How security companies can unlock growth through acquisition financing

Many successful acquiring security companies borrow against the equity of their recurring monthly revenue (RMR) portfolio to raise capital to support acquisitions.

Lenders who understand the value of RMR associated with security monitoring contracts will structure loan availability based on a multiple of your RMR. For example, if your company has $500,000 in eligible contracted RMR, and the lender provides an advance rate of 20×, that results in up to $10 million in borrowing availability. This does not mean you have to take out a $10 million loan, but merely determines the maximum available for borrowing.

Now let’s say you acquire another $100,000 in eligible contracted RMR. The acquired RMR increases your maximum borrowing availability by another $2 million, bringing the aggregate availability to $12 million. As you continue growing your RMR through acquisitions and apply any excess cash flow to pay down your bank loan, you’ll unlock the ability to finance increasingly larger acquisitions in the future.

Lenders that understand your business and the value of RMR can be a strategic partner in achieving your growth goals through acquisition financing. 

When most banks evaluate an opportunity to extend credit to a strategic buyer, they first look to the company’s balance sheet for tangible assets like inventory, accounts receivable and other fixed assets. As a knowledgeable lender to security companies, we find most balance sheets do not reflect the security company’s most valuable asset, the RMR contracts. As a result, your assets may seem too low to support your strategic goals, to a non-industry lender.

Banks also consider the cash flow from operations. Creating an RMR contract often requires a substantial upfront investment on your end. Initially, you may lose money in exchange for creating a long-term asset, the RMR contract. Your creation cost reduces cash flow as you invest in generating long-term RMR contracts. It’s not uncommon to see a fast-growing company with lower free cash flow, when compared to a similarly-sized, slower-growing company.

Based on traditional lending metrics, a successful, fast-growing security company might come across as an unsuitable credit risk, despite having RMR worth millions. Imagine how frustrating it would be to miss out on an acquisition opportunity because you cannot raise the capital.

This is why working with a lender with deep expertise in the security industry is so important. At CIBC, we understand the value of security cash flow and make the adjustments needed for a company’s investment in RMR when considering loan applications.

Financing a deal is just the first step to more growth. Savvy acquirers seek acquisition targets with accretive cash flow, so following an acquisition, you immediately recognize the additional cash flow from the acquired RMR.

Disciplined acquirers use the excess cash flow to pay down the acquisition debt quickly to create more borrowing availability for the next transformative acquisition. By repeating the cycle, you can leverage your business to grow exponentially over time, while maintaining moderate leverage.

Acquirers can achieve even greater success by creating a thoughtful integration plan for the deal that considers how to merge the operations of the two companies, blend the workplace cultures, and retain top-acquired talent.

For example, the acquired firm could come with its own successful sales team to help you generate even more RMR than what you purchased, provided you figure out how to get the most from these new employees. 

If your strategy includes growing through acquisitions, plan your financing well before you have an acquisition in the pipeline. Time is not an ally during negotiations, given the tough competition for quality deals. It is stressful, challenging and complex to complete an acquisition and a loan closing simultaneously, along with running your existing business, too.

You can get approved for financing ahead of time based on your existing RMR. The confidence in capital availability is another positive point to bring up when negotiating with a potential seller.

Your lender will still need to review and approve the acquisition, but you can shave off significant time from the process by getting a line of credit in place ahead of time. That can help you avoid losing a deal to a competitor because of financing issues and time delays. Starting early also gives you more time to prepare your integration plan rather than trying to piece it together only after the deal.

At CIBC, we know that long-term relationships are key to the security industry — and that’s true of our team as well. We can help you understand your financing options and prepare you for a future acquisition, even if it might not happen for years down the road.

We support acquisition requests on a regular basis and work closely with clients to complete due diligence and provide consent within the tenor of industry-standard letters of interest

Are you interested in growing your security business further? Reach out to us today to learn more about how you can unlock the power of debt financing at CIBC US Security Industry Group.