Buying a Business and How to Merge Successfully

Hosts Stephen Olmon and Collin Trimble lay the groundwork for M&A in security & life-safety, how to buy your first (or next) company without blowing up your P&L or culture. They unpack how they’ve bought 6 (soon to be 7) alarm businesses in under two years, why they’ve stayed in their lane with RMR-heavy alarm companies, and how to think about platforms, add-ons, and tuck-ins before you ever sign an LOI.

From choosing the right type of security company (integrator vs alarm, commercial vs residential), to navigating RMR vs EBITDA valuations, to financing and due diligence, this episode is your primer on doing deals that actually make you richer, not just busier.

If you’re daydreaming about “buying a book of accounts” or a shop in the next city but haven’t nailed your strategy, financing, or integration plan, this one’s for you.

✨ What You’ll Learn

• M&A Fit > M&A FOMO
• Types of Security Companies to Buy (or Avoid)
• Platforms vs Add-Ons vs Tuck-Ins

💼 Extra Special Thanks to Service Scalers!

We’ve been partnering with Service Scalers to maximize our Local Service Ads (LSAs) and optimize our Google My Business profiles, and the results have been incredible. With hundreds of thousands in sales and 900+ calls in a single week, GMBs are now our top-performing organic lead channel.
Want to learn how Service Scalers can do the same for you?

 🔗Check Them Out Here    

🔗 Connect

Stephen Olmon 

Collin Trimble

Owned and Operated

New Episodes Every Wednesday!

Subscribe For More

Chapters

• 1:15 Understanding Different Types of Security Companies
• 5:21 Strategic Considerations for Acquisitions
• 25:11 The Importance of Auditing Contracts
• 29:31 Understanding RMR vs. EBITDA
• 42:29 Financing Your Deals

Transcript

E&E EP 07

Colin Trimble: [00:00:00] Welcome to Entry and Exit. I'm Steven Ulman, and this is my co-host and business partner, Colin Trimble. And we run Alarm Masters, which is a security and fire company in Houston, Texas. And we're here ultimately to unpack the security and life safety industry piece by piece to give you practical, tactical advice on how to grow and scale your business.

Stephen Olmon: Today we are talking about m and a. We're gonna spend a little bit of time talking about how we purchased. Six businesses, almost seven, soon to be seven in less than two years. What today's not gonna be is a story on every single one of the deals we've acquired, which we hope to spend some time on, on future podcasts.

Uh, what we want to do is kind of set the scene on the state of m and a things that you need to understand from a valuation perspective, understanding certain terms and ways, uh, different types of businesses that can be acquired. What would be the right fit for you? Thinking about where we can find these particular deals, um, and [00:01:00] what type of targets are realistic, what type of ways you could get funding or financing.

So we really wanna set the foundation today. Um, just in an effort for us to spend more time in the future talking about this concept, we are gonna sprinkle in some kind of anecdotes and stories about some of the deals that we acquired, uh, to give you guys a little bit more information. Uh, but we're gonna kind of kick it off, uh, today, talking about.

Different types of security companies or integrators that you could acquire. And I think that it's important to distinguish this because in our industry there's several different quote security companies that exist. Mm-hmm. And ultimately, the type of security company you're gonna purchase is going to inform the way that you value them.

Uh, the way that their financial makeup is, looks and, and the things you'd be kind of looking for. And so I'm gonna let Steven kind of jump in here. Steven, tell us a little bit more about the different types of security companies and, and sort of their behavior, what they, what they look like. [00:02:00] 

Colin Trimble: Yeah, so I would say the, the largest delineation, just right off the top is, uh, commercial versus residential.

And then you've got a lot of people just like us that are somewhere in the middle. Um. Now even within that, there might be a, a company that's much more commercially focused and they just take, you know, the, the business owner's house and so they do the onesie two Z residentials, um, kind of out of necessity or just to be able to say yes to people, but it's not a focus.

Then you have people that are much more of a blend, a hybrid, and then obviously many of our friends that are all in on residential. So that is kind of like the very first thing I'd say is to think about. Who are these companies serving? And then the very next thing that I'm thinking about is how they're going to market.

Yeah. Are they more GC driven? Are they, you know, hyper kind of RFP bid driven? More of an integrator, much more construction [00:03:00] esque. Um, and so you see people that are focused on ground up, multifamily as an example, like that. Is a very specific style of security company and it differs greatly in, in a lot of ways, um, financially, operationally from a sales and marketing perspective.

Um, then a traditional alarm company. Right. 

Stephen Olmon: Yeah. I think that's an important distinct distinction. And, and even between in those is multiple layers or hybrids of businesses that, um, might not do ground up construction, but would still be considered an integrator. A lot of my friends and peers in the industry don't really do a tremendous amount of ground up or, or sort of GC work, but they're technology integrators, and that's really where the term came from is a technology integrator is usually somebody that.

Spends a lot of time on the network, maybe does a little bit of av, uh, does a lot more access control and, um, video surveillance and probably a little bit less intrusion or [00:04:00] fire alarm. Um, they're looking at gates and telephone entry systems and, and all of those things. So that would be sort of more of a traditional integrator.

And then, and then the traditional alarm business, which, which we are. Passionate about, uh, given the name of our businesses, ALARM Masters. Sure. Um, and that's who we target. Um, alarm, traditional alarm businesses are, uh, really what you would classify as small, very small or medium sized businesses that are typically, um.

Old 40 plus years old that, um, were some of the first to install these burglar alarms and they're gonna have a lot of burglar alarm, fire alarm accounts, and probably not as many video or access control. Right. So I think that that's important because like Steven said, I think the valuations are gonna depend on that.

And also, I think it's Steven and I think, can you talk about, hey, if you're, let's just pretend like if you're a traditional integrator that does ground up construction, why you may or may not wanna look at. Buying a residential company or buying an attrition alarm company, why sort of staying in your lane, or at least having a [00:05:00] plan for, you know, if you're gonna get outside your lane, having a pretty tight plan.

Can you talk a little bit about that? 

Colin Trimble: Yeah, we've seen it. We've, we've been tempted by it, actually. Yeah. Um, and, and that is to, to become something that you're not without a real plan in place. And so if you are, let's say more on that. Um, kind of traditional alarm side and maybe you want to get into a new market, you know?

Um, for us, like we obviously are in Houston, maybe we're looking at other cities in Texas, you could potentially, uh, kind of reach overreach, overextend yourself without a really solid plan in place by buying, let's just say kind of a more, um. Integrator, construction, you know, ground up, multifamily, I said earlier as an example, and if that's not what you're used to, there's a few different issues with that.

So one, [00:06:00] um, the, the kind of the financial operations of your business, the way that you are used to functioning, who you have on the team, um, and ultimately the, the services you're providing. All of that. Um. It's, it's not like a formed playbook that you have, and maybe it's a scenario. It could be where you are thinking about an acquisition that is different than you are, and you're going to try to keep some of that leadership in place, uh, like I would hope so.

Mm-hmm. Um, if you don't like, there's gonna be a leadership kind of management ops gap real quick, real fast. Yep. And I'm gonna get really concerned about that p and l. Um, and so, you know, um. It kind of comes back to who you are, um, what you're good at, what you're doing today, what you know. And if you're gonna take a big left turn just to go enter a market, you're gonna get kind of punched in the mouth if you don't have a very [00:07:00] specific plan in place.

Stephen Olmon: Yeah, I think having a plan is important because I think, I think another thing that's really important is what is your reasoning for buying a business? I think you've gotta get to that. Why? If you're just trying to accumulate EBITDA or RMR, then you're gonna probably want to, um, buy something in your lane that's very close, maybe within your geography or something that's in a new geographic market.

If you're trying to build and scale, uh, and you're trying to grow horizontally, you may look at some industries that are tangential. So I have a friend that's an integrator who does a tremendous amount of access control and he's hunting for locksmith targets. 

Colin Trimble: Yeah. 

Stephen Olmon: Uh, he really likes locksmithing targets.

Uh, he feels like there's some really great leads in that market. And by the way, I do too. It's not a fit for our business model, but I think that it's a fantastic place to go purchase, uh, is locksmithing because they get a lot of access control, electronic access control leads. Another one is, we had a friend that did, um, a [00:08:00] lot of ground up construction, so he purchased a, uh, a structured cabling company.

That did a little bit of like networking, uh, you know, some of played in that market. But then what they were trying to really find were those, uh, customers that are extremely loyal to the structured cabling company. And they'd been asking them, Hey, why don't you do security? Why don't you do access control video?

And so that was sort of a natural fit for them. So. I think you've gotta make a distinction between are you trying to get larger and broader in your scope and trying to find new, uh, avenues to generate value that that might take a little bit longer to see a return on your investment there? Or are you just trying to accumulate EBITDA and arm mar and truly, I think that that distinction is between what's your long-term plan Exactly.

If you're trying to, if you're trying to sell. In the near term, we'll say five years or less, then you're probably not gonna want to go take a swing at something that's tangential to what you're doing today. You're gonna wanna stay in your lane. But if you're building for decades, then yeah, I think you should take that longer term, more broad approach and I think that it's gonna pay you [00:09:00] dividends.

Colin Trimble: Yeah. A lot of it comes down to fit. Like does this fit, how does this strategically fit with my current business? We all know like business is hard. It, it's hard, uh, to, um. You know, ensure that things are kind of firing on all senders, on cylinders on a regular basis. Senders and then senders. Yeah. Yeah. Um, so don't play on hard mode, like don't Yeah.

Make a mistake without, uh, you know, and I also know some people that have thought about going into a new market, maybe they're going to try to buy both sides. And that's also, I mean. That that's even more cha and by both sides, I mean you, you're buying maybe alarm accounts and something that's more, um, kind of an integrator and you're gonna smash that together and Yeah.

You know, some of the nationals have done that, but they had a lot of kind of in-house discipline skill, team playbooks process already. That's right. That's different. It, you know, and, [00:10:00] and so a lot of times we're speaking to kind of the more independent, smaller regional operators out there. Yeah. And you just have to know who you are.

You have to know how this is really gonna play out. Like let's just use common sense. Yeah. You know, like, and so if you have any hesitation or, or trepidation around a deal, you probably should slow down and, and really make sure that, um, it's worth it. Like, is it actually going to play out and be worth it to go buy this business?

It's doing. 800 K of ebitda. Yeah. Or, you know, or it can invert too, right? Like if you don't know the alarm side, just buying alarm accounts and hoping they just keep paying you is a bad strategy. Yeah. Right. You know, so, um, it goes both ways 

Stephen Olmon: and value extraction, like having a plan for how you're gonna drive incremental value from that.

I, I talk to a lot of folks that this is probably honestly the most asked question we get from our peers is, tell [00:11:00] me more about your m and a strategy, how you're finding deals, how you're financing them, et cetera. Um, and one thing I always ask is, why do you want to acquire? And I'm not trying to sound elitist, like, oh, you can't join the club.

It's just like, Hey, if you don't have a, uh, robust organic growth strategy, then trying to go buy something and trying to find, you're just gonna have to live and breathe by the, the, the EBITDA or the RMR they're already doing. You're gonna have a hard time extracting value if you don't have your in-house organic strategy.

Pretty tight. Uh, and by the way. Yeah. And by the way, all the, the deals we've acquired six soon to be seven. I think there's a Gen Z joke in there. Is that right, Steven? Yeah, we're we're meaning six, seven, we're meaning right now. Okay. All right. Okay, cool. Uh, of the six that we've done, we've technically only purchased, uh, one platform business, which we're gonna talk about these terms in a second.

And all the rest were what we would classify as some blend of add-ons or tuck-in type acquisitions. Uh, another thing before we jump into that is. All of the deals we've purchased so [00:12:00] far have been alarm businesses. Um, of the six deals we've purchased, they have all been alarm businesses. We are pretty passionate about staying in our lane, uh, because we're not trying to be the best at everything.

I was at a conference recently and there was a, uh, an integrator I was talking to outta Canada and he was super successful and like truly props to him. Um, but I asked him, you know, what scopes of work do you service? And he said, literally everything we do, all the locksmithing, all the av, all the structured cabling, access control, fire, all of it.

Every single thing we build solar trailers, we build. I, I think that that's an approach for me that's. That's not the approach we want to take. We want to stick as close to our core competency as we can because there's also, and, and we could spend a whole episode on this, Steven could, at least on the integration of these businesses.

Mm-hmm. And when they're farther away from you, um, in your type of lane, the harder it gets. And if you're not buying them as a [00:13:00] platform, if you're gonna buy something that's not in your lane as a tuck-in, you're gonna have a lot of operational pain associated with that. 

Colin Trimble: Yeah, 

Stephen Olmon: so you've gotta think about what your strategy is.

Uh, alarm Master's strategy, we've talked about this, is we wanna buy accounts that have a lot of RMR associated with them, and we want to bring them into our business. And we want to put our organic playbook on top of that. And we would like to see, you know, return on investment within two to three years max from a gross profit perspective.

And our whole playbook is ad accounts, do drop-ins with the sales guys. That's our whole approach. So that's, we're laser focused on that strategy. Uh, we're also laser focused on growing organically. Sorry, growing geographically. Through inorganic means. So we don't really want a green field into another market.

Uh, we don't want to go open up a, a branch in Dallas. We feel like that's probably not wise. Trying to acquire somebody in Dallas and then grow that branch would be our preferred approach. Um, and so anyway, I want to [00:14:00] talk, Steven, talk, talk us through the difference between platform add-on tuck-ins, the nuances behind that, and sort of what you need to be thinking about from a sizing perspective, because I think that's an important thing to classify.

Colin Trimble: I, I would start that with just the idea of disruption. So with each level there's like increasing levels of disruption and challenge. And AKA pain. Pain. Yeah. Pain, um, energy, I mean, money, you know, all of the things that pull on you. Um, so if you, if you think about, um, you know, a, a true platform is. Um, for us today, like we are in Houston, so we would think of a platform in another market is what that, that would mean to us.

So let's just use, you know, DFW. So, um, that looks like buying a business and, and we'll get into valuations in a little bit, but probably more likely a EBITDA based transaction. [00:15:00] Um, it has a larger team that we're wanting. By and large to, to retain. Maybe there's a little back office admin that we would consolidate.

Um, but we're looking for a really quality team, talented technicians that have been there. Um, some, some management ops manager, things like that. Um, so, um, because it, that's what's required. I mean, even just a three hour drive, you know, down 40. It's, you know, we don't have teleportation yet. Um, Elon Musk, if you're listening, he's working on it.

Work. Please work on that. Um, yeah. And so it's just not as simple as you want to make it out to be, in your mind of buying a business in another major market that's hours away. And so if you're going to buy a platform deal, it's going to be expensive. It's competitive. Mm-hmm. You know, a business like that's got.

Several different people vying for it typically, unless there's some off market relationship you may have, which is great if you can take [00:16:00] advantage of that. But most of the time you're dealing with lots of competition and high multiples, which we'll, we'll get into more in a bit. Um, and so you've now got more risk in the form of spending more on it.

That also probably you, you likely may have used leverage, you know, some debt to fund that acquisition. Maybe a mix. Of cash and debt. So if that's a larger transaction, you've got a larger amount of leverage. Mm-hmm. And so there's just more risk at play, so you've really got to buy. Right. And by buy, right, I mean, going back to buying something that you feel very confident in the plan to execute on.

Ideally it is the same style of business that you already run today. Um, ideally. So that's, that is, uh, what I call a, a platform. Um. And they don't grow on trees, you know, to find a little tuck in to go buy 5, 10, 15, 20 k of RMR, you know, and you're [00:17:00] gonna go do that, that's one thing. But to find these really quality platforms in major markets is very competitive.

And so there is, um, kind of both sides of the house of you have to be careful, um, you, you don't wanna make the wrong decision. But at the same time, and, and we've seen this. You also kinda have to be willing to be aggressive to get those deals done. Right. So it just, all of it is more, it's more money, it's more time, it's more risk, it's more effort.

Um, more upside. More upside, also. Very good. Uh, addition. Thank you Colin Trimble. So, um, so then step that down. You know, we would think of an add-on. Being more in, so you got platform add-on, tuck in an add-on to us would be kind of a, a larger, um, RMR acquisition in your market typically. Yeah. Um, it's gonna add on to your operation, but it's not, um, easy.

You know, nothing's easy, [00:18:00] but it's not, you know, if you do a small little tuck in. That should be fairly seamless if you've built any sort of process around integrating those accounts in which we'll talk about, but an add-on, there's still some weight to it, you know? Yeah. Maybe you bring on over a couple technicians in that scenario.

Um, and those deals will still have some degree of competitiveness. Competitiveness to them typically. Um, and those are typically, um, kind of multiples of RMR if we're talking about an add-on that is more of a traditional alarm account. Uh, alarm business like we would buy. So, um, that is kind of fits in the middle of the energy and the risk and the time and, and the money and, and the competitiveness.

Yeah. And then the last, the last kind of, uh, segment is on the, um, on the tuck-ins, which, you know, it sounds cute. Just a little tuck in. Just a little tuck in at night. Just a little tuck in of accounts. No one's getting 

tucked in with a tuck in, you know what I mean? No one's getting warm tuck-ins with the [00:19:00] tuck-ins.

Just a little tuck in, you know, just feels, feels nice. Yeah. Um, yeah, you know, that's typically, uh, I would think of a tuck in being like 10% or less of your current RMR, you know, something like that's that sort of ratio. So let's say you're doing 200 K of RMR. What really is a tuck-in is, yeah, 20 K or less.

And it, it should be fairly seamless. The very first time bumps and bruises for anything. Yeah. But going forward you shouldn't have as much, um, kind of nerves around doing a deal like that. It should start to become a, a well-oiled machine. 

Stephen Olmon: Yeah, that was a really great overview and I think, uh, to, to apply it to our experience, we've really only done one platform.

Um, sized business, which was ALARM Masters. Um, so we kept all the employees. We, we walked into Alarm Masters with, uh, the whole operation stack. Staying, like, staying the same. We didn't have another business to roll it [00:20:00] into, so, so Alarm Masters was technically our first platform and we learned a lot, uh, a lot.

Um, and a lot of that is gonna inform our next platform purchase. Um, but then I would say. Of the remaining five that we've done, um, they were all add-ons and tuck-ins, and I would say probably, what would you say? Two, two of those five were add-ons and the other three were tuck-ins. I mean, something, something like that.

So yeah, basically. Yeah. And, and I think that, um, I think that it's important to distinguish that. And here, here's one thing I think is really important to understand, and this is, this is something that's. Hard to, to conceptualize until you do it, which is you are going to have to overpay and you are going to be, uh, less competitive when you're buying a platform versus somebody when you're competing against somebody that's in market.

So here's what I mean by that. When alarm masters [00:21:00] purchases add-ons and tuck-ins, we're typically gonna. Wipe out a lot of the overhead of the business that we're purchasing. We may grab some of the employees if that we feel like they're really good quality. Um, but we're theoretically gonna just take the list of accounts and the branding and, and maybe a couple technicians.

And so all of that revenue, uh, or sorry, all of that gross profit is really gonna flow pretty, pretty. Uh, linear linearly down to our bottom line. Uh, we're not really adding any overhead. We're not taking their rent, we're not taking their software expense, their vehicle, their insurance. Like we're gonna flow that in.

So you're gonna get a lot of growth and scale out of tuck-ins and add-ons. So we would be, alarm masters would be willing to pay a premium for those in our own market, because they're gonna have a higher return for us. Yeah, right. Versus a platform, you have to keep all of that overhead. Uh, in place. And so you're gonna have, you're gonna be tighter on the financials versus somebody else in that market, maybe at doing an add-on, right?

So [00:22:00] theoretically, if we were competing against somebody for a business in our own market, we would probably be willing to be more aggressive than they would if they're not already in the market. That's right. So I make that point to say, Hey, if you're purchasing a platform, which again, you would really probably only do that if you're doing some type of geographic expansion.

Be prepared to pay more as a premium than maybe what you're, you're ordinarily comfortable with. Um, and also have a plan because you're not gonna strip out as much overhead as you think, at least not in the first year. Um, and you're, you're, you're just, you're not, and, and, um, be less aggressive about your assumptions on how much you're gonna consolidate ev even if you plan to consolidate.

Um, other, some of the overhead back to your main, you know, kind of headquarters. Just know that it's gonna probably be less, it just, just gonna probably be less. And then one other kind of heuristic I think is important to add is if you're gonna [00:23:00] do a tuck in and an add-on, make sure it's in that same lane, because trying to tuck in, if, for us trying to tuck in an integrator into alarm Masters today would be very challenging.

Versus buying an integrator as a platform still challenging. But would be easier for us. So anyway. Steven, did you have something to add to that? 

Colin Trimble: I do. I'd like to take a moment of silence for due diligence. Yeah,

I'd like to. This is, you know what we, we prepare, we have notes. It's really, we really buttoned up super professional over here at entry and exit. Um, I'm going off script because we need to pause and talk about due diligence. Yeah. For. For maybe two minutes. 

Stephen Olmon: It's truly not on our script for today. So you are, you are going.

It's not, 

Colin Trimble: but I've realized because let's go back to the word pain. Yeah. We've experienced some pain and we've learned our lesson, and there are, I could talk about due diligence in [00:24:00] this industry for hours. Um, the number one thing that I would beg you to do, uh, especially if you are buying, um, RR. Is to fully audit all contracts.

Um, you, you need signatures and, and, and dates and initials, and you need clean contracts. Okay? So if you, if it doesn't have those things, it would typically be spoken of as like unqualified, RMR. So we wanna make sure we're buying qualified RMR and, uh, within that. There is kind of a common practice of sampling where someone will take 10, 20, 30% of the contracts and say, oh look, 91% of these have no issues.

Okay, that feels good. Let's figure out what the other 9% are, and that that was a chunk of the contracts. We're gonna just kind of extrapolate that across all the contracts. Looks [00:25:00] fine. Fine enough? Okay. Nope. Don't do it. Tap, tap, tap. Don't do it. No, audit them all. Audit them all. And so if there's anything that you take away from this episode, if you ever buy RMR, please audit and review every single contractor you're buying.

Thank you. My, my 

Stephen Olmon: and the, and the well and the associated, um. RMR, right. So like yeah. As an there's for us so much. Yeah. Like, as an example for us, if, if the customer, or sorry, if the seller is selling us a list of accounts and they're saying this customer is, you know, buying 50 bucks a month from us right now.

Colin Trimble: Yeah. 

Stephen Olmon: Then we would want to go see the vendor, the monitoring station or the cloud video provider or whatever service, like where we're getting charged for that. And, and then vice versa, you would wanna pull the list of vendor. Uh, alarm, you know, alarms, uh, the, the monitoring station [00:26:00] list of customers or accounts, and you would wanna make sure that you're getting paid for all of that.

Yep. Um, 'cause you don't wanna take over a whole monitoring station's worth of accounts only to find out that 10% of them are customers aren't even paying you. And that's usually as a result of poor cancellation, you know, procedures. Um, but yeah, I think we have learned our lesson on due diligence.

Multiple times. And by the way, it's a double-edged sword. Um, you, you do due diligence between that period of getting under LOI and that purchase contract and there's no guarantee you're gonna close. We have had Steven, how many three deals that were under l lo i that we spent months and thousands of dollars and hundreds of hours doing due diligence on, and the deal fell apart for one reason or the other.

Yeah, and there's no recourse on that. Be prepared for that. I, I te I tell people when we go under LOI, I'm only 50% sure that [00:27:00] we're gonna close. Not because of, and I'll be honest with you, very rarely is it something that we're saying we want. Like, it's not something we say, oh well we wanna, you know, a lower price.

It's not, actually, none of the lost deals have been a result of that. It was a result of something going on with the seller circumstances, whatever, that were a hundred percent out of our control. So just know that when you do due diligence, you're, you're gonna spend dollars and time there and, and it is possible.

It's likely that at some point you're gonna, you're gonna spend those and they're not gonna come back into your pocket. Don't skip it either. Like truly, yeah, you're gonna wish. 

Colin Trimble: Same, same thing. And, and these are things that you can reach out to us and ask us for recommendations. Same thing on legal, like, please don't like have, you know, uncle Ted who used to be an attorney, write up an a PA and sling it, like spend the time and the money with [00:28:00] really quality help, you know, uh, quality vendors and partners.

And that's how, that's how I viewed them at this point, is the people that we work with. For due diligence and legal, like I view them as, as a partnership of sort, um, working through deals. And so, um, you build trust there and you get used to those processes and so it's um, happy to, happy to point people in the right direction along those lines.

It is, 

Stephen Olmon: it is something that people, and then I'm gonna get off my due diligence, soapbox. Every deal we have not done due diligence or an adequate due diligence has resulted in significant pain a hundred percent. Like we have done deals where we thought we could do the due due diligence ourself. And we tried to, and we, if we could have rewound the clock, we would've done the due diligence, a more thorough due diligence on that.

Mm-hmm. And I would just say that there is a lot of owners that like to say, I touch a lot of owners that have done one or two acquisitions, and they say, yeah, you know, they joke I'm about to do my first acquisition. And I, [00:29:00] I didn't pay some lawyer for my a PA or my due diligence. I did it all myself. And every time I talk to them afterward, they're in very serious pain.

They're in ICU level pain and they're like, dude, that was a freaking mistake. So, uh, buyer beware on that. I mean, you know, there is some caveats to that, especially if it's a really, really, really small tuck in. You may do something different, but, but generally speaking, shout out to the due diligence providers.

Uh, we're happy to make recommendations. We use several, by the way. Um. And so we, we have a lot of relationships with the due diligence providers and can provide great feedback on who we like and who we've not had great experiences with. Um, so yeah, I think that's really important to talk through. Um, I want to jump in, we're gonna talk about financing in a second because I think it's important to think about how you're gonna finance the deal.

Before we do that, Steven, can we just, can we take a, a little, a little quick, uh, detour over to valuations, RMR versus EBITDA and. [00:30:00] The nuances about each of those so that we can then talk about financing. Can we, can we stop there for a second? 

Colin Trimble: I, I didn't grow up in a, you know, family of business owners, and I like to joke.

I, I worked for some guys in my twenties that bought businesses and I like to joke, I couldn't spell EBITDA before I worked for them. And, and so it is kind of this. Uh, metric or this way of thinking about the, you know, kind of financial state of the company or their performance. If you're not, uh, familiar with it, that can feel, um, super, kind of high finance, snooty.

It's like, why can't you just say profit? It's like, well, it's not just profit. And so I'm not gonna totally unpack EBITDA right now. Um, but what I would say is, is, um, it is, it kind of is like get used to it. Yeah, you need to learn it. You need to kind of educate yourself. Um, again, another thing like we're happy to kind of help with, if that's something you wanna talk through or understand at a deeper level.

But my point there [00:31:00] is, is it's not changing. So you might like the simplicity of a multiple of RMR, but again, going back to like a platform deal, a lot of those are gonna trade on multiples of ebitda and you have to do the work. To understand what that means and what that equates to from a cash flow perspective.

And then also if you're using leverage, um, on, on, you know, buying a deal, then you have to also, uh, really understand the, what you're paying and what that's gonna mean for you going forward. Uh, but mm-hmm. On, uh, on the EBITDA side, what you see a lot in the industry is. And, and I'm gonna speak about kind of the, uh, smaller end of the market.

Um, not super tiny, but let's talk about kind of the 500 K to a million dollars of ebitda. A lot of nationals will come in and they'll sit down with owners. I've talked [00:32:00] to them and say, you know, you don't even have a million dollars of ebitda. We're not gonna be able to do anything here. And so, you know, we, we do look at deals that are underneath kind of that limit.

Um, and so the multiple that you see a lot, you know, there's different factors obviously that could, um, skew that higher. Think about, um, churn rates or attrition rates, um, or, um, revenue concentration. There's, you know, poor contracts. There's all sorts of things that could impact it, but the average that we see a lot is kind of in that 5, 6, 7 times, maybe eight times.

For a platform. So if someone's, you know, just to be direct from a math perspective, someone's doing half a million dollars a year in ebitda, then that deal often is gonna go for three to $4 million, something like that. And yeah. Uh, then on, on the RMR side, you know, you're buying typically, you know, accounts thing, going back to the idea of an add-on or a tuck-in.

Um, and you're typically looking at, [00:33:00] again, commercial versus residential skews quite a bit. Commercial accounts. More valuable, more sought after, especially, you know, kind of, um, fire accounts. I would say fire 

Stephen Olmon: alarm. Yeah. 

Colin Trimble: Probably driving the highest multiple. Um, and even within that, are we talking about the gross RMR?

Are we talking about net? RMR netting out those like pastors and so, um, but roughly, I'd say the average is about 35 to 40 times RMR on the commercial side, depending on, on the gross 

Stephen Olmon: multiple. 

Colin Trimble: On the gross, yeah. What, what the mix is. Um, there are definitely outliers where people, especially like national buyers, have overpaid to get into a market or, or really try to, um, get a, a much greater percentage of market share in a specific market Yeah.

That they're trying to own, so to speak. But yeah, that's typically where it lives. Residential, you'd see that kinda low thirties. Multiple Yep. Is more common now, but the, the bigger those [00:34:00] numbers get, you know, when you can just aggregate a really large amount of RMR hundreds of thousands of dollars of RMR, it might juice those numbers up a little bit.

Right? Yeah. So you get a little bit of a premium for just pure size. Yeah. Um, so that's, um, that's what we're seeing a lot. Pretty standard. And, um, it's important to understand. You know, we've had brokers say to us, will you even buy a deal? Uh, an EBITDA based deal? Or, or, Hey, do you guys only do RMR transactions?

Or, you know, so you again, stylistically like, who are you? What are you buying? Yeah. What sort of valuations do you understand and you're comfortable with? But I would say if you're thinking about all of, all of these things are maybe an option to you, you're thinking about geographic expansion, you really need to be pretty well versed.

A, so that you don't come across, like they can't be confident in you as a buyer, but b, also so that you don't make a mistake and don't get taken advantage of and, and don't make a bad deal. 

Stephen Olmon: Yeah. I want to call it a couple [00:35:00] nuances in each of those buckets. Yeah. Uh, so the first thing is in the EBITDA bucket, uh, typically in an EBITDA transaction, you're gonna have something called add backs.

Um, these are. Expenses that exist on your, or sorry, on the prospective, uh, company, you're looking to buy their p and l that you would, um, add back into the valuation. So if they have half a million dollars of, um, of net income and the owner takes a hundred thousand dollars salary, you're theoretically gonna add that salary back in.

So it would be a $600,000 EBITDA add backs will kill you every single time. That is one of the most hotly debated. Um, subjects there is, I mean, we're saying this from a buying perspective. There is a, a set of add-backs that are pretty standard and universally accepted, and then there's a whole bunch that are gray area and then there's some that are just right out of, you know, left field that are like not relevant and you've just gotta make a [00:36:00] decision on where you're gonna bend and don't get hung up just on the add-backs, get hung up on the total purchase price.

That's what you need to get hung up on. Is or do you feel like you're getting the value that you want, uh, for that? So, so add-backs are one really important distinction. Also, on an EBITDA based deal, you're, you're typically gonna have some amount of structuring. So you would have something called an earn out.

So let's just say you're gonna buy a deal for, you know, $5 million. You may give the, the seller 3.5 million in cash up front, and then you would do 1.5 million on what's called an earn out where. The business has to hit some varying degrees of performance. Maybe it has to continue to hit the same EBITDA that it's hit for the last three years.

Maybe the, maybe it's something tied to the owner. The owner has to stay in for two years because there's a lot of concentration risk. There's a lot of ways to structure earn-outs, but that's a way to protect your downside. That's also highly debated, um, and, and very [00:37:00] sensitive. Uh, sometimes you do a seller note.

Sometimes you do both. A seller note would be. Uh, if you've got $5 million of purchase price, you buy 4 million up front, and then you finance a million back to the seller over the course of a year, two years, three years, five years, typically three to five years is the standard. Uh, we, we, we see five as the most common.

Uh, and then there's structuring within that. How long are you gonna pay interest only, and then within principle, and what's the interest rate and what's the guarantee that backs that seller note? And is it a conditional seller note or is it unconditional? So there's a lot of structuring that goes into ebitda, and it's really just a, a way to figure out.

How to protect downside risk for both parties is really what it's about. So, um, I think people always say the best deals are the ones where both people are a leaf a little disappointed, uh, and I think that that's universally true. Mm-hmm. Um, and then on the RMR side, you, you very, you, you most commonly see what's called a holdback.

So a purchase, uh, the part of the purchase price is held back for one year, typically [00:38:00] between 10 and 20% of the purchase price to account for attrition. So as the attrition. Gets netted out in that first year, which by the way, I'm gonna just say this universally, don't do a deal without a holdback unless it's really, really tiny and there's some other ways to protect yourself.

10% would be the minimum. Um, especially if you're doing an add-on and a tuck in, you're gonna, na, you could be the world's best at customer service and still see 10 to 15% of attrition because there are accounts that have just been waiting. Kind of just you, you poked the, the bear and now he's awake, and now he's like, yeah, I'm, I'm ready to move.

So. Uh, make sure you're really tight on your hold back. And then just two more things on the RMR thing. One is, um, we talk about gross versus net. So you might say, Hey, I'm gonna buy $50,000 of RMR at 36 times, but then what you do is you net out third party fees, not the monitoring station. So, but this would be software providers.

Mm-hmm. And this is really a protection against bad RMR is really what it is. [00:39:00] So if, if somebody's selling. Uh, $20 a month per camera, and their cost on that camera per month is $19. There's a $1 of gross profit that's RMR that's gonna get very low value. Um, so the third party fees are there to protect you.

And then also, um, you typically are gonna have what's called deferred revenue that's backed out. So deferred revenue is, you know, you may have a lot of customers that pay, um. Annually in advance. And so what will happen is if you're gonna close a transaction, let's just say in November, but then everybody's annual bills flow in in October, then they get all of that first year of money.

So typically that, that those dollar values are added back into the deal. So you do a, a deferred revenue calculation to make sure that they're not. Forward grabbing revenue, the seller. So it's just, it's a calculation. It's all doing what's fair. Some of that you're gonna flex around based on the size of the deal.

I just think it's really important to call out [00:40:00] and, and we have. Really, most of our deals have been RMR based deals. Um, yeah, we've been under LOI for some deals that have been EBITDA based deals. Uh, we are pretty heads down on RMR based deals until we buy that next platform. And then we'll probably end up doing, 'cause it'll be a bigger deal, so it'll probably be an EBITDA type deal.

So we've, we spent a lot of time talking about RMR versus ebitda. Truly reach out to us. We've done this a lot. We have, not only have we done six deals about to do our seventh, we have. We have offered Lois on dozens of deals for both RMR and EBITDA and gotten all the way to the finish line on some of them.

And, uh, so we have a lot of experience and would be happy to help point you in the right direction anytime. Um, I wanna, I wanna move quickly into just financing because I don't wanna, I don't wanna lose sight on that. Um, and, and, and I want to talk, talk, Steven, like, can you talk a little bit about how you could finance deals, [00:41:00] um, and different options that exist out there 

Colin Trimble: as the great theologian?

Randy Moss once said straight cash homie.

You could always use cash. Um, yeah. That's, I mean, when you can work in a Randy Mosh, shout out. You have to 

Stephen Olmon: Yeah. I've never heard him described as a theologian, but I'm in, I'm in on it. Oh, you 

Colin Trimble: know. Um, so in, in a lot of deals, a, a mix of cash is, is probably really prudent so that you don't get over levered.

Um, and you don't have, you know, uh, debt that just kind of runs away from you and puts you in a bad spot. So, um. Some ratio of cash that is highly dependent. I wouldn't say there's some perfect ratio there. It really depends on the current state of your business. Please don't do acquisitions 'cause it feels good.

Yeah, please don't, you know, do it because you want to put it on LinkedIn, like that's not a win. Um, what a win is, [00:42:00] is to buy a, a deal that, um, helps you maintain financial health. And is accretive to your overall value and really adds to what you're building in a way that is strategic and, and you have a path to really extract that value.

That's a good deal. Mm-hmm. Do that deal. So, um, types of debt, you know, you could, um, use, there's different loan products. You could use an SBA loan, um, if you're large enough, you might be able to go direct to a senior lender and get a more traditional. Uh, loan product, um, to take down an acquisition probably wouldn't be the full amount in that scenario.

If you're buying RMR deals, there are RMR based lenders that will typically lend up to a certain percentage or ratio of that RMR. Um, and, and there's a lot of 'em out there. I mean, and, and again, good actors, bad actors, like I think we. Know some really [00:43:00] great people that you could speak to if you need assistance there.

Um, and then, you know, uh, capital partners like there are, uh, for, you know, certain, in a certain life cycle of your business, it may make sense based on your goals and your momentum to partner with an external capital partner that can fuel your growth like a, a growth. A growth equity firm, something like that.

Family office. Family office. It sees your vision, wants to inject capital, um, and you know, where everybody wins. You know, and that's, um, that's another potential solution. 

Stephen Olmon: Yeah, I think the financing side's really important and understanding your financing strategy and figuring out your financing before you were under LOI on a deal are all really, really important.

Yes, if you're gonna use debt at all. You need to go have a relationship with a debt provider first thing, um, because that is going to be [00:44:00] one of the single most important elements. Okay? Um, doing a little bit of equity, which would mean like taking on cash from a firm or from friends and family or a family office and giving them a portion of your equity in your business.

That is very, very common. Um, I think a lot of people are resistant to that. I think there's some great ways to do that, especially while keeping control of your own business. Uh, I think, you know, you don't have to think about giving up equity in the form of giving 50% of your business away, uh, if you are gonna do that.

But buyer beware, get an advisor for that and a really good lawyer and make sure you have a fair and reasonable understanding of the valuation for your business and like. All of that needs to be papered up really tight. If you're gonna do it with an institution, they're gonna require that. If it's gonna be friends or family, you just, you want to protect yourself and the person that's investing in your business needs to be protected.

Yeah. So, um, so be careful about that. I, we have done all mix of all things of, we love doing straight cash, [00:45:00] baby. That's one of the things that we care a lot about. I think that this is a little bit of a philosophical discussion too. And this just kind of gets into the heart of the industry. A lot of operators that have been in the industry for a long time are used to taking a salary and sweeping all of the net income back into their pocket at the end of the year.

And so to buy something off your balance sheet would require you to make less income. Um, and a lot of folks don't want to do that, uh, 'cause they're comfortable at their income level. So you need to make a decision on what your strategy is. And I would say, um. Anecdotally that the best investment you can make is the investment in the thing that you control, right?

Um, so trying to make a good investment in, uh, buying a business that you have a plan for, for return on capital is a smart move. Um, but just depends on the deal. Um. So I wanna jump into homework real quick. Steven. What are a couple things that folks can work on if they're listening to [00:46:00] this? Um, just some action items, some things they can do in the next seven to 10 days, uh, if they're interested in doing an acquisition.

Um, just can you name two or three things that would be great for, for us to focus on? 

Colin Trimble: Yeah, so I'd say, um, know who your partners are, whether that's a capital partner or a vendor doing due diligence or an attorney. You know, lenders, um, identify those different categories, and I would actually say be two or three deep on each one because inevitably, you know, uh, certain things that a bank may change in a given month, and so you always want to have a couple different solutions to whatever you need done.

What if it's an attorney who's just slammed, like, Hey, we, we can't help you with this deal. Sorry. So to be two or three deep across all of those. Um, is really important. And then the other thing that kinda most directly comes to mind is to be very self-aware. It's like, okay, I am [00:47:00] interested in acquiring.

Why, what's my motive? Um, what's the long-term goal from that acquisition or acquisitions? Um, and then, uh, how am I going to go about integrating that acquisition? Again, we talked about three different types, um, and having a really tight plan that you and, and the team like can feel really good about going into that.

So those are, those are kind of two sides of the house I would think you, you need to really prepare for. 

Stephen Olmon: Yeah. The last thing I would add to that is understanding your why is really important. It's the most important thing he said. Um, you ultimately, whether it's organic or inorganic, want to purchase revenue.

In the least expensive way possible. And so sometimes that's just investing or organically, sometimes it's not. And I think a lot of folks that are listening to this call just think, I want to grow, so I'm gonna add more to marketing, to sales. That's great. You, you should do both. I mean, the healthiest mix is to do both.

[00:48:00] But to say you're gonna only do one or the other is probably not the right approach. But, um, you know. There are folks that do that. So, so anyway, we, we we're an open book here, so if you guys, we have a lot of people that reach out to us after the pod to say, Hey, I've got a question on this. You can find us on LinkedIn, you can find us on Twitter, Instagram.

We're there, shoot us a note. Um, we'd love for you to ask us questions. This is the whole reason we do this, uh, is because we get a lot of questions, sort of one stop place to get all the information. Um, if you haven't already, please subscribe to the pod. Leave us five stars, if you would. It really does help a lot.

And then also we've got, we're about to launch our newsletter, so if you go to entry exit.co, you can sign up for the newsletter. It's gonna be a recap of a lot of what we talk about. So it's that kind of too long. Don't read of the podcast if you don't wanna listen to the whole thing of the podcast or you miss it.

Or it's maybe a subject you're kind of interested, but not all the way. We're gonna have a lot of the highlights from the podcast in there. We're also gonna share some additional resources over time. We're gonna release more like [00:49:00] guides on, Hey, here's RMR versus EBITDA sale. Here's what to look out for.

We're gonna put some of that out there and, and actually that we've already done that, so we're just gonna kind of release it, uh, over time. So if you'd go subscribe to those things, we'd really appreciate it. And of course, leave us any feedback or questions you have. Thanks for listening in. Appreciate you guys.