 2 year earnout of $1.5 per year.

Tom Burns

In reply to Brian Karas | 07/24/16 10:46pm

To add in case this is helpful:

One of the most common reasons why a seller will push for a higher EBITDA multiple is growth momentum (i.e., "Yes Mr. Buyer, but my company is worth more because the avg market growth rate is 'x' and we're growing at 'y'). To accommodate, they'll agree on a base value with an incremental earn out schedule based on mutually agreed upon future growth targets and duration.

However, these have become less popular in the last 10 yrs in certain circles, especially when the acquired company is to be integrated into another- the reason being lawsuits. Too often the seller will allege that the acquiring company negatively impacted the business (imposing different processes, changing sales people, etc..) and sue or go to arbitration. This can be expensive for both parties.

Buyer beware of earn outs.

Christopher Freeman

In reply to Brian Karas | 05/12/17 02:18pm

Strategy Here , its about strategy

Christopher Freeman

05/12/17 02:16pm

Items left out here are Projected Growth, Value, and Potential to multiply the figures over 5 years

sold Mine at Full Value , up Front, upon contractual signatures.

Combined with other company's it multiply's the figures.

Not always Value, But potential value , or to Just close down the competition and bring up the value of the other purchasing company

Marty Calhoun

IPVMU Certified | 05/12/17 06:44pm

Nice Information, Thank you Brian!

Mitch Reitman

05/13/17 06:06am

I'm not complaining and I appreciate being quoted in the article, but I wasn't interviewed. Again, not complaining, but the quotes look like the substance of a presentation that I gave at PSA Tech on May 8, 2017. What I actually said was that an integrator with a significant amount of RMR should consider valuing the RMR at a multiple, then computing the EBITDA less the cash flow from RMR. The presentation was an hour long and much too complicated to explain here. The other issue is that the discounts are for lack of control and lack of marketability. The source for this is a US. Tax Court case (Holman v. Commissioner). The reference to Revenue Ruling 59-60 refers to the IRS' definition of value of a company or asset as "the price that a willing buyer would pay to a willing seller."

When using the income approach to value a company based upon cash flow or EBITDA there are two methods:

Capitalization of Earnings Method - used for a stable company, again complicated, but historical EBITDA or cash flow is discounted and a multiple is applied.

Discounted Future Benefits Method - projected earnings or cash flow are discounted back to determine a Net Present Value.

If a reader was a participant in the PSA Tec Conference he/she can download my slides from the web site.

Thanks for your interest in valuation of an integrator and feel free to email me off of this site with any questions.

Undisclosed Integrator #2

05/13/17 08:55pm

3-5x ebitda is the rate is for acquisition or 32-48x monthly rmr. Most deals actually get done beween 34-40 monthly RMR. Other reasons for buyout are to pick up another manufacturer line-- however I will say that most integrators above 15mm+ have access to just about whatever line they want with a phone call and stocking order.

A company with a larger market share but smaller addressable market is generally worth more than a player in a larger metro with lower market share.

John Honovich

IPVM | 07/23/20 10:57am

Ron Davis / 'Graybeards' had a newsletter on the topic of valuation today. In it, he estimates a "traditional integrator with $8 million of annual revenue, and annual EBITDA of about 10%... should sell for anywhere between $4.6 million and $5 million". That's a little over 0.5x revenue which makes sense to me.

However, he argues that a "hybrid, with about $50,000 of RMR, and $4 million of integrator revenue... would probably sell for between $4,2 million and $4.6 million." His argument is that integrators should aim for more of a hybrid model.

I think there's valuation and strategic benefits of integrators being more hybrid (e.g., dealing with downturns like this one).

Clint Hays

Rasilient | In reply to John Honovich | 07/23/20 11:22am

Adding RMR, in addition to project profits, has been a very common business goal for almost every integrator that I talked to in the last 18 months. There are issues with smaller or regional companies with deciding how to pay out commissions to their sales team that is used to a normal CAPEX purchase order. The owners may see the benefits of RMR over multiple years for the company but the salesman can be concerned with losing out on commissions from a larger one-time sale. This can lead to confusion or even a lack of buy-in from the sales teams since they don't want to make less money on their same efforts because their comp plans are now more complicated.

Undisclosed Manufacturer #3

In reply to Clint Hays | 07/23/20 02:15pm

Anyone who has dealt with a large well known national security company through the years knows the flip flop focus change between revenue from leases, monitoring, inspections and outright sales.

To manage the focus, the financial incentive was built around it. For a direct sale you got paid X percentage at booking and then X after install. For a lease with monitoring, maintenance etc, you were paid a multiple of the monthly.

It wasn’t hard to figure out for the smart sales guys how to guide the customer.

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