Host: Many guests on Acquiring Minds are generalist searchers. They have a broad sense of the characteristics they like, but they're industry agnostic. Then you have the thesis driven searchers, those with a clear vision of the industry where they want to buy a business. Exhibit A Today's guests Stephen Ullman and Colin Trimble. Colin knew the alarm business. This is the industry that installs and services a building's security and fire alarm system, then monitors the building remotely. And Colin saw opportunity there a fragmented market, high margins, recurring revenue, large exits for blue collar founders. He got excited about buying a security and alarm business even without knowing what entrepreneurship through acquisition was. He pitched Stephen, who did know ETA and quickly got on board. In today's interview, you're going to hear the story of the platform acquisition of two entrepreneurs who intend to roll up a fragmented market in Texas. After listening to Colin and Steven, see if you agree that having a thesis about an industry is a powerful lever in conducting a quick and successful search and hitting the ground running once you close on the business. Also, you're going to get a great primer on the alarm industry, which Colin and Steven believe holds opportunity not just for them, but for you as well. Here are Stephen Ullman and Colin Trimble, owners of Alarm Masters. Two quick announcements an event you should know about in May, the M and A Launchpad Conference is bringing together searchers, experienced business buyers, owners and private equity investors for one day to go deep on buying businesses. Walker Deibel, author of Buy Then Build is one of the keynotes and 30 other experts will be on hand sharing their expertise. It's happening May 11th in Houston. The organizers are running a promotion just for us. $200 off with the code acquiring minds. Go to malaunchpad.com and use the code acquiring minds all one word or use the link in the show notes. Also tomorrow, Tuesday is the fourth installation in our webinar series with Sam Rosati, the fourth and final, at least for now, this one on a topic that can badly trip up first time operators. They can mean the difference between a successful transition and a nail biting one that can mean the difference between life and death of the business. And that is working capital. It's a concept whose subtleties are easily underestimated, which is why it often ends up being a problem. So Sam is going to do a primer on the topic how you should approach working capital while negotiating your deal. Then how you should think about it once you become owner. The webinar is tomorrow, Tuesday, March 26th at noon Eastern. The registration link is in the show Notes right at the top where it says register for the webinar. If you can't make it Tuesday tomorrow for the live webinar, register anyway to get emailed a link later to the recording. About the Presenter Sam Rosati. He's an SMB owner, investor, independent sponsor and educator. He's also the co founder of SMBash, the conference for small business buyers, operators and investors. SM Bash is happening next month, April 18th through 20th in Salt Lake City. I'll be there, as will many names familiar to Acquiring Minds listeners. Okay, Come learn how to approach working capital in your deal and Beyond. Tomorrow, Tuesday, March 26th noon Eastern. Registration link at the top of the notes. Foreign. Welcome to Acquiring Minds, a podcast about buying businesses. My name is Will Smith. Acquiring an existing business is an awesome opportunity for many entrepreneurs and on this podcast I talk to the people who do it. An SBA loan broker, as opposed to a direct lender, doesn't work for a particular bank. Instead, the broker pairs you with the right SBA lender for your deal based on industry terms, risk thresholds, then helps you navigate the process better than many lenders themselves do. Matthias Smith of Pioneer Capital Advisory is just such a broker. Matthias worked at two of the country's top 10 SBA lenders. So so he's been on the inside of the SBA process and knows well the pitfalls and hurdles and how to avoid them. He struck out on his own to laser focus on the ETA and search space. Our niche is his niche. You'll see Mathias at all the ETA conferences. He's closed over 30 search deals since starting Pioneer in May of 2022, including some acquiring Minds guests. To learn more and get in touch, go to PioneerCapitalAdvisory.com or click the link in the notes. Stephen Ullman and Colin Trimble welcome to Acquiring Minds.

[5:36] Guest 2: Thanks for having us.

Guest 3: Yeah, thanks you guys.

Host: At the end of last year, bought a security and fire and alarm business in Texas and this was the first acquisition we think of what is essentially an industry thesis and geographic thesis based roll up. You'll correct me if you don't characterize it as that, but I think you do. So we're going to hear that story of this first acquisition as well as get an education on security and fire and alarm businesses and why the two of you liked this industry so much that you set out to roll them up across Texas. But first, Stephen, let's start with you. Would you give us a little background on yourself? And then Colin, we'll go to you

[6:24] Guest 2: Sure, I started out in management consulting. I'm not sure what a 22 year old management consultant is or does, but I did that and then quickly progressed on to a software as a service company in the healthcare space. And like to say we were like real time kind of analytics for the senior living industry and learned a lot. There were two cousins that had bought that business and I like to joke that I couldn't spell M and A before I got there, so maybe or ebitda. I saw two guys really change their lives through buying a business and growing it and hiring smart people and putting them around them. And so that gave me an appetite for buying businesses. But I had come out of like so many do, have significant student loan debt. And so by the time I transitioned out of that company four and a half years later, I didn't have significant capital. And although I wanted to buy a business, I decided to start. And so for a few years I was more of a starter of kind of new cos and more in the productized service space. And I have a few different business partners, really enjoyed doing business with others. I'm not a great soloist and so I love getting to partner with people like Colin that are way smarter than me and I've convinced them somehow to, to do business with me. And so that, you know, it started over the last couple years, an acquisition path I've offered on a handful of businesses with a few different partners. And over the last nine, 10 months, you know, we've been at Alarm Masters and been having a lot of fun doing that. And really as I look forward, have no intention of slowing down both at Alarm Masters and otherwise in terms of acquiring small businesses.

Host: Stephen, curious. The two guys that you worked for after the your consulting gig when whatever you were doing in the consulting world, would they have self identified as searchers or were these two entrepreneurial guys who came at their own that venture through

Guest 2: some other way it really backed into it. They joked that it was the longest due diligence period ever because they were brought in as consultants to try to help improve the business. And one was more on the financial side, one was more on the technology side. And as they got to know the business, they really realized they loved it. And so they ended up buying out the original owner who was more at kind of a classic retirement age by that point. And so they spent about a year and a half in the business before they chose to try to pursue acquiring it.

Host: Okay, all right. Yeah, can't beat that. Due diligence for sure. Awesome. Colin, to you tell us a little bit about yourself.

[9:07] Guest 3: Yeah, like, like many out of the Texas A and M University, I went the other route. Instead of consulting, I went to oil and gas. Started out as a financial analyst there. And they quickly told me, hey, you're not going to go anywhere in this company unless you have an MBA or you're an engineer. So I'm not great at math. So I went ahead and jumped in, did my MBA in finance, kind of wandered my way around and landed in a sales gig there. And from there I actually jumped into a startup out of D.C. that was selling into the physical security space. I started over as an inside sales guy, effectively calling on security companies, owners of small security companies, to have them sell my product. And I worked my way up to sales leadership there. Had a couple of sales guys reporting to me and the whole gig was getting to know owners and helping them improve and learn how to sell cloud based technology. That was very new when I was, when I was there at the company. And they didn't know how to sell cloud, they didn't know what cloud was. Literally had a deck that was Cloud101. And so I learned a lot about that space. And I saw a lot of these owners, man, kind of ride off into the sunset on these massive multiples of recurring revenue. And these were guys that were turning wrenches 20 years ago. Um, they, they didn't, they didn't know anything about ebitda, they didn't know anything about Salesforce, they didn't know anything about technology. And so that really piqued my interest in this industry. I ended up Getting recruited from Salesforce.com, the technology provider, to go be an enterprise individual contributor, selling to Fortune 100. So I went from sort of a sales management role over to this enterprise, selling to these large companies and selling massive contracts, continuing to do the RMR thing. And while I was there, I got some customers that basically asked me to be their VP of sales. And I said, hey, how about I consult for you? And started doing some fractional sales consulting work. And Steven and I have been friends for a long time. He has a tremendous amount of digital marketing experience. And he kind of approached me and said, man, let's try to do this thing full time and start servicing some middle market companies. And so I actually went back to some of my customers in the security space and said, hey, you don't know what you're doing in sales and marketing. Let me help you. Let me see if we can go in there and improve your business. And that was really the first taste. I've, I've bought some other businesses and built some other businesses along the way, but my first taste was kind of helping serve these guys. And so we did that and then, and then Stephen and I kind of chatted a little bit about, man, what if we, what if we did this ourself? What if we went and bought a company and took all the best practices we're already sharing and try to build a business ourselves through acquisition. And so that's how we, that's how we landed in the searching for, for alarm masters.

Host: So Colin, from your first experience, you knew a lot of these owners because you've been selling in to the market and so you had been selling a cloud solution that you wanted. You were basically developing a channel they were going to sell to their customers, your resell to their customers. Your solution. Okay.

[12:15] Guest 2: Yep.

Host: And then you guys circle back around with a digital marketing agency to serve this niche and so you start calling upon some of these for former clients again.

Guest 3: That's right.

Host: So at this point, you guys really, you guys really know this space. Let's hear why you liked it so much. Let's start with Colin. You mentioned how you saw your first gig selling the cloud solution or have building these reseller relationships with these folks. You saw them, some of them, right off into the sunset. You just mean you'd hear about an acquisition or something or somebody being bought out, one of these owners being bought out and how much, how well they did. Because you weren't, you guys weren't doing the buying, you were selling into them. This was just kind of hearsay that you were witnessing in the industry.

Guest 3: Well, I would, I would have, you know, I worked with thousands of security providers across the nation and I would get to know these owners really well and what would happen is I'd be with them for several years and I'd watch their company grow and I'd get a call and they'd say, hey Colin, like I'm really excited. I just sold my business for X amount of dollars and I was blown away. I didn't even think they would get near that valuation just, just simply because I knew the business. I mean, they'd operate out a small business park, you know, and had a couple vans and I was blown away. So I knew these folks pretty intimately and they would, a lot of them would share those details with me and kind of give me the inside track on how they sold and what they did and what that valuation was. And yeah, so I got kind of firsthand experience on that.

Host: Okay, great. That's great. And, and you mentioned how these guys were quote, turning wrenches 20 years earlier. So this is kind of, this is actually a blue collar business where people like a technician might grow a business around himself gradually over the years. So kind of looks like grows like an H VAC or plumbing business might.

Guest 3: That's right. Yeah, exactly. That's exactly right. These guys were, I mean a lot of these guys kind of came out of the telecom world. So they were, you know, doing phone systems and low voltage cabling and started getting into fire alarm and burglar alarm as those technologies started to progress. And they started out as a technician and built their book of business around them and, and then they, you know, before they, you know, picked up their head 20 years later they've got a full company that they've got a full staff of technicians and.

Host: Yeah, okay, great. We're going to put a pin in learning more about the industry. I want to return to that later and hear more of the story. So you guys, you know, really are, know this industry quite well, see opportunity there to buy a business in it. And I think actually like a lot of digital marketing folks, it's like if I'm, if I'm able to grow leads and grow the funnel for my customers, wouldn't it be better if I had my own business that I could do that for? So you're kind of blending that with what is. With this kind of industry thesis that's developing for the choice industry to go after. Still buying a business, big step, kind of get us over the hump of like where you kind of commit to do an eta.

[15:08] Guest 2: Well, Colin said I want to do this. And when Colin says he wants to do something, extremely hard to convince him otherwise. And so he said, give me an hour, I want to. And I mean the guy loves to whiteboard. Oh my goodness. So, you know, bring back his corporate days. So he says, give me an hour. And it took about 18 minutes, I think. You know, it did not take an hour. And you know, he walked through salesman

Host: under promising over delivering.

Guest 3: That's right.

Guest 2: Even on his presentations, always ice to Eskimos. Like the guys ice to Eskimos. Absolutely.

Host: So

Guest 2: and that's why I love being a partner with him, you know, and he has a lot of conviction. So there was conviction around the industry and he knew his numbers and we talked through which we'll get into, I'm sure around gross margin profiles and you know, fragmentation that still remained in the industry, which I was a little doubtful of. At first. And so he really convinced me that this was a great opportunity to pursue and I got on board quickly, you know, in about 18 minutes like I said. So that's, that's kind of where, where we came from. And it really was birthed out of his own conviction and his own experience. And you know, we were already working together and he said, hey, let's, let's do this together.

Host: And you both had some zero to one experience. And I think Colin, you mentioned that you bought some businesses before. Did I hear you say that?

Guest 3: Yeah. So I own a couple small businesses. I own a CrossFit gym here locally. I started a small dumpster business that I, that I sold. So I had, I have done some business building outside of the digital marketing space. So I had some knowledge around scaling businesses. Nothing dramatic, but had a little bit of knowledge around that.

Host: And then. So why not, if you'd started, you both had started businesses from scratch, why was the opportunity here to buy and not start one from, from scratch? Particularly Colin, because you're hearing, you're seeing that there's really high premiums being paid for these businesses. So it would seem like the play would be to start your own and sell that rather than, you know, pay high top dollar for, for, you know, for when yourself.

Guest 3: Yeah, I think honestly it comes down to the infrastructure and the platform. This industry, like many service based businesses, it's really tough to find really good quality technicians in this space and to have an operations platform already in place. Customer base. There are a lot of companies out there, our company included, that are, have been open for 35 or 40 years and have a track record of customers that have been along with them on that ride and are super loyal to that local business. And so the ability to scale and cross sell within that existing base was really appetizing to us. And to be able to walk into an operations platform that already existed, that sure needs some help and needs some tweaking. But guys that already knew how to go to business. So day one, you're, you're still doing calls, you know, you're taking over the business in day one things are still happening. And so for us that, that really was, we just looked at the unit economics. We said man, you know, it's going to be hard to try to scale this, get those customers organically, get enough Runway to get the tech first technician hired. And you know, we, we looked at it from, from the buy perspective and it just made sense.

[18:29] Host: Great. Well, you could have abstracted everything that you just said out to just Be an argument for ETA generally, of course, yeah, sure, yeah. But I'm talking to two guys who'd started stuff from scratch, so I figured I'd ask.

Guest 3: Yeah.

Host: Colin, did you know what quote search was or eta or was that, was that something that Stephen brought to your awareness?

Guest 3: How did, Yeah, I, I didn't know any, I didn't know anything about that. I didn't know what ETA was or Searcher. I, I didn't know, I didn't know about it till after we bought Alarm Masters. Stephen was like, yeah, what is, what's ETA stand for? Who knows, you know, and yeah, we, so he, he, he brought it to me and was like, hey, this is, there's a lot of people like doing this. This is a thing that exists out there and you should go get educated and learn and try to meet other people. And I have since and met a lot of amazing people. But no, I didn't know, I didn't know what it was. I just knew that this business made sense and I knew that I could scale it and.

Host: Yeah, cool, cool, great. But Steven, you know, you're Collins in your ear or whiteboarding, you know, the opportunity in this industry, but you did have an awareness of search and eta. So you're, you're bringing like that kind of validation of concept as you, as Colin just put it, it's like, you're like, you know, people do this, this isn't. You like this industry. But by the way, people are doing this across all kinds of industries. Guys just like us. Guys and gals just like us. Anything more to add to the fact that you brought kind of this search awareness to the equation?

Guest 2: Yes, I had bought one business and so had already gone down that road one time. So I think Colin valued that, that I had some experience of a little bit of a sizable transaction that was with a partner as well, a different partner, and was not financed in a classic ETA kind of SBA perspective, but, you know, had, had done that, was aware and well versed in ETA as well as some other, you know, kind of maybe more private equity esque type of strategies, independent sponsor, et cetera. So had been really looking at a bunch of different opportunities and this one really clicked for me.

Host: Most business buyers acquire their target company using an asset purchase, which means that you've got a brand new legal entity that needs to be ready on day one to properly employ your new team. Payroll, HR documents, tax accounts, workers comp, benefit plans like medical and 401. You need to make sure all of that is transferred or Set up on day one, Aspen HR understands this challenge and the delicate timing that searchers have to juggle. Led by a successful former searcher, Mark Sinatra, Aspen HR can assist searchers to ensure a seamless transition for the employees. If you are structuring an asset purchase, contact Aspen HR for a free consultation. They'll walk you through their proprietary checklist for asset purchases that assesses your readiness for HR payroll and benefits. Check out aspenhr.com or contact Mark directly at Mark aspen hr.com well, guys, let's hear some about the search itself because as you both know, searching for a business to buy for many searchers is, you know, a long and difficult process. But when you have an industry thesis and you're, you know, you're laser focused on this, this particular opportunity and also, by the way, in Texas, I'm not sure we've made that as clear as we should. So this was right, I mean this was even. We're going to, we're going to roll up this, this industry in this state. Correct.

[22:14] Guest 2: Right. And even more specifically, we're going to start in Houston where Colin was. So we were extremely narrow. And I'll let Colin speak to kind of how we approach that.

Host: Yeah, Colin. So what did that look like?

Guest 3: Yeah, so once we, once we jumped into the world of search for this business, which I wouldn't have defined it as that, I called the first person I knew in the industry, which was a gal that was, worked at the company, that startup out of D.C. she had since transitioned to be a broker in this industry selling alarm and security businesses. So I made literally one call and I, I just talked to, talked to my broker. I was like, hey, I'm interested. Here's what we're kind of looking for. I'm looking for a deal in the Houston area. And she said, oh, I, I have a deal for you. And so she's like, you got to look at this deal. And the very first deal was a guy that I knew was one of my dealers when I was selling at my old business. And he was a guy, him and his wife were running it and retiring. I knew him really, really well and knew his background and his dad had started the business, so he was second generation. And so we, we kind of skipped through that first part of when you're searching a business of like getting to know each other. It was just like immediate. We knew each other, we had rapport. He, he could trust me, I could trust him. And so in terms of search, yeah, it went from like literally one conversation. I mean, We've literally looked at this company and, and it, it, it fit our profile exactly.

Host: I mean that's wild. Not only that it was just one conversation, that there was no real search, there was a phone call, but that you actually knew the guy from a former life.

Guest 3: That's right.

Host: That's wild. Okay, well before we hear about the business, let's also hear just a little bit about the partnership. What can you tell us about how you envisioned equity? If you can share that roles, time, et cetera. What did the substance of this partnership, how did that map out?

[24:06] Guest 2: Sure, we approached it with an equal mindset and so being equal partners, we know which we'll talk about more, that there's significant opportunity to continue to do add ons in our current local geography as well as additional acquisitions, ideally in major markets in Texas, which is what I'm more focused on. Kind of the financial side of the house and acquisitions and that Colin being in the market we were acquiring, we actually moved the office to be closer to where he lived in Houston. And so he was going to be day to day ops, kind of face the business. And so that's gone well and that's kind of how things have played out so far.

Host: Great. Gotcha. And so you Stephen, you're already looking at other acquisitions?

Guest 2: Yes, we actually have already executed one add on and are pursuing others currently.

Host: Oh, we'll have to, we'll have to hear about that. And where are you based, Stephen?

Guest 2: I'm in Dallas.

Host: Okay, tell us about this, this business that was so difficult to find.

Guest 3: It was kind of a funny deal. I mean we, we immediately knew, kind of our profile going into it was we were really looking in that kind of from a top line rev perspective. We were looking in that sort of 2 to 4 million dollar range. And we were also looking for a company that. Well, two other things. We're also looking for a company that had been around for a long time, that had some staying power. There's a lot of companies out there that get started from a technician and they don't make it and they maybe they're around for a couple years and they just, you know that the customers aren't real happy and so you just have to be very careful. And so we wanted a company that had some staying power that had been around for a long time. And then, and then really that, that third thing that we were looking for was the, the technician base, the installation pace. I, I know that in this industry there is a lot of companies that love to install systems, but not a Lot of companies that love to service them. And so I was looking for a base of technicians that were service technicians that knew how to go and maintain these systems as a way to go to market. And we've got some guys on staff. Their tool belts are older than my entire life. Like, these guys know this industry so well, and they know these panels. They can keep any panel alive. We're kind of the. We're kind of the dog pound for alarm panels. So we get a lot of companies that just can't do it. They don't know how to fix the thing. And so they come to us. And so that was really appetizing to us to have these technicians that have done this and had been in the company for a long time. And so those are really the three things we were looking for.

Host: And when you say 2 to 4 million, top line, what do margins typically look like in this business?

Guest 3: Yeah, so they. It kind of depends by the revenue category. So when we look at the revenue category from a.

[27:00] Host: We.

Guest 3: We look at most things from a recurring revenue perspective, in fact. And Steven can get into this more. This whole industry is based on a multiple of recurring revenue. So when you're looking at gross margins, it's. It is important because it kind of helps you understand operational efficiency and understand how well you can execute. So, like, a standard gross margin in this space is, you know, 25 to 50%. But we were really concentrated on gross margin for recurring revenue, which is that. That was the key metric we were looking at, and that really sits at about 85% for the recurring revenue. And so that. That was where we were honed in on it. And Steven can give you some background on that, too.

Host: Wait, so, okay. Well. Yeah, why don't you go ahead, Stephen, give us whatever breakdown we need.

Guest 2: People may be surprised to hear that you won't even see a net income or earnings or STE or EBITDA number in a SIM in this industry. It's not there. You won't see it. So you have to do that work after the fact. What you see is recurring revenue, average install revenue, but it's heavily predicated on rmr and that RMR being recurring or from my software friends, mrr. Right.

Host: And sas, you'd call it mrr, but it's. It's even the same words. It's just they switch the order recurring.

Guest 3: This is like the whole industry that does that. Yeah.

Guest 2: It's weird.

Host: Yeah.

Guest 2: Yes. There's. There's a lot of things about this industry where that statement holds true. You know, it's it's very unique to this industry. It's very unique to this industry constantly, which is also painful for me, who approaches acquisitions from more of a classic, you know, multiple of EBITDA perspective. And the brokers and the sellers are saying, we don't care, that's not how we do business. So we had, I really had to get my arms around that and to get comfortable with that and happy to dive into that more. But what it means is, in my perspective, it creates a lot of opportunity for someone that maybe is a little more of a sophisticated buyer, especially on the lower end of the market, when you can have the, the context of what that means to buy from a earnings multiple perspective. But we're buying on a multiple of RMR with really great gross margins. So it was very attractive. That's when I talk about Whiteboard and how Colin convinced me Those, you know, 20 minutes or so, that's where I got really excited and interested. And so the business that we bought was operating at about 25, 27% EBITDA margins. But from a gross margin profile, 80 to 85% on the monitoring side is really strong. And that's my world. Right. I come from more of a high gross margin recurring professional or productized service business. So this to me was kind of this blue collar opportunity to do the same thing that I already liked doing and participating in. And unit economics were kind of familiar. But the cool thing is you still have installed revenues and project based revenues with, with strong gross margins, not as strong as 80%. That allows you to kind of have this overhead coverage mechanism. So when we're talking through, you know, different, you know, EBITDA margins or gross margins, hopefully that gives some, some context.

[30:18] Host: That's great. And, and so, but as you said, Stephen, you know, a business buyer who's from outside this industry is basically going to do, you know, the, the next order computation calculation to figure out what, what the SDE and what the multiple really is in our language and in our understanding, does it end up being wildly different than other small businesses? Meaning, you know, wildly different than 3 to 5x of, of what it's actually cash flowing?

Guest 2: No, it's, it's right in that range. And the nice thing is, is that some of those businesses that get talked about a lot from an industry perspective don't come along with, in this case, about 34, 35% of the revenues were recurring. So that was very advantageous. Right. If I go look at other blue collar home service businesses or whatever they may be, many of Them don't come along with this recurring mix. And that's another reason why I felt very comfortable kind of, you know, wading into these waters.

Host: Well, of course that's you know that that's what everybody's, everybody wants is the recurring.

Guest 2: Totally.

Host: I. Before we get too far away from it, thank you for the reminder. I meant to ask what these 18 minutes at the whiteboard contained that was so compelling. So it was, part of it was how the kind of economics, the economics of these individual businesses and how appealing they are. What else? If, if either of you want to answer or remember a lot of it

Guest 3: had a lot to to do with go to market and it had to do with the opportunity to expand in this space. You, you kind of, you kind of see really three tiers in this space in terms of the roll up private equity, large behemoths. Then you see the, the regional players that are, are, are I would say regional in within a state, multiple cities within a state. And then you see the hyper local and the hyperlocal are these folks that are, I'd like to say mom and pop operators to an extent that are operating these businesses and they have a massive base of customers, super low revenue concentration, customers that have been around for a long time. And there's zero mechanism for cross selling and upselling. There's zero sales effort. The sales effort is answer the phone when it rings. And so a lot we definitely started with union economics but where I was trying to help Stephen understand the perspective is the opportunity to grow through organic sales by implementing the things we already knew, the things we were already doing and helping other middle market businesses with to implement those. And also this idea and this gap in the market that I highlighted earlier that people don't want to service these systems, they want to install them, they want to put in new brand new systems and these, the customer bases.

[33:05] Host: Why is that, Colin? I, I was going to ask that. What is that? Why don't they like service?

Guest 3: They don't like service because it's complicated and you have to do things like route optimization. I mean it's all the same things you see in other service based businesses where you've got trucks and you've got guys that are hard to find good service technicians and there's a million different technologies that have been acquired and end of life and everyone has a different type of technology and a different type of thing and it ends up just kind of wearing down your margins a little bit versus on a brand new installation of a system you're looking at, you know, 50% gross margins, you're getting some RMR off of it. So they really just want to install and walk away. And these customers are left literally calling saying, who can help me? My system isn't working, I've got a camera down or my alarm system's beeping, can somebody do something about this? And, and so we get the call, you know, we get the call first to say, hey, I'm not, you know, I'm not monitored by you, but can you come help me with this thing? And absolutely, we'll be there tomorrow. Let's come out there and help you fix that keypad or that camera and get it back online. Because my technician Bill has been doing this for 40 years and knows exactly how to fix it and has worked with that panel. And so that, we saw that as a huge opportunity.

Host: And so, yeah, this, this is totally, you know, thanks to your industry understanding, Colin, because that's, that's, you know, that's, that's not a point. That's a point that probably would have been lost on an industry outsider.

Guest 2: Yeah.

Host: And the other obvious question here is if these businesses are so appealing and there already has been private equity interest in the category. And in fact I think that there's a, there's a famous search, searcher case study or maybe two around in, in this industry. So it's also, it's also had searcher interest. Historically, why does there, why is there so much opportunity remaining?

Guest 2: Yeah, so a lot of the opportunity, a lot of the activity historically has been on the residential side from an aggressive kind of roll up and acquisition perspective. So, and then a lot of those acquisitions have occurred up market or kind of mid up market. And we are patient and we see the opportunity as doing the dirty work of aggregating the lower end of the market and also focusing more on the commercial side of the house. Today we're about 70% commercial as it stands. And we intend to continue to push that percentage upward through acquisition and through our own organic efforts. We will still add a new residential customer and service them. But generally speaking, we anticipate that our percentage or our book will continue to skew commercial. And so that's, that's really a core part of our thesis.

[36:00] Host: What about the, the nature of the service you're delivering? You know, we're, we're talking very kind of abstract business and financial appeal here. But at the end of the day, you are providing a, a system that should protect people from a fire, from security breaches, people breaking in. I mean, this isn't stuff to, to toy around with. Does that give the business a different kind of element of responsibility or, or not? Like these systems are robust enough as long as you have good technicians that are keeping them humming along. It's, it's no more weighty than another type of business.

Guest 3: No, I mean it, that, that weighs a lot on it. In fact, in our first month of buying the business, we switched our phone providers and a lot of these alarm systems kind of inadvertently travel through phone numbers that we own. And we were switching phone providers and there was an issue on the porting of the numbers. So I was literally at the office like month one until like 4am picking up the phone in case it rang and there was an alarm going off so I could dispatch out to the monitoring center. So there is definitely a significant amount of weight on that. And it's something that we focus on a lot. In fact, we've built systems around when an alarm system, some what we would call kind of leading indicators of here's some things that are going on with these systems to be able to notify the customer, hey, we think there, there may be an issue. There may not be, but we want to just check. Can you go through these checks with us to make sure that your fire alarm system is, is working? And in the fire world it's so serious. These customers are required by the fire marshal to have their systems inspected on a quarterly basis. So we have, they pay us to come out once a quarter. We check every single device. We put a tag on that panel and then have to report that tag back to the fire marshal to let them know, hey, this is, this system is in working order. And many times you do that quarterly or semi annually.

Guest 2: I would also add that there's moat that exists there because you're dealing with life safety, especially on the fire side. And from a licensing perspective, all of that is taken very seriously. But to us that's moat that's a positive. It's harder to get and maintain those licenses. And then also in general we find that buyers of alarm and security view this as a non discretionary purchase, which is huge. And so it is a heavy weighty thing. And because it's a heavy and weighty thing and a service, it also is a positive because most people making that buying decision view it as non discretionary, which is exciting to us.

Host: Yeah. And on the licensing, so say more do did you guys or do other would be acquisition entrepreneurs out there looking at this industry. How should they think about licensing?

Guest 3: Yeah, they should pay attention to it, because it's a very real thing if you don't have the right. Every state is different. So it's mandated by your state. And for both a fire alarm license and for a security license, there's licenses that have to be held at the company level, there's licenses that have to be held at the technician level. There's experience requirements that you have to be able to hit that are audited frequently. You have to go take a test to be able to get into the company requirements. So it's, it's not a matter of buying the business and you're good to go. In fact, if you don't do your due diligence on the company license, you could buy the business and then at time of renewal lose your license because you don't have the experience requirements and you don't know what you're doing from a licensing perspective. So again, kind of another moat for us. But luckily we had all that experience and all those things kind of checked during due diligence and really before due diligence.

[39:47] Host: And you as new owners don't need individual licenses yourselves. The business entity or somebody at the business having that license is sufficient.

Guest 3: So you don't have to have a technician license, but you have to have an experience requirement met. That's within the industry. But I had that experience requirement already met, so I had to take a test that basically is associated with holding a company license. And so I had already had that before I went in.

Host: Ah. And so could somebody listening, how much ex. Like how difficult would it be for them to pass this test or how much experience do they, should they have?

Guest 3: Yeah, so it's two years of experience, consecutive experience. And then you have to have this test is only offered a couple of times a quarter and it's about a 70% fail rate, 30% pass rate on your first time. So it's, it's pretty significant. And you, you really have to understand it has nothing to do with like how do I install a panel. It has everything to do with codes around reporting, around making sure you have background checks, how you make sure you're doing fair business practice and how you're doing marketing, etc. So as soon as we took took over the business, I had to almost immediately go take that exam.

Host: Oh, wow. Okay. So somebody who's just listening to this podcast and, and likes what they hear about this industry couldn't go buy one of these businesses because not only do they, even if they thought they could pass the test, they also actually have to demonstrate two years of Experience.

Guest 3: Yeah. So it's kind of a complicated deal in the state of Texas. There's something a term called a primary company representative that has to be on your staff and that primary company representative has to pass that exam and they have to have two years of continuous experience. That person technically could be an employee of your business. So if you had somebody that you really trusted that was a long term employee in that business, then they could go be that primary company representative. They don't actually technically have to. The owner itself doesn't technically have to meet those experience requirements. The only risk with that is now you have that license tied to an employee who really kind of has you because they, they are the one that holds that. And if they leave, you have 60 days to find a new primary company representative underneath your business. So you're absolutely right. It definitely is a barrier to entry. You should have those two years of consecutive experience. But there are ways to work around that.

[42:14] Host: Yeah. Yep.

Guest 2: Okay.

Host: And right. And a reminder that it's state based. So we're talking just Texas regulations here. But Texas being looser on regulations, we can imagine that, you know, other states are going to be, are going to have an even higher bar to pass.

Guest 3: Yeah, no doubt.

Guest 2: Certain ones, I'm not sure which ones you're talking about, but certain ones.

Host: Yeah.

Guest 2: Okay.

Host: A little bit more in the industry, although I think we're going to be returning to it constantly. But we want to hear about Alarm Masters, the business you bought. But just first hiring. So what does labor look like in this industry?

Guest 3: Yes. When you say labor, are you referring to like technicians and different types of stuff? Yeah, so. So we have different types of technicians that are out there. There's a whole, like many industries, there's a whole career path. You, you, you start with helpers and these helpers are full time employees that are basically helping out a full technician and getting two years of experience so that they can become a licensed technician. Then you kind of have just a technician level level one and then you would go to a level two technician and then supervisor and project manager. And so you have different levels of that. We, our business before that didn't were, were a little smaller than, than some of the larger national players which would have multiple levels of that. We really only have like 1, 1 level for each of those, one person for each of those levels. And it is difficult to find, as you can imagine, everybody in the service based industry. It's hard to find folks that are sub 40 years old, 45 years old that are interested in this Space. And so we're, we're really, we're actually trying to solve for that now. There's some programs through the U.S. military Department of Defense where they give incentives to hire veterans to bring them in. So we're working on some of those programs. We're trying to get involved with our local community college that offers trade based programs. So we're trying to develop that training path now. We've got a really robust and healthy technician department and we've done a lot to keep them and retain them, but we're trying to get ahead of this curve and try to recruit early and train early.

Host: Okay guys, tell us more about Alarm Masters, the business that you actually bought and maybe you can tell us from the perspective of the story. So you reconnect with this person, Colin, that you knew from your former life. How do things unfold?

Guest 3: Yeah, so we, the first thing we did is we, you know, we jumped on a call with the owner and he was like, wow, hey man, good to see you. I haven't seen you in five years. Like great to, great to reconnect. And we really just kind of got into, we were most, again, most concerned about the health, if you will, of the rmr. So we were looking at how long, not a formal cohort analysis, but really trying to understand how long each of these individual customers had been around. How long? When was the last price increase they were doing, what was the health of the contracts? Ensuring that they were transferable, that they had price increase and auto renewal clauses in there. Digging into the average recurring revenue, understanding the expenses and the cogs associated with that recurring revenue, asking questions about employees and technicians, that was huge. Understanding what was the average retention for these, for these individual technicians, what licenses they have, they have a fire and a security, or is it just one or the other? What were the individual roles? Did you have senior technicians? What were you doing to develop them? So a lot of it started out with, during due diligence was, was questions. You know, there was definitely document exchange like you would see and you would, you know, you'd have a data room. We didn't really have that. It was a lot of conversations, lunches and dinners with the owners to talk to, talk through their business. And you know, these are people that have owned these businesses for 35 years. So they're, they have a lot to say. So you're having to kind of wade through and understand and be sensitive to their story and the, in the business that they have built and in this case the business that his dad had built who had, had since passed. And so we, we really were sensitive to that and trying to understand a lot about, you know, the company. Also I wanted to understand what were you doing to grow? What, what were the things. You see this with a lot of small business owners where they're so in the weeds, they just don't have the time. They know the things they need to do to grow. They know it. They could write it down on a piece of paper and write a research paper on it. What they don't have is the bandwidth. And so that's what we spent time on. As we said, hey man, tell us about how you would grow. If I could give you four 40 hours back in a week, what would you do with it? And so these were important things for us to be thinking through in terms of is this the right type of business? And, and honestly, I don't, I don't think people in this industry would have been doing that. They, they typically don't have. They look at the stack of the rmr, they look at a couple check marks and they decide, are we going to buy or not? And we were more concerned about the business, not just the rmr.

[47:07] Host: That's a great question, Colin, about what would you do if I had, if you had 40 extra hours in the week? Not only because you get a little, you know, sense of what, who, somebody who's so strategically positioned would suggest that you do, but it also just kind of reveals how easy or how much growth they think there is if they're excited to tell you about all the things, even if some of those things you ultimately decide were wrong headed or not the way to go. Like at least they, you get that you kind of can take their temperature on how much growth potential there actually, they believe there actually is. Pretty, pretty interesting. You know, I, I'm feeling like the, the, the, one of the themes of this episode is the value of being able to buy into an industry that you already know. I mean, Colin, you must have just blown their socks off with the questions you were asking because you just clearly, you know, know this industry backwards and forwards. And like you said, you're not just asking kind of financial numbers, you're asking the real subtle stuff. I mean, so you're asking the right questions to make sure you buy the right business. And meantime, you're building rapport quickly with an owner who respects you because you know what you're talking about. I mean, so kind of respond to that. Again, if somebody's listening to this from outside the industry, do you think that they have a shot at this industry or it was a lot of your success at buying this business based on Colin, your, your resume here.

[48:36] Guest 3: I think they totally have a shot. What I'll say is you say I knew this industry backward and forward. I would say I'm still learning a tremendous about this industry. I literally started that position going into the owners, like, hey, pretend like I don't know anything. Yeah, I know a lot. But tell me the things I don't know. What are the things I'm missing? Like I'm a guy that was from channel sales and like I understand business economics. Explain to me what it's like when your van gets burned, broken into and all your tools get stolen. What do you do? You got three other service appointments. Like how do you handle that? What do you do when the fire alarm is going off at a building that it's one of your key clients and it's not communicating and the owner like walk me through this. So I really started from a position of humility and, and not to be viewed in any potential way just because I didn't know what I didn't know. And I really wanted to understand from this owner's perspective what am I missing. Share with me the things that I need to know about this, this space. To answer your question, I would say there's totally room for more entrance and there's totally room for people that don't have experience in this industry. But you have to have humility. Like you got to know what you don't know and you gotta. I would say it's really important to have this relationship with the owner you're buying from in a lot of business transactions. Now that I'm learning more about Searcher, it seems almost cold. It feels very calculated these conversations that you're having with the owners about the, the APA you're doing or the stock sale or the due diligence and, and they have the one or two conversations with the owner. I'm, I'm think I'm saying, man, if you're going to buy a security business, you should be setting up weekly meetings with these owners, start having conversations with them. And, and yeah, that's a risk because you're going to have dead, dead deal risk. Right. If you invest all this time, the deal doesn't go through. You may have wasted a bunch of time, but if you want to be in the space, you've got to be willing to commit to that.

Host: You know, Colin, I, I think this is your, your sales experience. I mean your, your curiosity Humility, rapport building is really valuable when you're talking to sellers and it's something that, it's a theme that comes up a lot on this podcast and throughout search. And some people kind of get that intuitively and so they don't, they don't make that mistake. But a lot of searchers do make that mistake and they come in, you know, with just the, just the facts ma' am sort of mentality and they have to learn the hard way that you know, this is the, this is the seller's baby. The seller cares about their legacy, their people. You know, this is a very personal and delicate dance that you, that you engage in. It's not just, you know, give me the bullet points and I'm, you know, you know, write a number on a piece of paper sort of situation.

[51:10] Guest 3: Totally.

Host: So the bullet points please.

Guest 3: What, what were the.

Host: Let's get back now to the cold hard numbers about alarm masters. What, what did you, how big a business was it? You had said that it was a second generation owner. Give us some of those if you would.

Guest 2: It was 35 year old business, second gen. They had had really, if we look back over five or six years, very steady financials and they were growing up into the right very slowly over the last five years. But what was really positive to us is that we looked at a business that through Covid really didn't waver. In fact they grew that year and which, which really reinforces and validates the idea of it being non discretionary. So we really appreciated that quality about the business. There were not major fluctuations. Now you could say, oh well, there's not a lot of meat on the bone. But we knew what they weren't doing and we knew what our skill set was that we could apply that we've started to do and is working. And so we were comfortable with the fact that it was steady and the, the business was, you know, kind of on the lower end of that two to $4 million revenue top line range. And we purchased the business for just over one times revenue essentially. So that's from a top line perspective. It was kind of that two to two and a half range that the business was doing at the time from an acquisition price.

Host: Now one times mrr. M R. No, yeah, rmr.

Guest 2: Yeah, keep it.

Host: Keeping it. Whose language are you speaking now, Steven?

Guest 2: Yeah, so we just mathematically we bought the business for a little over 1 times revenue. But the classic kind of industry multiple that you would think about is somewhere in this 32 to 38 times monthly revenue, so, you know, 32 to 38 RMR. And we bought the business for kind of right in the middle, kind of really, kind of a classic standard multiple which we validated through other brokers. And, and even since and kind of learning more about the industry, we feel like we, we bought the business for a really fair price. We feel really good about where we came in at.

Host: And when you back out the numbers and convert them into our, you know, understanding of SDE and ebitda, does it end up being a multiple of cash flow in the whatever three to four range?

Guest 2: Kind of. Yes, about. About three and a half times.

Host: Three and a half times. Okay. And so you said the business was on the low end of the 2 to 4. So I'll just be conservative. Say it was 2 million. And margins in this industry can range from 25 to 50%. That's a very wide range. But so we're, we're talking a, you know, 500 to a million in ste.

[54:04] Guest 2: Yes. Yeah. So, you know, we were kind of in closer to that like 700, 750 number.

Host: Okay. And your deal was it SBA? Does the SBA have anything to say about this type of business? Are they anything, you know, does do? Are there banks that like this or don't like this industry or what? You're laughing.

Guest 2: We really had to educate our lending partner on the deal about this industry, and we did kind of a classic SBA deal and there was just a lot of discussions back and forth around valuing the business on a more classic industry multiple and then trying to provide them with a more normalized valuation that they would expect. And so we worked with them, you know, to kind of process through that together and, and really created a good relationship along the way and have re engaged them since about add ons.

Guest 3: Yeah. And just to add to that, it's kind of funny because now, now that when we were going through the initial due diligent phase of, of buying alarm masters, they didn't, they didn't even care about the recurring revenue. Really. They, they didn't even. It was great that we had it. They didn't want any reports around it. They didn't, they didn't want any of that. And then since we have closed and, and started exploring other deals that have developed a deeper relationship, they have since realized, whoa. I mean, literally our, our lending agent was like, man, this is great. We want to start doing more deals in this space. And now the only questions they ask about is recurring revenue of potential acquisition targets. We're looking at I mean, that's the thing that they focus on. They don't even ask us about, you know, gross margins and all the other metrics. They're really just concerned about that recurring revenue and wanting to know about the contracts. And so we've, we kind of had some interesting education there. And one thing to add for those folks that are looking at this industry, not only are we, are we valuing businesses on a multiple of recurring revenue, they have this little tricky mechanism in there called a holdback. And so a holdback is this idea that you will hold back at 10 to 20% of the purchase price on the day of close for typically one year. And what you do is through that one year, any attrition you have gets deducted from that holdback. So if you have zero attrition, you're going to pay them the remainder of that 10 to 15%. One year later, if you lose X number of recurring revenue, you could potentially not be paying them that 10 to 15% at all. And that's really to protect the buyer from any inevitable attrition when you buy a business. And that is a concern, that is a very real concern, particularly if you're doing a roll up and you're changing that brand name and you're changing that owner that you are working with in the same lady they call in for scheduling. So anyway, that hold back mechanism is tricky and a lot of SVA lenders don't have the mechanism or don't understand the mechanism of how to execute that in a traditional deal.

[57:12] Guest 2: One, one other thing I'll add is that I actually sought out a specific business valuation firm who had deep industry expertise and had, I think had done 30 or 40 different deals in our industry. And we actually connected them because our lender did not have, from a business valuation perspective, have someone that was already kind of whitelisted, that had valuation expertise. And so that was another thing that I would say not only for this industry, but if you're buying in somewhat of a niche, I would consider just discussing from a business valuation perspective with the lender, who their kind of approved partners are and what experience they have. If they have experience in your industry and if they have openness to go to bat for, you know, adding another valuation partner vendor that might be more helpful in that deal process.

Host: Because you, you want somebody, a valuation partner who really knows this industry.

Guest 2: Correct.

Host: Particularly when, when an industry has such kind of idiosyncrasies around how the valuations are done.

Guest 2: That's exactly correct.

Host: You know, the thing about the Holdback too. That just, it just reinforces the point that this industry in enterprise value, all it cares about are these contracts. So even though, you know, I think you said at some point Stephen that what, 40, 40% of the revenue are the contracts? Something like that.

Guest 2: We were, we were at about 33, 34% of top line was recurring when we bought it and that since has increased.

Host: So you know, it's like how. Why doesn't the industry care about this other 65% of the, of the servicing and, and the installing now? Correct the answer. The answer might be like well who cares about top line? Let's look at cash flow. And so if the, the monitoring recurring revenue is actually 85% gross margins then maybe it actually represents like 70% of revenue. I mean you could do a quick calculation. Can't do that one in my head. So it just, it's an outsized portion of the actual cash flow coming off of a business. And so that's probably the answer. But, but really interesting. And, and you know Stephen, the way you also put it I think is like to the extent that the business is doing installing and service, it's almost just, it's. I guess it's gravy profit like you could find a bit. I guess what you'd look for is a business that doesn't have a ton of monitoring because it's being, but has, has a lot of install and service because you're not, you the acquirer are not then paying for that install and service profit cash flow. Am I thinking about this right?

[1:00:06] Guest 2: The trade off. So yes, your, your observation is correct. In general we would always want healthy RMR in the business that we're going to buy. But you are correct about kind of noting it as gravy and that is, was part of that whiteboard session when I really started to understand how are these businesses valued. And you're saying these additional revenues really aren't priced in from an industry perspective. And so that was a major factor in my own interest. And you know, if you look at buying a business that is lower kind of on the RMR end, it's almost like you're buying a construction business. Like you have some risk there. That's so heavy. Project based. 33% was even a little lower than I was hoping from you know, an acquisition or a platform target. I would have loved to have been in that 40 to 50% range personally. But um, you, you just have to choose what is right for you and, and how much risk you're willing to take on that project based or one time revenue versus recurring.

Host: Okay, tell us now guys. Tell us more about the deal. I, I recall from our pre call, Stephen, that holdbacks played a role here or I should say didn't play a role seller note. The, the talk to us about those two things.

Guest 2: Sure. So we knew that the deal was listed right and we knew it was not off market. Like Collins shared came from a broker that there was a personal relationship with, but that didn't mean that we were the only people that had a shot. So it was a multiple offer scenario. And so we chose based on specifically the fact that they had such consistent revenues over the last five years to offer without a holdback, which was risky. We knew that that would carry some, you know, downside risk post close. But it's what we chose to do to try to stand out. And after the fact, you know, we were told that that really was a deciding factor. So it was a risk that was calculated. And we still now today, especially with where our RMR is at, we feel phenomenal about making the choice that we did. But it was a risk. And there was no additional seller note included in this deal.

Host: Yeah.

Guest 3: And I would add that one of the reasons we were willing to take that risk is because we were going to be using this as the platform business and we were going to be keeping the brand and the staff and the technicians along for this business. We felt like the attrition would be lower. Whenever you're doing in this industry, when they're consolidating, they're pretty much buying their recurring revenue in the book of business business and they're stripping away any brand name and a lot of times not even hiring the employees, maybe the technicians and they're gobbling up that, that revenue and that rmr. Well then what happens is these customers say, well what about Brian? I've been working with him for 20 years. Like where did he go? And so if you don't have a really good playbook, if you don't have a way to handle that, you're going to lose some rmr. And, and that it's so common that that's how that holdback mechanism became industry standard. Well, our thesis was we're, we're keeping the same employees, we're keeping the process. You can call our ops manager, he's the same guy you've always dealt with, Valente. He's coming back out to your site tomorrow, don't worry about it. So a lot of that was able to be mitigated because we were keeping the brand. But I would say if you're coming from outside the industry and you're, you're going to roll up or you're going to be buying and not keeping that brand and those, those employees, those keep employees, you should really consider what that holdback is going to look like. Mm.

[1:03:53] Host: And so just jumping ahead a little bit, how do you guys think about doing your second, third and fourth acquisitions? Are you going. I mean, I know you've already got your second one, but in general, it's easy to say all that, what you just said, Colin, when you're, when you're an outsider coming in, everything stays the same. But as you start rolling up yourselves and look, look for economies of scale and look for brand unity and you know, there's a reason why the playbook is what you just said, Colin. So as you guys get bigger, how do you think about that? Are you going to go a different path than what, what aggregators have done before you?

Guest 3: I think we're going to do a combination of both. Our, our, our game plan and playbook is, yes, we're going to pursue holdbacks. If we can get a hold back and we can make that work within the deal structure, we're going to pursue that also. We're going to pursue a low attrition strategy. And that was something we did here. You would be short shocked because of this such low concentration of recurring revenue. When a customer that's outside of their contract calls to cancel, many of these owners, they don't even call. They just say, okay, we'll send you your bill, whatever, and they move on because it's, you know, 15 bucks a month, who cares? But that was not our approach. Every single customer that had called to cancel from the day that we purchased the business, I have personally called, texted and sent a message to. At the very least, I want to understand why at the second piece is, is there anything we could have done better or keep you. And so what that has happened is we have drastically reduced any attrition. I would say 3/4 of the people that have called in to say they want to cancel or whatever, we've been able to keep those individual customers just by having a conversation. And a lot of it. You know, even with this first acquisition we did, when a customer would call to cancel, we would, I would just talk to them, talk to me about why and what your fears are. What do you feel like you're going to lose by coming over to us? What are the things you feel like you're not going to get and so that really helped us keep that attrition low. So I would say yes, we're going to pursue that holdback. We're also going to pursue this playbook of customer retention. I mean our customers are the core of what we do. So we're going to be, we're going to be aggressively pursuing customer attention.

Host: Colin, I know that was just an example when you said $15 a month. But what, what actually does like a, an office building, a typical office building kind of down the fairway for you guys. What is the, the monthly revenue that they would pay? That monthly price that they would pay for your service on the monitoring?

[1:06:15] Guest 3: Yeah, so there's a couple different things you sell to a customer whenever it comes to an alarm system because there's some other additional lines of recurring revenue. But a good general round ballpark is about 35 bucks a month for commercial and about 20 bucks, 15 to 20 bucks a month for, for residential. And then on the fire side you're looking at 55 to 75 dollars a month for fire alarm monitoring.

Host: That's a lot lower than I would have thought actually. So, so like a commercial office building is just paying $70 a month, give or take for fire alarm monitoring?

Guest 3: Yeah, roughly between. Yeah, about 70 bucks a month on average. Yeah.

Host: Wow. My sense was that these were going to be higher value contracts recognizing a lot of that's profit. But to put in a system I imagine is thousands and thousands of dollars. And those are Steve and I recall from our pre call are also pretty high margin as well. So yes, it's project based work. But like you know, one installation is worth countless customers over countless months of revenue. So you're nodding. So you like this. I mean you guys like installation work?

Guest 2: Yes, we, we want to do both and ideally we, we only ever install where we're getting something recurring on the back end. Like we just did a, a bid for a church that was a little over 40k from a project perspective and would carry 500 to $600 a month in recurring revenue. And, and that's another thing. And Colin, if you want to dive into it and talk on the access control side, I mean there's various service lines and that, you know, kind of RMR per location can expand. And also we get a larger kind of average contract value out of businesses that are multi site. Right. So the chain of grocery stores or you know, whatever it may be. So that's another way we can kind of pull that ACV upwards.

Guest 3: Yeah. So there's, there's multiple business lines when you think about a security company, there's not just fire alarm and your burglar alarm, there's also those card readers you use every day and you don't think about there's cameras that are there, there's gate control, there's a lot of different types of services that we provide. And in this industry historically the only ways that these owners would make money on the recurring revenue side is they would just the alarm. But then when they would do camera work or access control, that would just be one big lump sum of, of installation revenue. And in fact the company I worked for, Brevo, that was on the access control side, so they were the very first that was doing cloud based access control. And so there was this RMR element. So one of my jobs was teaching owners of security companies how to sell to a customer that traditionally was not used to having an RMR element tied to their access control. And so, so that's something that we have done and since moved into. The previous owner didn't sell these other service lines with any attached recurring revenue. He sold what we'd call local, local based systems. And so that's something that we've totally pivoted away from. We pretty much won't even do an installation if it does not have some amount of RMR attached to it. And simply it's a factor of motivation. Like if we're going to exit down the road, we are going to be incentivized to build our enterprise value. And if our enterprise value is recurring revenue, we need to make sure we're producing enough project revenue to cover overhead and pay ourself and do distributions. But ultimately this is an EV game. We're trying to build the EV of the business no matter what. So that, that's something that we've kind of changed over time.

[1:09:55] Host: Great. Well, let's start closing out guys with revisiting now kind of from the other side of the acquisition actually. Second acquisition, how the thesis now looks from within. So Colin, you just said that you're, you know, this is an EV game because you're obviously thinking about, I mean obviously creating growing EV just gives you optionality but if you're so hyper focused on it, that probably suggests that they're, that, you know, that you're would, would like to make yourself an attractive acquisition target whether or not you actually do sell. So, so what is the grand plan? Why don't you answer that first and then I'll ask some follow ups.

Guest 2: Sure. So our kind of big hairy, audacious goal is to get to a million dollars of rmr. That would, that would, that will take a while, but we are already trending in a good direction. We're up about 37, 38% in RMR since we acquired the business in May. So we're you know, eight, nine months in and we're, we're trending nicely just from that like EV perspective. But we're really just getting started. You know, we, we still have a long ways to go to reach our goals and like you said, we want to build to be sellable. We may choose to hold the business for a really long time, but we want to be opportunistic and build the business in such a way it would be really attractive.

Host: Great. And so you said a million RMR is your goal and your mark. You're got a ways to go, but you're marching in that direction. Can you share what your RMR is today?

Guest 2: Yes, yeah, we're, we're at about 80k RMR and you know, have, have some contracts out. We, we expect to get across that six figure mark soon. And so you know, call it 10% of our goal roughly is kind of where we are and we have a 7 to 10 year kind of outlook. But that also could accelerate based on certain acquisitions and we could also, like I said, hold the business for 20 plus years. We, we believe in the industry and how we're approaching it. So we'll see.

[1:12:11] Host: And the industry itself and, and kind of the, the health of the industry. What is this one where you perceived that there wouldn't be kind of some disruption from the outside or, or what? How do you think about the staying power of the industry?

Guest 3: Yeah, I feel really good about it. Particularly with building technology that's becoming more and more prevalent. You're seeing a lot more building automation. You're seeing a lot of these technologies that are writing code and wrapping their technology around the security system because it's such a massive piece of what we're doing. And honestly the industry continues to grow really healthy. I mean it's grown almost the same rate for the last 20 years, just consistently every single year. And we love that. I love the boring slow burn of growth in the industry and I think there's, there's going to be some disruption particularly at the tip of the spear on residential. But man, I'll tell you in the commercial space it's tough to move these old ships and customers. This is what they've been doing for a long time. So I don't see, see tremendous disruption on the commercial side. But we'll certainly see stuff on the residential side and, and we're ready for that and we're excited for that.

Host: And how does the industry look different now that you're on the inside of it? Or, or does it, I mean compare, or let me ask it another way, compare what you've now experienced as Insiders having done two acquisitions with those famous 18 minutes. Are they consistent with what was promised or are things different?

Guest 3: Yeah, I think just like anything else in this world, you learn a lot along the way. And to say that my 18 minute game plan, we 100 were right on, I would be lying to you, that would not be true. But I would say that the, the core thesis remains. And I think I'll say this, we're more excited now that we own Alarm Masters and have done this purchase. I think we're, we're more excited about the, the proposition of the industry. I would say there's definitely a lot that I was not anticipating. Running a service based business with technicians on the road in trucks, you know, going to visit four, five, six customers a day, that is harder than you think. I mean look, I have an MBA in finance, but I'm going to tell you what, understanding the mechanism behind service, that's a whole different world. And those are questions we ask the old owner and continue to do, continue to ask the old owner for, for insight and best practices and how to improve in those areas. So there's definitely some areas that I wasn't anticipating how difficult or challenging this particular part of the business would be. But there's a lot about the industry that I'm more excited about.

Host: Anything to add to that, Steven?

Guest 2: I would just say that we also continue to believe in a really exciting way about the add on kind of acquisition side. There is ample opportunity, especially in that more fragmented lower end of the market. And if anything I more strongly believe in that opportunity than I did originally.

[1:15:09] Host: Perfect segue. So tell us about this, this first bolt on second acquisition.

Guest 2: Yeah, so we as much as we can want to kind of employ creative finance on these smaller deals. And this was a very small deal. This was sub 10k RMR. But the great thing about it was it was not some large deal as our first add on. And so it allowed us to kind of build a playbook and a process to ingest, you know, a set of customers and contracts. This was local, you know, it was in the greater Houston area. And I'm really glad that we. The first add on was quite small because it took some of the pressure off From a performance perspective. Now, Colin has done a phenomenal job and some of our other team members to help eliminate churn on the backside of that acquisition. But I feel now when we go do our next deal, way more confidence around doing that because we've already kind of done it once, learned some, you know, learned some things, made a few mistakes. Classic. And so that was, that was our first add on and I think in a lot of ways it was very strategic. I think trying to do our first add on at 50% or 100% of current RM our size would have maybe been a mistake.

Host: And does the add on come under the brand umbrella now of alarm masters?

Guest 2: It does, yes. And so that's an example where you are changing the brand that's associated with their service. And you know, we reached out in I think four different ways to every single customer and we did the best we could. But even still there was 20, 30% of customers that were left confused or frustrated. And so that is, you know, there's deal risk there. Right. Associated with changing that brand that they're familiar with and that they themselves have known for 10 or 20 years. So that's something that we learned about. I think we did pretty well. But there's even still some things that we could do better the next time around.

Host: So even if you don't change anything, just the brand, you're looking at potentially 20, 30% attrition.

Guest 3: Yeah, I would say that it's, it's, it's the brand. It's also depending on the size of the business, you're removing the owner. So the guy that was texting you every single day, every time your alarm was beeping and you were so having to go through a different channel to get those questions answered. And even, I mean, candidly, we lost a customer that never paid for his alarm. He just exchanged tires to the owner. He gave the, the owner a new set of tires and he thought that that's what we were going to do. And so we had to gently explain that we don't do tire trade for monitoring. And you know, we, we lost the customer there, There wasn't a tremendous amount that I could have done unfortunately in that particular instance. But there is some of that mechanism, the way it's always been done is not going to be the same. And so you just, you're going to have to account for that. No matter how good you are, you could be the best sales guy you're going to lose. And you need to bring some of that into your model.

[1:18:18] Host: So there was hold back in this deal.

Guest 3: So yeah, we, we did, we had a holdback, but we had part of our mechanism of our creative financing had that hold back, but it extends longer than one year, which is great for us.

Guest 2: Another thing I'll add is contract terms. Some of these contracts might be, they might be in the middle of a three year contract, whereas others might have already tapered off of some multi year agreement and they were just sitting month to month. So depending on the mix and the aging of your contracts, that also can produce a lesser or greater risk of churn if someone's sitting in a month to month. Obviously even if we have, you know, transferability language in a contract, they can still churn, whereas it's more defensible if they were sitting in a multi year agreement in the middle of that.

Host: Sure. Great guys. Anything that we didn't get to that you think the audience should know either about your story or about this industry?

Guest 3: I would just say that it's a, it's a great industry and I think that there, it's, it's growing like crazy and that there's a lot of room for folks, searchers and others alike that want to jump in. And I would say do your due diligence like you always would, but, but do a different set of due diligence. And I would say it would be so important to go have a conversation with some owners even if you're not planning to buy them. Just hey, meet with your local alarm guy and start having conversations. And if, even better, if they've done some acquisitions, ask them, hey, can you share some of your playbook with me? That is going to give you a lot of help when you're looking for these businesses. So that's all I'd share about that.

Guest 2: And I would, I would add, I'm biased, but I think that I've done multiple acquisitions now across multiple different industries, both with partners. And I would say if you're considering buying a business, consider doing it with a partner. I think that there's a lot of really just a strong case to make to not go it alone and especially if you have differing skill sets. And so that's one of the things that I've found extremely valuable and helpful in this process.

Host: Well, and I, but just before I let you go, I do want to circle back, Colin, to something you said a couple minutes ago about, you know, being an MBA or what was it, MBA in finance. Is that what you said? Or degree in finance.

Guest 3: Yep.

Host: And now basically the, the operations guy for a, for a Field crew style business and how the skill sets are so different. And so, so I just want you to expand on that for us because that is the reality for many searchers, that they'll, they'll get into a business and find themselves doing what you're doing, this operational stuff and it's such a departure from anything they're, they're used to. So just talk to us a little bit about it. What's so hard about it, I guess would be what I'd ask.

[1:21:08] Guest 3: Yeah, I mean, what's so hard about it is you've never done it right. Like you've never lived in the shoes of these technicians that are going out there and they're actually helping and being the front line to the customer. They're stepping foot in a lot of people's homes. These panels are in their master closet. So you're going into the pretty much the depth of their home to understand and fix problems for them. So their perspective is going to be a little different than your number on your spreadsheet. When you look at average revenue per service ticket and how much time you spent there and you start tracking the time and you say, bill, why were you in there for 20 minutes talking to this customer? Like this was a 10 minute walk in and out. And when he says to you, hey man, I'm about to go into this person's closet, like, I need a few minutes to just like warm up and have a conversation with him. I need to put the booties on my boot so I don't get mud throughout their house. Like, you need to be willing to listen to your people, certainly hold to your convictions around profitability and those things need to be tracked. You've got to look at that and you've got to be paying attention to it, but you got to hold it with a kind of an open hand and really be communicating with your team consistently daily, honestly to be able to understand how to improve. And I think it just takes time. Honestly, I think, yeah, I get the numbers in the sense I could put a spreadsheet in front of my technicians all day long and they have a lot of perspective that's just different than mind.

Host: So it sounds like it's really kind of un trying learning to understand where, you know, spreadsheets make contact with human interactions. But the actual, the actual work of deploying a fleet route, route scheduling and so on, it's less that stuff. It's more the kind of where quantitative meets qualitative.

Guest 3: Yeah, and there is some quantitative as well. I mean, route scheduling and how much inventory to hold on your truck. I mean, there's nothing that frustrates a customer more when you've got to come back because you don't have that one in a million part. So it's what how many of those one in a millions do I carry? And how do you stack rank the inventory problem against the route optimization. So there's definitely some of that as well. I feel like that's for me at least that's more solvable, that's easy to quantify and to put into a spreadsheet and to track and build models against. What's not is understanding customer process perspective and attitudes around what should this cost and how long should you be here and all that. So great.

Host: Thank you for that color. Colin okay, guys, what's the best way to reach you if somebody in the audience wants to ask you a question?

Guest 2: STEPHEN we're both active on Twitter, formerly known Twitter X and so open DMS and happy to interact with people and answer questions. And you can also go to thealarmmasters.com if you wanted to reach out that way. Great.

Host: I'll have your your Twitter handles, your X handles in the show notes for everybody, probably LinkedIn's as well. Stephen Ullman and Colin Trimble, thank you guys very much for a deep dive into a pretty interesting industry. I'm sure you whet the appetites of a lot of listeners, so thanks very much.

[1:24:03] Guest 2: Thank you.

Guest 3: Thank you. Appreciate it.

Guest 2: Sam.