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

**** ** * ******** ** how ** (*) ********* your ******** **********'* ***** and (*) ** **** your ******** **********. ** you *** ** **********, want ** *** *** or **** *** ******** of ******** **** *** one ***, **** ** a **** ****.

** ***** **** ** M&A ******** ***** ***** *** ******* **********, **** ************ ** security ********** *****, ***** ******* that ****** *** ********* of ******** ********** **********.

**** **** ******:

  • *** **** ** ******* security ********** ** ***** / *** *** ** a ****
  • *** **** *** ***** price ** ****** ** RMR 
  • *** ** **** **** it ***** ** **** to **** **** ********
  • *** **** ** ***** to *** * **** completed
  • *** **** ** ***** to **** ** *&* advisor *** **** *** sale
  • **** ** ****** ***** the ****

[***************]

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 (10)

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?

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.

"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?

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.

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.

Strategy Here , its about strategy

 

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 

Nice Information, Thank you Brian!

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.

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.

Read this IPVM report for free.

This article is part of IPVM's 6,300 reports, 840 tests and is only available to members. To get a one-time preview of our work, enter your work email to access the full article.

Already a member? Login here | Join now

Related Reports

Wesco Wins Anixter on Jan 13, 2020
Despite Anixter earlier arguing that Wesco's bid was inferior to CD&R's by nearly 10%, Anixter confirmed that they are taking Wesco's 3.1%...
Anixter Resisting Takeover From Competitor, Bidding War Emerges, Wesco Wins on Jan 13, 2020
Mega distributor Anixter is going to be acquired but by whom? Initially, Anixter planned to go private, being bought by a private equity firm....
Resideo CEO To Step Down on Dec 03, 2019
Resideo's CEO, Mike Nefkins, is stepping down, just 18 months after being brought in to lead the now plagued spin-out. Inside this note, we...
Resideo Stock Plunges 37%, CFO Ousted on Oct 23, 2019
The horrible year for the ADI / Honeywell Home spinout, Resideo, just got worse, with their stock plunging another 37% today. Not even a year...
Security Integrators Outlook On Remaining Integrators In 2025 on Aug 22, 2019
The industry has changed substantially in the last decade, with the rise of IP cameras and the race to the bottom. Indeed, more changes may be...
OpenALPR Doubles Prices on Jun 06, 2019
There is no 'race to the bottom' in cloud / AI video surveillance. In May, Verkada increased their prices. Now, OpenALPR is doing the same with a...
Knightscope Adds Just 2 Total Customers In Past Year, Yet Raising Money at $300 Million Valuation on May 02, 2019
This is no longer funny. While Knightscope has laughed it up promoting robot selfies, joking about a 'suicidal robot', the man who attacked a...
Verkada Gets Half Billion Dollar Valuation on Apr 26, 2019
Last week, when we profiled Verkada (The Fastest Growing Video Surveillance Sales Organization Ever - Verkada), we predicted they would raise $40...
The Fastest Growing Video Surveillance Sales Organization Ever - Verkada on Apr 17, 2019
Verkada has the fastest growing video surveillance sales organization ever. In less than 2 years, they already have more salespeople in the US...
Failed Integrator Rollup, Securadyne Sells to Guard Giant Allied on Apr 10, 2019
One of the most ambitious integrator rollups of the decade has reached its conclusion—selling to a mega guard company. Allied Universal has...

Most Recent Industry Reports

LIVE Now "Fever Camera" Show Day 2 on Jun 03, 2020
IPVM is excited for the world's first "Fever Camera" show. Day 2 is today from 11am to 4pm EDT. Recordings from Day 1 are posted at the end of this...
Cobalt Robotics Presents Indoor Security and Access Robots on Jun 03, 2020
Cobalt Robotics presented indoor security robots at the May 2020 IPVM Startups show. Inside this report: A 30-minute video from Cobalt...
Dahua Sues Ex-North American President, Says Legal Typo on Jun 03, 2020
Dahua's former North American President Frank Zhang claims he is owed almost $11 million but Dahua counter claims it is just a "scrivener's error",...
Smart Entry Systems Presents Cloud Multi-Tenant Access Control on Jun 02, 2020
Smart Entry Systems presented Cloud Multi-Tenant Access Control at the May 2020 IPVM Startups show. Inside this report: A 30-minute video...
Genetec Drops Support for Dahua and Hikvision on Jun 01, 2020
Genetec has dropped support for Dahua and Hikvision, citing US blacklisting and ONVIF conformance blockage, the company informed partners in an...
Dotty "Hot Or Not" Elevated Body Temperature App Tested on Jun 01, 2020
What if you could take an existing phone or tablet and transform it into "fever camera"? That is what DottyAR is doing with their strangely named...
Optris "Fever Screening Systems" Examined on Jun 01, 2020
German manufacturer Optris has been building temperature measuring instruments for industrial manufacturing for over 15 years, and thermal cameras...
Fever Camera Sales From Integrators Surveyed on Jun 01, 2020
Fever cameras are the hottest trend in video surveillance currently but how much are integrators selling them? 220 integrators answered the...
Proxy Presents Mobile Credentials For BLE Devices and Access on May 29, 2020
Proxy presented Mobile Credentials For BLE Devices and Access at the May 2020 IPVM Startups show. Inside this report: A 30-minute video...
ISC West 2020 Moves To The Basement on May 29, 2020
The twice cancelled/postponed show will now not only be held in a different month (October) but on a different floor, moving down to the...