Acquiring thy neighbor?

YARMOUTH, Maine—One of the best ways for security companies to build density is to acquire a local competitor, but there also are potential pitfalls when doing business in your backyard, according to five security company executives who have experience with these kinds of transactions.

John Jennings, president of Scottsdale, Ariz.-based Safeguard Security; Pat Egan, president of Lancaster, Pa.-based Select Security; John Loud, president of LOUD Security Systems, based in Kennesaw, Ga.; David Goldstein, president of Guardian Alarm in Detroit; and John Cerasuolo, CEO of ADS Security, based in Nashville, spoke to Security Systems News about best practices for acquiring neighboring businesses.

There was some difference of opinion—particularly on the question of when to rebrand an acquired company—but all agreed that, as Egan put it, “you need a little extra TLC when you're dealing with a guy in your backyard.”

For ADS, that TLC starts well before any acquisition activity.

Be a good neighbor, says ADS' John Cerasuolo. “It's very important that your company behave in an ethical way and have a good relationship with competitors.”

He said that ADS has a proactive program where they reach out to competitors so they get to know ADS.

“We're competitors, but there's no reason we can't have a trusting, respectful relationship,” he said. In addition to good business relationships, this goodwill “sets the stage, so that if they're ever thinking about selling they know what kind of company we are, how we treat our customers and employees, [and] that we're aggressively growing.”

Cerasuolo said that getting competitors “interested in our company, what we do and how we do business … can lead to acquisitions [down the road].”

Once an acquisition is completed, nomenclature matters. When you buy a direct competitor, it's best to announce the deal to customers as a merger rather than acquisition. “We'll announce it to the customers as a merger of two assets,” Egan said. “You don't want to make it sound like you're superior over another.”

Jennings pointed out that “customers don't like to be acquired.”

And you enlist the seller in announcing deals to customers. Letters are sent out to customers from the seller and new owner, explaining that this deal will be beneficial to the customer and that the former owner made the decision to sell to this particular company.

Goldstein, of Guardian Alarm, said that welcoming the new customers is a “driven campaign that goes on for four to six months.” Guardian sends a series of letters, starting with a welcome letter, and 60 days later Guardian may send a letter offering that customer an opportunity to use an automatic payment feature. Other offers follow. “They hear from us so often, they believe their security company has always been Guardian,” Goldstein said.

John Loud said the initial customer letter may “also makes the case that the seller chose to sell to another local company, not a larger regional or national brand.”

Loud hand signs every letter that goes out to new customers and includes his cell phone number.

Loud also rolls a truck out to every new account he acquires. It's an expensive practice, but one that pays dividends, he said. During that visit, the LOUD technician updates the emergency contact list, recertifies the system, and walks through the operation of the system with the customer.

This ensures the alarm system is in good working order and that the customer's billing and monitoring information is correct and up to date. It's also an ideal time “to sell add-ons, whether that's cellular or interactive services, or a maintenance plan. At the very least, they may want us to replace a battery,” Loud explained.

The personal visit is an opportunity for the new customer to get to know LOUD Security. It may have been several years since the former company was in touch with the customer. “The goal is to keep attrition down,” Loud said, and the visit is one way to do that.

LOUD said he figures the cost of that visit into the purchase price. “We equate it to a four multiple,” he said.

Loud pointed out that sellers are interested in assisting with the transition, because they must typically guarantee all accounts for 12 months after the deal closes.

For important accounts, it's often a good idea for the seller and buyer to visit those customers before the deal is announced.

Egan said he bought one company and two large customers were not interested in becoming Select Security customers. “I went out with the seller, met the people,” he said. “We assured them that all the staff [of the acquired company] were coming on board, that nothing [in the agreement would be disturbed] and that that monitoring would change for the better. Today, those customers are still ours.”

While a local competitor is generally selling because the owner wants to retire, there are other situations—death of an owner or an owner who is terminally ill, for example—that need to be handled delicately.

Other situations also warrant caution on the buyer's part.

Understanding the employees is “very, very important, and more so if you're buying the guy next door,” Egan said. You want to know if an employee or an owner intends to go out and start a competing company and whether non-compete agreements are in place.

John Jennings put it this way: “You need to understand the end-game of the person you're acquiring.”

All said that they generally try to hire employees of the former owner, but they had different opinions about when to rebrand an acquired company. “I don't make global changes [immediately] after closing,” Egan said. “I'll use their name for a while. We'll answer the phones as ABC Alarm for a while, then it becomes ABC Alarm/Select Security, then eventually it becomes all Select Security.”

Jennings and Loud, on the other hand, said they will rebrand an acquired local competitor immediately. “We try to make them our customer as quickly as possible. I want them to know they're dealing with Safeguard,” Jennings said. He said that his brand is very strong in the Scottsdale, Ariz. area and “we want customers to see that they're dealing with a better company.”

The exception would be if he acquired a company outside of his general area. “If I went to another city, I would probably keep [the seller's] brand, because his brand would probably be stronger than mine in a different market.”

Loud concurred. “I always rebrand right away,” he said. He also agreed with Jennings about keeping a competitors' brand if he were acquiring outside the area. For example, he said, “Loud has no brand or value in Macon, [Ga.], so why would I change a good brand if [an acquired company] had a good thing going?”

Regardless of whether you decide to rebrand an acquired company, there's one golden rule of acquiring thy neighbor, according to Egan. “Treat them right,” he said. “If you don't it'll be your last deal in this industry.”