Alarm companies, are you focused?

IRVING, Texas—A new Barnes Associates study shows that alarm companies that specialize in vertical markets within residential security are likely to have a greater return on investment when it comes time to sell.

“We analyzed more than 120 transactions over the past 10 years (those involving $100,000 to $10 million of RMR) and looked for correlations across a number of variables [including size, metrics and operational focus],” Michael Barnes told Security Systems News.

Barnes, a partner in the consulting and advisory firm Barnes Associates, which specializes in the security alarm industry and co-sponsors the Barnes Buchanan Conference, presented his findings here on Jan. 11 at the ESA Leadership Summit.

When you look at the exit multiple alone, size had the strongest correlation to value, he said. However, he said, when you consider the ROI for investors, “focus” had the strongest correlation to value.

So what exactly is focus? Barnes defined focus as companies with a concentration in vertical markets, geography, and product/service offerings. Noting the term “vertical markets” is generally reserved for commercial concerns, Barnes said he “included segments of the residential market as vertical markets—for example if a company focused only on entry-level residential using low/no cost systems, we considered that a vertical market, as we did someone that did only ultra-high end residential to the very wealthy.”

Barnes said he did not have a specific list of vertical markets, noting his team took a close look at each of the companies and “scored” their degree of reliance on vertical markets.

Barnes surmised that companies with a vertical market focus were likely to have greater operation efficiencies, a more defined value proposition, a clearer competitive landscape, and a better narrative that is easier to tell.

“The Broadview valuation, and its contrast to Protection One supported this thesis, as Broadview was highly focused on the residential middle market vertical ... [while] Protection One was less focused: commercial, residential, wholesale, multi-family.”

He also said the higher valuations/returns realized by dealer program players in a very tough market (Monitronics, Security Networks, CSG) supported the vertical focus thesis, as they are almost exclusively focused on one vertical.

Do these findings suggest alarm company owners should begin specializing in vertical markets? It's not that cut and dry, Barnes said. Other traditional correlating factors (size, performance metrics, geographic focus) still are extremely important.

However, he said, “Having operating focus, including focus on vertical markets, can and is statistically rewarded with higher valuations and/or investor returns.”

In many ways, the overall data showed “what most operators already know,” he said. “Being a large, focused operation, concentrated geographically or by vertical markets, with great performance metrics, is a great place to be. The more you chip away at any of these characteristics, the more the odds work against receiving a premium valuation or return.”