2015 Predictions

January 6, 2015

Some experts I know are predicting that 2015 will be the year of "the deal" in this industry. I believe, in fact more than I would have thought possible at the beginning of 2014, that this is going to be one of the few remaining years in which traditional RMR is still going to drive purchase price, meaning that sellers are still going to be able to look for high valuations for their companies. Keeping that thought in mind, here are a few of my predictions:

There is going to be a significant shakeout among some of the biggest players in the industry. I see at least one, possibly two, of the larger players selling out and taking their chips off the table. And one of the probable sellers is going to be a large player that no one saw coming.

Many "traditional" alarm dealers are going to start migrating to the integrator model, thus not relying so much on RMR. This will more than likely create a "hybrid" approach to pricing — a seller who has both a book of RMR along with a traditional integrator book of business. Buyers are going to have to get more creative in their pricing models, brokers are going to have to develop a financial format that shows buyers why a particular target acquisition is worth more by combining a "blended" offering document that combines a multiple EBITDA on the integrator portion along with a multiple of RMR on the traditional book of business. It's probably the only way a reasonable valuation will be made on companies that offer both types of services.

Conversely, many integrator type companies will start offering traditional RMR models, focusing in particular on remote managed services revenue. Sellers in this category will be looking for buyers who are willing to use the same approach of placing separate valuations on RMR, along with valuations on EBITDA on the integrator portion of the business. Many buyers are going to have a problem with this approach since they are used to bundling any RMR into the multiple of EBITDA that is usually offered by traditional buyers. They've been able to do this primarily because the RMR portion is relatively small. That's not going to be the case going forward.

There are going to be more financial analysts playing prominent roles in the acquisition and merger sectors of our industry. As deal size increases, and more and more buyers of EBITDA type companies come into the marketplace, more and more efforts will be needed to fully understand the financial strengths and weaknesses of target acquisitions. This will force greater dependence on industry lawyers and accountants for good advice, not just for sellers but buyers also. This reinforces our opinion that it is necessary to have an understanding of our industry, combined with professional knowledge and skills in order to do the best job for clients.

There are going to be more opportunities for guard and patrol companies to expand their business offerings into the electronic sector of the security industry. Conversely, there is going to be an equal if not greater opportunity for traditional alarm companies to start offering services historically provided by guarding companies. As a side benefit of this, it may be just one of many answers to the question of how we resolve problems inherent in "false alarms."

Alarm dealers whose primary activity is marketing residential systems will see more and more activities that provide integrating opportunities for residential customers. Home automation, video monitoring, Internet monitoring of computers, PDAs, telephones, etc., will add value to the "stickiness" (i.e., customers will continue to stay with service providers who provide quality products and service, starting with security systems) traditionally associated with alarm companies. This will have some impact on the valuation of RMR, but that is still a work in process, although our thoughts are that evaluation would be made on the " blended rate" of the total contracted RMR.

I'll revisit this article at the beginning of next year, along with new predictions, and a look back on what is actually transpired relative to this year's six predictions. Should be fun! In the meantime, if anyone has any thoughts about these predictions, arguments or compliments, feel free to contact me, and I will respond to them along with an appropriate response.

2015 is going to be a great year for this industry. That's not just a prediction but a fact. The question you have to ask yourself is, of course, "have I done everything I should to take advantage of the opportunities that are coming down the road?"

By: Ron Davis, President | The Davis Group Ron Davis is well known in our industry, and is readily acknowledged as one of the most visible people in the security industry. He is President of Davis Mergers and Acquisitions Group, the industry’s longest running “broker” or “finder”, exclusively representing the sellers of alarm companies.