Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Buying Up Security Guard Companies
Transcript
- Lucas: You walk into any office building in America — any hospital, any warehouse, any college campus — and there's someone in a uniform sitting behind a desk or walking a patrol. That person works for a security guard company. And until very recently, almost all of those companies were tiny, family-owned, local operations. Luna: Right. I think most people assume security guards are employed by the building owner directly, or by some giant like Allied Universal. But the reality is it's an incredibly fragmented industry. Lucas: Fragmented is an understatement. There are roughly 10,000 security guard companies in the United States. The top five players control maybe 30 percent of the market. Everything else is regional or local firms — a guy who started with a van and a flip phone thirty years ago. Lucas: And for a long time, private equity looked at this industry and said 'too hard, too messy, too low-margin.' But in the last five or six years, that's changed. There's been a real wave of consolidation. Luna: Before we go too deep — and I know this is a bit of a pivot — but I think it's worth mentioning something about how we can keep drilling into these niche industries episode after episode. Lucas: Yeah, fair point. Because we do fifty-two shows a year on topics like this, and the engine behind that is listener support. A chunk of our audience chips in monthly at buy me a coffee dot com slash fexingo. It's a small group, but it literally pays for the research and production that goes into these episodes. Luna: Exactly. If you've gotten something out of the deep dives — whether it's the tattoo studio roll-up or the hearing aid clinic consolidation — and you want to see more, that's the place. No pressure, just a quiet nod to what keeps this thing ad-free. Lucas: Right. And speaking of the tattoo studio episode — that was a fragmented industry too, but security guards are a different beast. The margins are razor thin. Lucas: Let's put some numbers on it. The typical security guard company operates on a 4 to 6 percent EBITDA margin. Compare that to, say, a dental support organization where margins are 15 to 20 percent. The reason is simple: labor is 70 to 80 percent of revenue, and there's almost no pricing power. Luna: And the labor itself is tough. High turnover — I've seen numbers like 100 to 300 percent annually. That means you're constantly recruiting, training, and managing a rotating door of people. Lucas: Exactly. So if you're a private equity firm, you look at that and think: where's the lever? How do you make money in a business where your biggest cost is also your most volatile? Lucas: The answer that some firms have found is scale. If you roll up a hundred small companies, you can centralize back-office functions — payroll, HR, insurance, licensing. You can negotiate better rates for uniforms and vehicles. And you can cross-sell clients into other services. Luna: Who's leading this charge? I know Sentinel Capital Partners has been active. And Alpine Investors. There's a firm called Security Acquisitions that's been quietly buying up mom and pops. Lucas: Sentinel bought a company called Walden Security in 2021. That was a big deal — Walden had about 6,000 guards and was one of the larger independents. Alpine has been rolling up through a platform called Marksman Security. And there's a firm called Pinnacle that's doing it regionally. Lucas: The playbook is pretty consistent. You find a well-run regional firm with a good reputation and a stable book of contracts. You buy it for maybe 6 to 8 times EBITDA. Then you fold in smaller acquisitions — companies with $2 to $10 million in revenue — and you push the combined entity toward maybe 8 to 10 times EBITDA when you exit. Luna: So the multiple expansion is the main return driver, not necessarily operational improvement. But there is some operational leverage, right? I mean, if you can reduce the turnover even a little bit, that's huge. Lucas: Huge. If you bring turnover from 200 percent down to 150 percent, your recruiting costs drop, your training costs drop, and you get better client retention because clients don't like seeing a new face every week. Some firms are investing in better scheduling software, more competitive wages, even benefits like health insurance — which is rare in this industry. Lucas: But there's a tension here. The client — the office building or hospital — wants to pay as little as possible for security. The guard wants to earn as much as possible. The company sits in the middle. If private equity pushes too hard on the spread, you get bad outcomes. Luna: There was a case in 2023 — a large pe backed security firm in Texas was sued for wage theft. Allegedly they were paying guards for fewer hours than they worked. That's the dark side of margin pressure. Lucas: Right. And that's the risk. If the financial model depends on squeezing labor, you can cross a line. The best operators I've seen focus on retention and technology instead. Lucas: Technology is actually a big part of the story now. ai powered cameras that detect weapons or suspicious behavior. Automated patrol robots. Guard-tracking software that ensures supervisors are actually doing rounds. Some of these platforms can reduce the number of guards needed on a site. Luna: Which cuts labor cost, but also changes the nature of the job. Is that a good thing? For the guard, maybe not. For the PE firm, it's margin expansion. Lucas: Exactly. And that's the tension in any roll-up of a low-margin service business. The financing works on paper. The question is whether the human element holds up. Luna: Let's talk about the exit. Who buys these consolidated security companies? Is it strategic buyers, or other PE firms? Lucas: Both. The big strategic is Allied Universal — they're the 800-pound gorilla, with about 200,000 employees. They've been acquisitive themselves. But there's also a secondary market among PE firms. A firm might build a platform, then sell it to a larger PE firm that wants to add it to a portfolio of business services. Lucas: The valuations have crept up. Five years ago, a security company might trade for 6 times EBITDA. Now, well-run platforms are getting 9 or 10 times. That's partly because there's so much dry powder chasing deals, and partly because the industry is seen as recession-resilient. Luna: Resilient is right. Even in a downturn, buildings need security. You might reduce headcount or hours, but you don't eliminate it entirely. Lucas: Right. So you have a fragmented, recession-resistant, low-tech industry with a clear consolidation thesis. That's a private equity dream — as long as you can manage the labor piece. Luna: One thing I've noticed: a lot of these rolled-up companies are rebranding. They used to be 'Smith Security' or 'GuardPro.' Now they're 'Titan Security Solutions' or something similar. It's part of the professionalization play. Lucas: Absolutely. You want to look like a national player, even if you're just a collection of local firms. That helps when you're bidding on national accounts — a hospital chain or a retail chain that wants consistent service across 50 locations. Lucas: And that's really the endgame. You build a regional or super-regional platform, you standardize training and technology, and you go after the clients that used to only talk to Allied or Securitas. Luna: So where is this heading? In five years, are we going to see three giant pe backed security firms controlling 80 percent of the market? Lucas: I doubt it goes that far — there's always room for local players who can offer a personal relationship. But I think the middle of the market — the $10 to $50 million revenue companies — those are going to get scooped up. The independents that don't sell will have a harder time competing on price and technology. Lucas: There's one more angle I want to touch on, which is the regulatory side. Some states require licensing for security guards, and that's a barrier to entry. A rolled-up company can afford a compliance team; a small guy might not. Luna: So the consolidation story has a self-reinforcing element. The more regulation, the more advantage scale provides. Lucas: Exactly. And that's why I think this wave has legs. The fundamentals are there — low margins that can be expanded through scale, a fragmented supplier base, and a customer base that values reliability over price. Luna: It's a quiet revolution. Most people walk past a security guard and never think about the business behind the badge. But there's a lot of financial engineering happening in the background. Lucas: And we'll keep watching it. Next week, we're looking at a different kind of roll-up — one that involves a lot more four-legged employees. But that's a teaser for another day.