Security patrol guard business diligence
March 05, 2021
by a searcher from Princeton University in San Francisco, CA, USA
Fellow searchers, I was wondering if anyone has looked at security patrol guard businesses for acquisition and what risks one should watch for when going into this.
I see on BVR Dealstats and Peercomps that the multiples for $3M-$8M revenue businesses is around 2x, which seems lower than say a commercial landscaping business and implies a higher risk premium.
I also see on the IBIS report that the industry is in a declining phase because of security alarm systems, so it appears similar to the print industry in some ways, except for being asset light.
I would appreciate any thoughts! Thank you.
from Cornell University in Denver, CO, USA
This is very similar to a "cost plus" model with slim EBITDA margins (5% - 10%) and a highly variable cost structure (ie. most of it is low wage labor);
KPIs: direct margin (essentially the difference between bill rate and wage rage, including allocation of training, vacation, and workers' comp insurance); hours won / lost on a week over week basis; bill rates over time; wage rates over time; overtime; guard turnover (for good companies this is ~ 75% and for bad ones it's about 300%);
Other considerations: ability to hire, train, and place guards (issues happen when guards don't show up / shifts don't get filled = angry clients); this industry is very old school in that a lot of the customer relationships sit with the owner or one or two senior execs - it's very common to see customer loss post-close); insurance programs and costs are key diligence items; armed vs. unarmed guards (armed = more liability); geography (eg. it's easier to operate in the southeast than California, for example (CA has a high degree of wage / hour litigation); minimum wage; customers by end market (eg. wouldn't want to be in Events right now or office-oriented real estate)
Valuation stuff: $10m+ EBITDA businesses will trade for 10x+; smaller deals (<$3m EBITDA) are usually done as asset deals where the seller keeps the working capital and there is usually a 30% holdback related to customer retention over a 12 month period (this is a very common construct in this industry and many of the aggregators lead with this structure, so many of the smaller firms "expect it"). Smaller firm multiples in the 3x - 6x range
Happy to speak directly if it's helpful - redacted
from Massachusetts Institute of Technology in Boston, MA, USA