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The economic impact of the COVID-19 pandemic may force many integrators to look into selling their companies to larger firms.
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4.16.20 – SIW

Companies lacking sufficient revenue to weather the coronavirus storm may need explore their M&A options

The COVID-19 pandemic has slowed or shut down large segments of the U.S. business community. The security industry is no exception. The economic uncertainty has led many end users to cut back or postpone planned security projects. Integrators have responded with four-day work weeks, furloughs, layoffs and other cost-saving measures.

Those steps still may not be enough for firms lacking sufficient revenue to continue paying employees and serving customers. The best alternative for owners of those firms could be selling the business. A few well-funded integration firms are already preparing for acquisitions as a strategically viable way to build a larger service footprint or enter new vertical markets.

If we’re still moving forward, we need to see a company’s EBITDA (earnings before interest, tax, depreciation and amortization). It enables us to focus on the integrator’s profitability as the prime measure of performance – minimizing non-operating results unique to each business. That helps to level-set comparisons between integrators.

Acquisition offers are typically based on a certain multiple of a company’s EBITDA. In some cases, a company’s current financial numbers don’t look great. However, forecasted EBTIDA – based on business returning to normal – may be far more robust. Owners may have to accept a lesser amount for their business now then receive more money a year or two later if the forecast is accurate.

What else do potential buyers want to see? They will look at accounts payable and accounts receivable reports that show how suppliers and subcontractors are paid and how promptly customers are paying for service. Any legal agreements with customers, subcontractors, vendors and technology partners are required, as is evidence of insurance.

Other necessary reports should list backlogged projects and tangible assets such as inventory, company vehicles, office equipment and real estate. An organizational chart clearly showing the responsibilities for each member of the team should include compensation data, benefit plans and vacation policies.

List any employees still embedded with customers as they represent recurring revenue. And highlight other sources of income, such as hosted and managed services and service maintenance agreements. “Lifestyle” integrators might tighten up their budgets by taking items such as family mobile phones and leased cars and country club memberships off the business’ books.

Owners also need to think about the role they want to play if their company is sold. Some may take the check and leave, while others prefer to remain and continue to help build what they created – in effect, take a second bite of the apple. Most often, buyers will want former ownership to stay long enough to help smooth the transition with employees and customers.

The owner of the integration firm being acquired needs to ask as many questions as the buyer. Here are just a few; How will the new firm be structured? Will all employees be retained? Will agreements with suppliers and other vendors remain in place? Also, confidentiality is vital. Sharing details of the negotiations before completion could sink the deal.

Don’t see this as a comprehensive listing of all the steps required to buy or sell a company. Both sides in the negotiations need to work closely with their legal and financial representatives to create a final agreement that protects everyone.

The industry offered many acquisition opportunities even before the pandemic hit and the number of owners looking to partner with or sell to better-funded companies has grown within the past few weeks. Brokers across the U.S. have asked us to consider several integrators as potential acquisitions.

Social distancing has temporarily made it impossible to close deals. We can complete evaluations and paperwork, but it’s still important to see the integrator’s physical location and meet with the owners beyond an internet video conference. It’s difficult to imagine any deals being closed within the next few weeks unless negotiations began long before the recent travel restrictions.

Acquisitions occur during the best of times. But economic upheavals caused by the current pandemic will leave a mark on the security industry that will last for years to come.

About the Author: 

John Nemerofsky is the chief operating officer of Kent, Ohio-based Sage Integration