Ashley Bancroft – Vanity or Value?

Ashley Bancroft, h&Hendricks LLP, Partner photoAshley Bancroft, a founding Partner of H&Hendricks LLP, discusses how to value security businesses in this tumultuous business environment and what metrics you should be looking at.

I’m sure you know the one about revenue being vanity, profit being sanity but cash always being king. But where does value fit into the equation? And when I talk about ‘value’ I mean the enterprise value of a company or the equity value of its shares.

Despite the motto ‘cash is king’ being constantly bandied about, you would be surprised to learn that very few business leaders truly understand the relationship between revenue, profit, cash and overall value.

With the annual Infologue Top 65 Security Companies due to be published this week, the question whether bigger does mean better – or more valuable in this case – will no doubt once again be topic for debate.


Do you know your value?

The principal of ‘maximising shareholder wealth’ has become more contentious since the turn of the century, but whether you agree with it or not, increasing the value of a company is a fundamental business objective.

Whilst it is relatively easy to assess the value of a public company by the share price on any given day, the science (and art) behind private company valuations can be a bit trickier. In fact, I am yet to meet a business owner who believes their company is worth less than what it actually is!

Growth is a good sign of prosperity; however, it is indeed possible to destroy value even if you are growing, and the sum of the parts can very often be greater than the whole.

With economic doom and gloom seemingly on the horizon, the security industry looks primed for a period of consolidation (the pending merger of Atalian Servest and OCS being a case in point), so knowing your true value is probably not a bad idea.


2022 M&A activity

Deal volumes across all industries over the first half of 2022 saw only a small reduction (6.5%) despite the uncertainty resulting from global political tensions, interest rate rises and inflationary pressures. EBITDA multiples (EV/EBITDA) have generally declined over 2022, and this decline is more pronounced the higher the deal size.

At an aggregate level, Business Support Services – which includes the security industry – fell from an average multiple of 7.1x to 6.6x.

Within the security industry there has been a marked decline in M&A activity in 2022 with a circa 50% reduction in deals being completed. The most notable deal this year was the acquisition of TSS by G4S back in March. Other transactions have mainly involved security systems/technology companies, which is to be expected given the current shift towards security tech.


The calm before the feeding frenzy

I expect to see an increase in M&A activity across the security industry from 2023 onwards and there are a few tell-tail signs to support this view:


1.)Less is more… tolerable

 Since covid (and not forgetting Brexit) we have all got use to not expecting too much. Whether due to the lockdowns, inflation or a flight of talent, security budgets have had to adapt to the times, including substituting people for technology where possible. Also, bundled services are once again the dish of the day on the procurement menu, so squeezing price and budget is very much at the forefront of client minds!


2.) The Haves and the Have Nots

Some companies are sat on cash piles and others are saddled with debt. Given the current economic headwinds, there will likely be an increase over the next year in companies teetering on the brink that would welcome an M&A lifebuoy to rescue value. That said, there are also quite a few unsuspecting players that are eager to dabble in the exciting world of M&A and are waiting for the right opportunity to get the chequebook out.


3.) Eat or be eaten

Shareholders and analysts tend to have short memories and public company boards know this. As lucrative government covid related contracts have now come to an end, this risks the unthinkable, a future decline in earnings! Corporate Development are dominating the board agenda, tasked with delivering double-digit revenue growth (worry about profitability later!). Also, with interest rates likely to continue to rise over next year, listed companies are acutely aware of the downward pressure on their share price.


Commanding a higher multiple

Regardless of what the future may bring, good companies with great management teams will always command a premium price tag.

Companies that have high pricing power are equally attractive as double-digit price increases are likely to be the norm for the foreseeable future. Also, the ability to mitigate inflationary costs (people, energy, etc) will help to capture and sustain competitive advantage and ensure costs don’t grow at a faster rate than revenue in the short to medium term.


How valuable is your kingdom?

The value of a company in essence boils down to 3 things: (1) cash flow (or free cash flow if you want to get technical); (2) the risk to that cash flow; and (3) the expected/potential growth of that cash flow.

Clearly, there is a link between cash and value.

Firstly, you can’t spend revenue or profit and being profitable does not automatically mean that you have cash in the bank. The most valuable companies are those that generate strong, reliable and growing cash flows.

Equally, if that cash flow is concentrated with one customer (or market segment) that makes it more risky than if it’s generated across a portfolio of clients and market sectors. For example, if more than 50% of your total income comes from a single client, the value of your business is at the mercy of that client.

Finally, you really want to be increasing market share in a growing market segment. If your business is operating primarily in a moribund sector or what you are selling is fast becoming obsolete, it’s time to reinvent yourself!

The moral of this story is cash is still – and always will be – king. If you want to increase the value of your kingdom, make sure cash rules over it.


Long live the king!



Ashley Bancroft is a founding Partner of H&Hendricks LLP, a boutique firm of Chartered Accountants and Business Advisors that specialise in helping companies to transform in the ways that matter most to their value. The firm works with business owners to ensure they are best positioned to realise the maximum value for what they have built whenever that time may arise. Crucially, it is not a business broker.

A qualified Chartered Accountant, Ashley has considerable experience of successfully leading and transforming both small and large organisations, including as managing director of a UK top 10 security company. He holds an MBA from a world-renowned business school and specialises in finance, strategy and entrepreneurship, with particular expertise in value creation.