.16.19 – Security Business Aug. 2019 Cover Story:
Security Business Aug. 2019 Cover Story: Five security integrators on the mindset, mechanics and thought process when it comes to company expansion
Some security companies strive to stay a certain size; others embrace expansion – either through adding accounts organically, through new business, acquiring customers or whole company purchases. Depending a company’s size, its current makeup, vertical markets and customer base, the methodology is often based on real numbers – and sometimes gut feelings – on what will work and what might not.
Security integrators create an interesting business profile. The majority of companies in the physical security industry are considered small, ranging from one to 50 employees. That doesn’t mean they don’t have growth goals; however, smaller companies and start-ups especially usually need giant leaps to add substantial account base and boost revenues. Many of the larger companies boast significantly higher revenues and numbers of accounts, with operations spread across the globe. For them, continued expansion means critical, daily planning and a significant ongoing investment in infrastructure and operations.
The ‘right’ size is a matter of personal or owner opinion. But overall, the consensus is that decisions need to be made on the current environment, growing carefully and methodically while maintaining a strong focus on the customer and never compromising philosophy or ethos.
Examining the Metrics
What size company is best? It depends on the objectives and capabilities of the owner/management, says Henry Edmonds, president of the Edmonds Group, an investment bank focused on the security alarm industry.
“As businesses grow, they should enjoy economies of scale and improved performance metrics. If they do, they will become much more valuable. Larger businesses are more complex and more difficult to manage. Overly rapid or undisciplined growth often leads to failure or underperformance. Management’s ability is typically the principal constraint on a business’s ability to grow successfully. Recognizing your limitations, or the limits on the amount of time and effort you can put into the business is a key to determining the best size.”
There are reasons and considerations to maintaining a certain size, and if the business generates enough cash to meet needs both now and in retirement, then there is no financial pressure to grow, Edmonds says.
If growth is desired, there are certain specific metrics to use, according to Edmonds. “The key metric to determining valuation (and success) in businesses is cash flow and the rate that it is growing.”
He explains that the best measure is EBITDA (earnings before interest, tax, depreciation and amortization); or for the cash of RMR businesses that invest in new customers, steady state free cash flow (SSFCF). SSFCF is best defined as EBITDA before the cost of new subscriber acquisition less the cost to replace attrition. Key metrics that drive SSFCF are attrition rate, creation cost multiple and margins. “Customer unit economics and lifetime value are very important analyses that look at the combination of the key metrics,” Edmonds adds.
Choosing Their Spots: Security Pros LLC
The challenge to orchestrate the right process and timeline for expansion is real, especially for smaller security businesses.
It is a struggle to grow smartly, says Chris Gilbert, president and founder of Security Pros LLC, a custom systems integration company based in Memphis, Ind. With a mission to provide extraordinary product quality and customer service, Security Pros is focused on integrity, work ethic and a commitment to long-term customer relationships.
“It is tough to figure out where you are going to start and when and if you are going to stop,” Gilbert says. “We have grown and we have contracted at times. Right now, we aren’t anticipating growing via acquisition – instead, we are growing organically to maintain our customer-centric position. It is not that the company doesn’t want to grow, but we want to grow in a way that keeps our name at a higher level than our competitors.”
Security Pros, in business for 10 years, has 17 full-time employees and keeps projects in-house, rarely relying on subcontractors in order to maintain quality focus. “On our end, we are focusing on the customer and the niche markets that make sense for us and those jobs are getting bigger,” Gilbert says, adding that an acquisition is not out of the question in the future.
“We were looking at a local fire alarm company at one time – we reviewed the books and financials and realized the fundamental thought process to the business was so different that bringing this company in would not have been a fit,” he explains.
With integrity and customer care essential to Security Pros, Gilbert says that philosophy leads their expansion planning processes. He agrees that if a company grows too fast, it can become mediocre. “You lose focus on the customer and the processes that make it work well,” Gilbert says. “If you are growing fast, selling a job and moving quickly onto the next one, you are not able to build and solidify that deep relationship. Those relationships grow the business with less work. Focusing on relationships and those customers will bring more business too.”
Avoiding the Inflection Point: Northland Control Systems
Northland Control Systems Inc., Milpitas, Calif., is the epitome of a large, progressive managed services integration company with the future always in its sights – with measured and ongoing expansion part of the plan.
Northland Controls is a global company, covering the U.S. and Asia-Pacific, Europe, Middle East and Africa regions and with offices in Silicon Valley, Washington, D.C., London, Bengaluru, Singapore and Shanghai. It was founded in 1982 by Phil Cuendett as a fire and security systems integrator in the San Francisco Bay Area.
In 2005, current CEO Pierre Trapanese purchased the company, and its growth has been off the charts ever since. Over a 10-year period, the company grew organically from $1.5 million to $44 million. It has expanded to include the world’s largest commercial global security operations center as a service, which monitors more than 350,000 people across 400 sites and 20 countries; as well as a professional services division that provides everything from security systems audits and maintenance to performance improvements to compliance assessments. The company is a member of the PSA Security Network.
Although the company has grown to nearly $80 million in annual revenue, it is at an inflection point in that expansion. Trapanese says companies reach this inflection point in their growth where they need to make substantial investment to continue on that path.
“At 150 to 250 employees, a company is too big to be small and too small to be big,” Trapanese explains. “It is best to stay under 150 employees or work really hard to get beyond 250 people. You can be extremely nimble at 150 employees and above that, peer pressure starts to break down. We are working to get beyond 250 people and up to 300. Less than 300 is an extremely painful place to be, but we are breaking out of it.”
Trapanese does not believe companies have an optimal size; rather, growth depends on management and in-house capabilities. “You can have a 50- to 100-employee company and it can be highly profitable; but there are things you cannot do project-wise with 50 to 100 employees,” he says.
Trapanese adds that growth mandates going beyond typical investment needs. “The metric for growth is cash flow – 15 percent is a healthy growth number,” he says. “In the early days of a company, you can have 100-percent growth. Going from $50 million to $75 million, it is difficult to find that $25 million in a one-year period.”
Northland Controls has strictly grown organically, but Trapanese acknowledges an acquisition may be necessary to reach his $100 million annual revenue goal. “My angle is to build a $100 million company that is built to last, and it is critical to find the right people who can deliver,” he says. “There are a lot of variables and rules to growth, but no hard-and-fast rules.”
Keeping it in the Family: The Protection Bureau
For The Protection Bureau, Exton, Pa., started by Keith and Mary Ladd from nothing in 1975 and adding central station monitoring in 1983, expansion from zero to an $18 million company has been planned and purposeful, explains president J. Matthew Ladd.
The company continues to be owned and operated by several family members and has been a TMA Five Diamond-certified central station and Security-Net partner for many years, as well as a PSA Security Network member company.
“You have to adjust and maneuver and reposition yourself to be successful,” Ladd says. “With an $18 million company, I have to hit those numbers every day. You have plateaus where you reach a point where you want to raise it to the next level, (but) we want to grow in a profitable and efficient manner. That means looking at profitability and expenses carefully. It is a juggling act to use manpower effectively and not waste it.
“You have to look at all your vertical markets and where you are successful,” Ladd adds. “The industry is at a challenging point. We have to deal with cybersecurity, APIs and new integrations, and there are many moving parts and new players.”
Ladd says the company is currently growing more organically than through acquisition, however, he always remains on the lookout for new opportunities to boost market share. For example, he expects a 30-percent boost in the company’s overall growth as a result of upgrading legacy access control systems for certain clients.
“There’s a thought process to expansion, and growth is good as long as you plan for it,” Ladd says. “You have to be alert and understand the finances and operations of the business.”
He adds that it too can be difficult for smaller companies to maintain growth. “There’s no room for error – you need a well-rounded installation, monitoring and service operation so one piece can pick up for the others if things get slow,” Ladd explains. “In any business, you need to have a plan, execute it and make sure everyone in the organization knows the objectives and how to reach those goals.”
Focused on Organic Growth: Allstate Security Industries
Allstate Security Industries Inc., of Amarillo, Texas, is a third-generation business started in 1926 by Randall Renfroe’s grandparents.
The company has grown over the last six years from 40 to 97 employees and from operations in five states to all 50. This year, they will bring in some 67,000 new monitoring accounts to its UL-listed, Five-Diamond central station, including 8,000 video alarm verification (VAV) accounts.
The company’s growth has come organically and from zero acquisitions, says Renfroe, who is company president. He is bullish on potential profitability from video monitoring; in fact, by next year, he expects to have more than 20,000 VAV accounts while also growing its third-party monitoring and internal accounts.
“We are adding 17 more workstations to our monitoring stations, and right now, one of the biggest issues is that because we are growing so much we need to automate more,” Renfroe explains. “We invested $250,000 in our infrastructure last year to integrate all of our systems into one platform so everything can operate under one umbrella. If you are not trying to grow your company, you will end up having to sell. If you do not change, you won’t remain relevant in the industry.”
As far as the future, Renfroe has a goal of obtaining a total of 400,000 monitored accounts.
“Our first step to achieve that number is with VAV and managed access,” he says. “Once we get to that number, we can be one of the big players.”
Renfroe says he does not believe accelerated growth can harm a company – especially when the business is bringing in large numbers of the same type of accounts, like VAV.
Open to Many Options: Marshall Alarm Systems
A past president of the Electronic Security Association (ESA) and executive committee member, Marshall Marinace, president of Marshall Alarm Systems Inc., of Yorktown Heights, N.Y., says the RMR aspect of the business dictates that the status quo just will not work.
“I don’t think anyone should think of keeping their company the same size – they should always be looking for continued growth,” he says. “If you don’t grow, attrition is going to eat you up. Everybody should have growth on their mind. There are companies that do not have a large account base and decided to stay small and keep it simple, but what is their exit plan?”
Marshall Alarm Systems is a 40-year-old company with 15 employees. Oldest son Marshall J. is currently working day-to-day in the business as operations manager and has brought a fresh perspective to the company.
“Companies should always look to grow so they do not become stagnant,” Marinace says. “No matter what size company, it is important for even the smallest companies to have metrics in place and plan to grow by X percentage or number of accounts. I think the status quo is a death knell.”
Deborah L. O’Mara is the managing director of DLO Communications. She has been writing about the physical security and systems integration industry for more than two decades. Reach her at firstname.lastname@example.org.