Should You Buy or Build Your First Security Company?

Security companies can look incredible on paper; but not all recurring revenue is created equal.

In this special collaborative episode of Entry & Exit, Jack from JackQuisitions breaks down the security industry and the 10 things he would evaluate before buying a security company or building one from scratch. From RMR quality and customer churn to contracts, licensing, service, and customer concentration, Jack explains what actually makes a security business valuable and sellable.

If you're considering entering the security industry through acquisition or starting from zero, this episode lays out what to look for—and the biggest mistakes to avoid.

In this episode:
→ What makes security RMR valuable
→ Commercial vs. residential security
→ Contracts, churn, and customer concentration
→ Licensing and service department risks
→ What to evaluate before buying
→ Why you should buy the system, not just the revenue

Connect:
Stephen Olmon — https://x.com/stephenolmon
Collin Trimble — https://x.com/TXAlarmGuy

Jack Carr — https://www.youtube.com/@Jackquisitionsco

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Transcript

Recurring Revenue Reality

SPEAKER_00 0:00

Not all recurring revenue is created equal. You can accidentally build a company that makes money today, but it's super hard to sell later because a thousand customers paying every month is only as valuable if those customers stick. The agreements you write today can directly impact the business and the value of the business in five, ten years from now when you are potentially looking to sell. I want to know why people cancel. Did they move? Did the competitor take them? Was the service bad? Because growth means adding customers faster than you use them. Watch this before you buy a security company. Security companies are one of those businesses that look great on paper. You install an alarm system once, you collect a monitoring payment every couple of months for years and years and years. 5,000 customers paying $50 is worth $3 million a year in recurring revenue before installs, service, cameras, fire, access control. And that's why these businesses are incredibly valuable. But here's the problem not all recurring revenue is created equal. A security company doing $3 million a year can be worth less than a small operator if the contracts are weak, insurance is high, and the owner holds the license and half the customers cancel tomorrow. If you start one from scratch, you can accidentally build a company that makes money today, but is super hard to sell later. So before you buy or start a security company, here are 10 things that I would look at and stay to the end because I'll tell you the mistake that I think destroys the value in this industry more than anything else.

RMR Quality Checklist

SPEAKER_00 1:41

Number one, is the RMR actually good? So this is different. You probably it's gonna sound the same to different things, but RMR, which is specific to this industry, is called reoccurring monthly revenue. This is the heartbeat of the business. If the company has 100K a month in monitoring revenue, that sounds great. But what is underneath it? Are the customers on auto pay? Are they under contract? How long have they been customers and what percentage cancel every year? How many of these are delinquent? Because a thousand customers paying every month is only as valuable if those customers stick. And when I underwrite one of these businesses, I care more about the quality of the accounts because buying one of these businesses that then just has 50% churn, like you paid for that. So hugely important.

Commercial vs Residential

SPEAKER_00 2:25

Number two, commercial versus residential. Commercial accounts are usually larger, they're harder to replace, and they're extremely sticky. You may be handling intrusion, fire, access controls, cameras, uh, inspections, and service all for the same customer. And the installation, the one-time installation cost of like putting the stuff in is extremely high, but it's B2B, and because of the stickiness, it's a catch 22. It's hard to get new contracts or new businesses. Whereas residential can grow faster, right? There's more houses going in every single year. A lot of people are concerned about security, which is wonderful for the business, but churn is higher and customer acquisition costs can get absolutely ugly. Neither model is better, but you need to know which business you're actually building. If my goal is durable sellable company, I generally prefer those recurring commercial relationships. That's

Contracts and Churn Risks

SPEAKER_00 3:18

just me. Number three, monitoring agreements. If you're buying a company, read the contracts. Are they transferable in sale? Do they auto-renew? Are the customers locked into terms or are they on month-to-month? Are there cancellation provisions that make the revenue less secure than it looks? Because again, you don't want to lose all those customers day one. And if you if you are just starting the company, this matters just as much. Making sure that all of these things are in place day one. The agreements you write today can directly impact the business and the value of the business in five, 10 years from now when you are potentially looking to sell. So build the company for the future from day one. That's a great advice for any industry, for any business, but specifically, it's extremely important for here because there's so many contractual relationships. Number four, customer attrition. So this is where security companies can absolutely fool you. They can pull the wool right over your eyes. If a company adds 500 accounts a year, but they lose 450, they're not really growing, right? They're growing by 50 accounts. I want monthly and annual churn. So if I have both at the same time, I want to know why people cancel. Did they move? Did the competitor take them? Was the service bad? Because growth means adding customers faster than you lose them, which we did here, but everything else is like it's a treadmill, right? If you can't get a hold of why you're having churn or why the company you're buying is having churn. So make sure that you understand the churn and actual the net increase or decrease in your customer rate. Uh,

Operations Deal Killers

SPEAKER_00 4:52

number five, the service department. Security is not just a sales business. Don't get me wrong, it is a sales business. You're selling a security product, yes, but it's not just a sales business. If the camera goes down and access control system stops working and fire inspection gets delayed, customers remember these are serious items. Hey, we got broken into and our alarm system didn't work. Like it's a big deal. They I want to understand like response times and open service backlog, inspection scheduling, and whether the technicians are actually keeping the customer happy, right? Because a great service department protects the recurring revenue, a bad one slowly destroys it. Number six is licensing. This one can absolutely kill a deal, right? Who actually holds the license and that's required to operate the company? Is it the owner, a manager, a technician that's maybe planning on retiring? And what happens if that person leaves the day after close? Depending on the state and the services offered, you may also have a you know fire alarm, you might have low voltage, you might have NICET related requirements. Never assume that the company's ability to operate automatically transfers with the purchase. So that's a big one. Number seven, customer concentration. If, especially in commercial, like this can be a huge red flag. If the customer disappears tomorrow, if they have just a great relationship with the last owner, and once you get in there, they don't like you as much. Like what happens? I want to see the top 10 accounts and what percentage of revenue they represent. Uh, one giant commercial account can make the finances look amazing, they can make it look incredible because you don't have to rebid it. Da-da-da-da-da. But again, what happens if they leave? So recurring revenue is great, but concentrated recurring revenue is a large amount of risk. Number eight, central station relationship. Most small security companies are not operating with their own monitoring center. They have a third-party central station, and so you need to know all that information about that. Like, hey, I need to know the provider, the price in the contracts, whether or not they have transfer cancellation fees. And if you're starting from scratch, make sure that you're choosing the right monitoring partner because this can create years of operational pain if you don't. I'd call around and ask, man. Just call around and ask the other companies. There's a lot of friendly, friendly people. Go to the channel entry and exit, send them a DM. They're more than happy to help. Great people over there. Don't just like don't pick one just because they're cheap. Pick them because of the best and they're gonna help you grow. Number nine, I want to know why the owner's selling. Like, retirement is different from a declining RMR. Uh, burnout is different from oh, hey, my lead salesman left three months ago and like this is getting hard. So I just I need to understand uh from the owner what his reasoning is, but also hit the market. Like talk to the local market, talk to the other companies. A lot of times, right, the rumor mill goes around that people know why people are selling, and it's a great thing to try and figure out why. Don't just take it at face

The Biggest Valuation Trap

SPEAKER_00 7:50

value. So, number 10, the big mistake that I feathered in at the beginning is buying revenue instead of buying the system, right? This is where most people get hung up. And this is not just this industry, it's every industry, it's every vertical, it's every single home service or service business. Don't buy the revenue, buy the system that's generating that revenue. And this is where people get crushed. They see reoccurring monitored in revenue and they immediately assign premium valuation to it. It's worth 3x. But the value is not just in the monitoring portion, it's in the contract call, it's in everything we talked about. I'm not gonna go through it all again. It's the the quality of contracts, the ability, the licensing, blah, blah, blah. Like making sure that you're not assigning a premium valuation to something that's not premium. That's the buyer's trap on every single one. If you're starting one, the same rule applies. Don't chase the installs. Build the system, build the recurrent revenue, build the strong agreements, build the service department, reduce owner dependency. This is the key to all businesses, but specifically this one, just because it has such a high amount of operational efficiency that you can put into place early on or buy early on, that will make your life significantly easier and cause this business to be a huge success. If you want me to break down another business like this, comment it below. And if you are into buying, building, scaling, boring businesses, subscribe to this video, like this, subscribe to my channel, like this, and I'll see you on the next one.