E163: M&A Through The Eyes of The Strategic Acquirer with Scott Kaeser

[00:00:00] Ronald Skelton: Hello and welcome to the How2Exit podcast. Today I'm here with Scott Kaeser. He is the Chief Development Officer for Tarian Security. And the cool thing today is I think he's probably the first or maybe the second ever strategic acquirer that we've had on the show.

So we're going to learn and get into the mind of the strategic acquirer and get a perspective of M&A through your eyes today. So glad to have you here. Thank you for being here, Scott. And, just like really appreciate taking, you taking the time to give us some of your knowledge. 

[00:00:31] Scott Kaeser: Thanks for having me.

[00:00:32] Ronald Skelton: Awesome. All right. So we're going to start off where we always start off. How did you end up in this? How did you end up as a Chief Development Officer? What is a Chief Development Officer? We've talked before, so I know, but for the audience sake, how did you get into the space now?

What is it? And we'll talk a little bit about your company so they understand the construct of what we're talking about. Your strategic acquirer for the company and then we'll get into the M and A side pretty quickly. I always joke around and said, you were born and then you ended up on a show about M and A, can you tell us how you ended up here?

[00:01:00] Scott Kaeser: Sure. I started my career in corporate finance, out of college. I was working with Ernst and Young's corporate finance group. Was supposed to be a rotation through their various corporate finance departments, including valuation, mergers and acquisitions. and restructuring. It was actually right when the internet bubble burst in 2000, 2001.

So it ended up being a lot more restructuring than it was M& A, but at least I cut my teeth doing modeling, capital restructuring, understanding the capital needs and requirements and how to capitalize businesses appropriately. I spent about six years as a management consultant. So really diving into the key line items of a P and L or a balance sheet for some larger companies and understanding how to improve those line items through the projects we were working on for our executive sponsors.

And then since then I've been doing corporate development for about 15 years. Corporate development is a functional area embedded within a company. And my primary role and function is to acquire other businesses and to tuck them into my company. So I am an executive within one company. We're in the security services industry, so security guards, security officers, security solutions. And we are acquiring as many companies.

It makes sense for us, if the financial and cultural fits are great. We're trying to build our company both through acquisitions, through corporate development, as well as organic growth. And we found that having corporate development and m and a as part of our functional areas really accelerates our growth, accelerates the value creation for shareholders. Is a really exciting way to build a company, which is really what I'm passionate about at the end of the day is building, building a business, building great teams and a great brand and a great company. I got started about 15 years ago doing corporate development. Was hired by Sterling partners, which was a private equity firm headquartered in Chicago and was part of their accelerator program, which was really designed to put young professionals embed them into some of their portfolio companies and help them grow those companies and create value. My portfolio company needed help, within M&A corporate development. So that's really where I got started. Did a lot of learning, and that was in the customs brokerage industry. It was, supply chain and logistics.

Piece of that industry it was called customs brokerage. So we were requiring other customs brokers. Since have been in a couple of different industries, including, dental labs, software and information services. And about 10 years ago, I got started in the security industry. I was hired by LaSalle Capital, which is a small mid market private equity firm headquartered in Chicago.

And they needed some corporate development acceleration and help at one of their portfolio companies. It was a company called United American Security. So they hired me to really ramp up the M& A efforts at that business. It was in the security world. So that's where I started doing corporate development for, security businesses.

We grew that business through M& A mostly and sold it in 2018 to a much larger firm, a company called Guarda World. You may have seen their cash trucks on the road. But they also have security services in the US, which started with, with the acquisition of my company in 2018. I spent two years with GuardaWorld, and then through COVID got a, left and was interested in getting back together with a team of guys and executives I'd worked with in the past.

And so in 2022, we started Tarian Security, which is where I'm at now. It's still in the security, security industry and I'm doing the same thing I was, which is acquiring other security companies and, integrating them into Tarian security. I've been doing that now for about a year and a half.

[00:04:53] Ronald Skelton: Awesome. Awesome. I rAn into a security guard here who, I kind of sat down and had coffee with him. I told you this one on our pre show interview. I was picking his brain about his business cause he owned the thing. It was very small. And, then I had the pre interview with you and I was like, so I'm really intrigued by this model. Now, everywhere I go, I can almost count the security. I see them everywhere.

My wife had a medical episode last week, I guess it was, where we didn't know she was diabetic. Now we know. But her blood sugar, she wasn't feeling very good. And I was like, okay, well, your doctor told you you're prediabetic. You risk the chance of becoming diabetic. Didn't he give you a blood glucose meter?

And she's like, yeah. And, we get her to the hospital and I noticed like, okay, there's two security guards at the front desk. And then we get in the back where they finally get her back. And I was like, what did they do? Put you in the bad girl wing? She was the only room of like 11 rooms back in the ER that didn't have a security guard. And these guys were laser focused on the person in the room. They were sitting in front of the door where it slides open down and they were just staring in there the whole time.

Like I walked by, the natural instinct of a human. When you walk too close to somebody, as they glance up at you, see what you're doing. These guys just laser focused on the person in the room. 

But I just never, never clicked on me how many security guards are actually out in the world until like you open your eyes to it because I was telling you I was like man there's a play in this area where we live. It might be a decent little business to start and in that security space. And just checking on all these vacation almost every home around here is a vacation home. And just having somebody daily drive by and check on the houses make sure they're okay and just giving people reports or something. But anyway since we talked I see them everywhere.I thought, there's not enough securities. Maybe, there'd be a good player. I haven't seen any security around here in the second I say that I see them. Like, random places like security guards standing in front of Walmart or whatever. There's like, I just see them everywhere now.

[00:06:34] Scott Kaeser: Well, it doesn't surprise me. It's actually a $30 billion industry in the U. S. So it's quite large of an industry, and there's 10, 000 different security companies in the United States. So it's very fragmented. Still, there's been some consolidation in the industry, but because a lot of guys who start secure, and girls who start security businesses come out of the military or out of the police force or other areas where they have a pension, they have this cash flow stream that allows them to start a business.

Asset- like. It's just a labor business. It's an industry they have some correlation and knowledge of, and they start these businesses. And some are small, some become medium sized, some become large. But there's a very healthy cycle in our industry of kind of the small and medium guys, small guys, because small companies becoming medium sized companies. Medium sized companies getting acquired by the big guys. Some of the big guys have a lot of trouble with customer service and customer retention, so that business falls back down to a lot of local, smaller players, and it's a very large and healthy industry.

And obviously with some of the pressures that have taken place with the reduction in police forces or reduction in funding, yet continuing crime and concerns with crime in almost every area of our country. The demand for security is high and getting higher. Good for my company, tough in some instances for the population, but the need for security continues to grow.

And what I like about our industry, the place that a security officer holds in our society is becoming more critical, becoming more important, becoming more valued. No longer is it just a mall cop, but there's many instances of hospital security, which you just mentioned, orother security services that are really critical.

They're high profile and very valued by the customers and the businesses that are employing the security officers.

[00:08:27] Ronald Skelton: If you're not looking for them by design there, if they're really doing a job, I guess it depends on what you're trying to do, right?

There's a show of force. I'm prior military too, but there's a show of force where you want security be seen and they're up front and stuff, but there's a lot of cases where they're there, but they're meant to be unseen that they don't. Like the client doesn't want you to see security guards everywhere.

They just want the security guards there in case they need them. So I guess it's the play of whatever the client's needs are. But, I was just a little bit set back by how many of them I see now. Cause like, I've been in some of these stores, I've been in there. You've been, been like regularly go in and like, I didn't know they had a security guard here. You just like notice it now. So it's just one of those, hiding in plain sight type of things. But, yeah, I didn't know how big of the industry was until you said it either. I was like, that's a pretty good pool of things for, 10, 000 company is doing.

It gives you a selection of, okay, which ones are the right fit. So it sounds like your entire career, you were primarily in that strategic acquirer mode. So you have a unique advantage point from everybody else I've talked to. A lot of these guys are, they're PE. The guys I talked to a few years, they're buying the anchor.

They might have added on once or two, but they're not you. They bring guys like you in to do what you do. So I want to hear kind of what does a day in the life of a corporate development officer look like? What do you spend your time doing? How do you source type of deals, that type of stuff? Let's just start right there. 

[00:09:49] Scott Kaeser: Sure. Well, my role encompasses the start to finish from a transaction standpoint. So deal origination through negotiation, communication with the sellers to structure a transaction that's going to work for them and for us. If that works, we typically structure a non binding letter of intent.

Once that's executed, we go into due diligence. That's a pretty rigorous process as anyone who sold a business. Or who bought a business knows. Alongside diligence or towards the end, we do contracting. So the definitive purchase documents that would culminate the transaction, would be considered the contracting process.

There's usually some ancillary agreements that go along with that process upon signing. Typically, we're doing signing close. So when we execute those definitive agreements, that's when funding happens. That's the transaction. That's the closing date. And then from there, it's integration. And that's part of my role as well as a strategic acquirer.

I'm an executive within a company, so I'm not my job doesn't end at closing. I have to work through integration, and that can take months and years before a transaction is deemed successful. Thankfully, I have a lot of other functional areas that start to roll up their sleeves and handle many of the aspects of the integration process.

So it's not just me. It's a whole team. But I am responsible for the success of those transactions for many years. Sometimes there's a delayed value or purchase price, whether it's holdbacks or an ounce escrows, those sorts of things. So I'm responsible to make sure the business performs well, because I'm passionate about having businesses perform well after we acquire them and invest.

But also just to, make sure the functional areas are working well once we take over a business. So I encompass that whole span. Much of my day is spent on various aspects, due diligence in transactions, especially if you have multiple transactions taking place at once, is a large component of my day.

Just making sure we're dotting every I, crossing every T, and understanding, looking under every rock for things that we need to know as part of an acquisition. Due diligence is a major component. We'll use third parties oftentimes for accounting and finance due diligence. As well as legal, insurance, and risk.

But I'm managing those third parties as well as their findings. And managing the sellers. It's a communication, it's a balance. Many times with these smaller transactions, there's significant deal fatigue. You're really inundating a company with information requests and needs. And usually with a small acquisition, a small target, you're only dealing with the seller and maybe a few folks from the organization that you're acquiring. 

And so they're having to do their normal day job as well as answer what seems like sometimes an unlimited amount of diligence requests as well as contracting. So balancing that process with the seller and their organization is important as well. 

[00:12:40] Ronald Skelton: It seems that you would have an extra layer of due diligence you have to do because of its security, right?

In the software world, I could buy a software company and just trust that the HR did a good job and all the employees are good. In my mind, if I buy a security company, maybe it's because I'm prior military with, I worked military intelligence with, and so I had, clearances.

I would assume you have to do a redo a background check on almost every employee at every acquisition you do, because they use different tools, different things, different criteria. Things change in life, things happen in life. Maybe they don't update their backgrounds, check that somebody's been there for five years.

And now they're doing things and get caught in things and they just never been updated or the owner loves them and let them slide. So is that another layer of stuff you have to do is okay, now I got to go through every employee and make sure I don't have anybody here that's bad actors. 

[00:13:28] Scott Kaeser: Yeah, for sure. Not only is it part of our due diligence process, but part of our integration process. We are a labor based business. We have 5, 000 employees. So with that comes all the nuances, the good and the bad related to that in a transaction, exactly what you just described. We're validating I 9s to make sure everyone is properly, vetted to work in the United States.

Background checks, both, local, federal, and state. That's oftentimes not something that the companies that we're acquiring have done. That kind of rigorous background check. We're doing education verification, employment verification, and then we drug test all of our employees as well. So it's a pretty rigorous process to make sure that everyone's qualified to be a Tarian employee.

There's going to be some fallout in those instances. Hopefully we catch them ahead of time so that we understand the hiring needs and replacement needs that take place with the transaction because that's some, that's a risk that we always have to manage and it Is something that is that does happen.

But we're really, regimented in our security processes for our own company, our risk processes for our own company. And that's just part of being a bigger company with good real resort, bigger resources, building a bigger brand, but we obviously need to make sure that we ourselves are safe and mitigate our risks also.

[00:14:43] Ronald Skelton: I imagine that the drug testing is a new can of worms within the last five years. All these states legalizing certain things. And some states basically saying nothing's illegal anymore. Is it Oregon or something like, nothing's illegal anymore. We don't care. So people, because it's not illegal, people think they can do things that may not be corporate policy or may not be in the best interest of the company. 

I'm just curious if that, I bet that opened some can of worms. Are there certain states, I don't know if any states passed any rules that say you can't fire somebody for, finding something like marijuana or something in their system. But, 

[00:15:15] Scott Kaeser: Yeah, every state's different. Obviously it's, even marijuana is still legal federally. So we have some protections as a company there. I'm not in HR, so each state has to be viewed differently, but we're pretty conservative in that regard. Obviously we're still testing for the other major substances.

As well as marijuana, and cannabis. And it's just something we feel confident in that we don't want our employees using and abusing substances while they're part of our company. And we are pretty adamant about that. So we make sure that, they're tested as part of their onboarding process.

[00:15:49] Ronald Skelton: Well, again, I was just curious of how, like, how the dynamics changed over the last four or five years, just because like the states are changing. And, like I said, just because a state says something's okay, or they don't care, they'll let you sell it. Doesn't mean that a corporation has to accept it.

I don't want my employees doing certain things either. If wherever my employees happen to be, starts legalizing everything, I don't want them doing hard stuff and then trying to show up and talk to my clients, that's a bad idea. And then on the other side, respect whatever they want, whatever they do on their personal time's their own business to some extent, but I'm not running a security company. There's a huge difference between that. 

So I get it. Let's go back into, like, you say security kind of give us a scope of things. I don't know, hospital security. Are you talking about armed guards too? Like, armored cars. Like, what's the whole scope of what you guys look for? 

[00:16:33] Scott Kaeser: Yeah, the primary foundation of our business is the manned guard, manned officer. So a uniformed officer. About 90 percent of our business is unarmed.

Obviously it protects the officer. It protects our risk, when you don't have a weapon. Yeah, of course. Certain clients do want and require armed officers. There are certain instances where it's more protective for the officer, more protective for the client. That's about 10 percent of our business.

So we do it. But again, it's an officer with either a less than lethal, weapon like a taser or in some cases it is a firearm. In some cases there are instances of, longer weapons of shotgun, long guns, shotguns or rifles, but that's fairly rare for our business. We're a little bit more down the fairway in terms of contract security.

We're not doing the highly technical, highly aggressive, I call it SWAT style security. That's really not our company. There are security businesses out there that specialize in that. They may have their armored vehicles and guys that were trained, in special forces or overseas.

But those details are usually fairly small. We prefer the standing regular ,weekly, annual security posts. Where it's a, what we call contract security. The business might need it at a front door, back door, you know letting visitors in, doing rounds throughout a building or a parking lot. That's the security that we typically provide and we've built a business that we believe is best in class doing so. And then they're like you said there's a myriad of other types of security out there.

We also, as a component of our business, we'll do security integration for video cameras, wiring, video monitoring, some alarms. We have an aspect to our business that encompasses those things. And it is a fairly large industry as well. It's a little more technical, it's hardware, software, video monitoring, and we do have an operations center that handles those things.

And like you, you were talking about earlier, the hospital security, that's a big component of our business. It's about 70 percent of our business. We're, with an acquisition we're working on, we'll be about 260 million of annual revenue. And about 70 percent of it is hospital security. So, all those things you mentioned, front desk officers, folks doing rounds.

We do a lot of what we call patient watch. It requires a lot of officers. Those officers are actually augmenting nurses, right? So instead of nurses having to monitor patients, 24 seven, you can hire security to do so.

And they're trained for issues or instances that they need to address. And it allows the nurses to go do much more important things that are medical related and patient facing. And so we do a lot of that work, patient watch, patient transport throughout the hospital or between hospitals.

Those are security services we provide. The other 30 percent of our business we call commercial. It includes aviation security. So at airports we're doing screening, not always like what TSA does, but more employee screening or cargo screening or perimeter, services, security services for the airports.

We have some of the largest airports in the country, our clients.And then we have other commercial services for any business you could imagine. Whether it's a manufacturing facility, logistics facility, we do schools, we do religious institutions. We've got just about any type of business, homeowners associations, things that other companies or associations that need security services, we'll provide that to them.

And we span coast to coast. We're Boston all the way to California. We're, Milwaukee and Salt Lake City, all the way down to Georgia and Florida and Texas. So we span all of the United States with our coverage at the moment. 

[00:20:15] Ronald Skelton: Wow. So you said you guys have like, what do you say? Multiple, like thousand employees? Like you said, four or five.

[00:20:21] Scott Kaeser: 5, 000 employees.

[00:20:23] Ronald Skelton: Wow. All right. So when you first started the, do you guys acquire a company as the first part of this when you started it? So you acquired a, an anchor and you built off of that. Okay. 

[00:20:32] Scott Kaeser: Yeah. We actually acquired two anchors and two more smaller businesses back in 2022 to create the foundation.

As we alluded to, I think earlier in the discussion, we're private equity backed. Our private equity investors right now is a group out of Rhode Island called Nautic partners. We're a portfolio company in their 10th fund. So these guys have been around quite a while, making investments in various portfolio companies.

We're in the 10th fund of Nautic's portfolio. And we, myself and the executives on my team worked with Nautic, managing directors and principals to found Tarian back in 2022, exactly how you described. We brought a few transactions together of companies in our industry to found our platform and we've rebranded those businesses as Tarian now. And we are on this exciting process to, to build our brand and have it be more well known throughout the industry as we grow over the next decade or so.

[00:21:32] Ronald Skelton: I'm wondering, so it is working with a I want to say four but working beside and working with a private equity firm similar to being public in that. You always have this kind of constant drive that you have to grow, you have to grow, you have to grow. So it's different if you found something yourself, you can grow it at your pace, you can play the game of well, I just integrated two companies I need to take, let's just let everything solidify for six or eight months. When you're working in a publicly traded company, where there's a constant drive from the market, expecting growth quarter after quarter.

And I would imagine, that's why I was curious, I was imagining PE is almost that same level. It's like, we want you to grow, grow, grow. I didn't know, I was curious on what that was like. You have board meetings with them and it's not like, Hey, it's never the conversation. Hey, we just acquired seven companies. Let's just calm down for about a year and let's solidify all this. I don't think that conversation would go over as well as it would. If it was just an independently founded company. 

[00:22:28] Scott Kaeser: Yeah. Obviously if you're a sole owner, founder, it's your business. You own a hundred percent of that business. You can grow or stay static depending on your whims and your time and capital availability.

With private equity backed businesses, just like you described whether it's private equity backed or public company. We have shareholders, we have a board. We have growth expectations and a budget. We have realistic growth expectations. It's not a scenario in which the company is expected to grow without realistic goals, but we have capital availability. Private companies, privately owned companies, private equity backed businesses are a little less visible, than a public company that has to publish information to the public and the shareholders on a quarterly basis. 

But we have monthly, monthly financial meetings. We have quarterly board meetings. We have biweekly check ins. So we're constantly in touch with our board and our investors to make sure that we're headed in the right direction. We're making good decisions. We're making good investments from a M and A and corporate development standpoint. But that's the important part. It's a partnership. We're growing a business. We all have the same goal, which is to create value for our shareholders. I'm a shareholder in the business myself.

So we're aligned in that regard. But yes, we have to grow. And that's, we have to create value. That's absolutely the critical mission that we're, we're on. 

[00:23:47] Ronald Skelton: So you, you said in 2022, that's like less than two years ago. You went from zero to 5, 000 employees now. How many companies have you acquired?

[00:23:57] Scott Kaeser: We've acquired four. So two of them were pretty large and that encompassed most of those employees. We acquired a business called HSS, which stands for hospital shared services. That's where a lot of our hospital business came from. We acquired a business in Boston called RSIG, which was, founder owned. That was a gentleman who had built his business in the New England area.

And we bought that company in 2022 as well. And then two smaller acquisitions, one in Boston as well, that we merged into our operations there. And one in Atlanta, Georgia another smaller transaction. So four total and we're acquisitive. Hopefully we've got a couple closing in the next month or so. We've got a transaction that's done with diligence.

We're doing some finalization in the contracting. And hopefully we'll have some good news to announce here shortly. But my role is to make sure the pipeline is continually full that we're, we're always originating and diligencing and closing transactions, in a good cadence that the operations can handle, but that help accelerate the growth of our company.

[00:25:00] Ronald Skelton: Yeah, if you look at your growth over that period of time, you guys could be, I don't know where you are in the scale of things now, as far as the top 10 largest security companies. But you could be there fairly quickly at that scale, right? You're going to be a player in this market. If you're not already, you will be within the first five years, you operating at that level.

It's a different game to play. A lot of people don't get that either. That it's different, if you're a privately owned company, you don't have the financial backing of a PE firm. It's totally different world than having that back and having the teams like, guys like you have done acquisitions and mergers your entire career. Out there, doing growth through acquisition. 

The growth curve that a business can go through, can be astronomically, different than, I go out and found something, get my first hundred employees the first year and like, I'm doing really great. And then the next year I'm going to go for 200. You've been, less than 24 months you've been into this and you've got 5, 000 employees.

That should be an eye opener for some of these guys out there thinking, I'm going to start a security company. Like, eh, you probably have to go buy one of these smaller ones and eventually sell it to Scott here. What's the target size for, let's take another approach instead of target size.

What are the aspects that as, you've been in multiple roles as a strategic inquirer. What are some of the key aspects you look for? Is there a too small or too large? Or is there, what are some of the key things you look for at this company and a previous companies even? That's like, okay, this makes you really attractive to a strategic acquirer.

[00:26:25] Scott Kaeser: Yeah, that's a good question. We're still, even though we're 5, 000 employees and we have, we're part of Nautic's 10th fund. That fund is $3 billion. We don't get all that. We have a component of it because we're one of many portfolio companies in that fund. But even with that significant amount of capital availability, there's still our companies in our industry that are beyond our interest or capacity to acquire, they're just too big.

Not everybody is a target. I would say at the high end, you're probably looking for Tarian at about a $10 million EBITDA acquisition. We still want to create value through buying and building companies. We're not just going to try and buy a company, that's already the size we want to be when we want, when Nautic may want to exit. There's a lot of work that we feel takes place that, that we're doing operationally to improve these businesses.

So we want to buy some smaller businesses. We want to diversify the investments. We're not just putting all of our capital availability to work in one transaction. So I would say 10 million of EBITDA is probably the largest size thatwould work for Tarian. And then we'll scale all the way down to, I guess I'll talk about it from a revenue standpoint, not an EBITDA standpoint, but five to $10 million of annual revenue. Which ends up being a fairly small company.

Our margins are quite tight in this industry. 10 percent EBITDA margin is a very good security business, and they can go negative, of course. A $5 million security business would at best be doing $500, 000 of annual EBITDA. If it's in a geography we really like, or if it's a, has a certain customer base or verticals that we really like, we would take a look at that. 

It's a smaller transaction, with less than a million dollars of EBITDA, but it may still have appeal to us and it may still be a transaction we would go after. So it's a pretty wide range. And there's, when I go back to the size of the industry, the 10, 000 different security firms that are out there, most of them are in that smaller size. Between, less than a million of revenue all the way up to the call it five or 10 million of revenue.

That's going to be probably 80 or 90 percent of all the security companies out there. So that's a space that we do play in and focus on. And I've done 30 acquisitions of security companies over my career with companies in that size. 

[00:28:47] Ronald Skelton: I'm really shocked at the profit margin is only 10%. Is it because it just it's really highly competitive?

There's 10, 000 of them out there. So if you bid too high, somebody else is going to get the job. I was thinking it'd probably be closer like, like I own a small pest control company. It's not uncommon. I think the industry average for a pest control company is 26%. It's not uncommon to push.

I think we, we're really small. We push 30, 37 percent pretty easily. We were small enough. We only take the jobs we want. So that said, we could scale too, it's just, I bought that one to employ some relatives. I just kinda, I was a little setback cause that, when you have a company that has that tight of profit margins, you have to be a highly tuned company, right? You're playing a different game. A lot of people think that that's really low. I think the industry average in the United States is two point something percent, because the manufacturing drives it down.

So if you actually start googling around and say, what's the industry average profit margin for a company? The restaurant industry and some of the high,remanufacturing of parts and stuff like that drive it way down. I think it's 2. 6 or something really low. The guys from the great game of business told me what it was.

It was 2 point something. We're like, no, it's not. So I started Googling around like, yeah, you're right. It is. Wow. I'm not that great of a manager, I wouldn't buy anything that would have that small of profit margins cause I would mess it up. I buy, like newsletters, digital media assets when they run at 70 to 80 percent profit margin. 

I can run a team of five is overload for me. So SEO, a couple of writers, myself, and maybe some social media guys, and I can run a content site. So the overhead is low. But I like that business because there's a lot of room for me to mess things, not do a great job. And still make money.

I think I'd be afraid of a security business where, at my best, I make a dime on every dollar that comes in. That's a tough business. 

[00:30:31] Scott Kaeser: It's a tough business. It's very competitive. It's a labor based business. So we're, we charge a bill rate to our clients. We have a correlated pay rate that we pay to our employees as a, that's really our revenues and then direct costs. 

And like you said, it's competitive, labor based businesses. We have, unbilled overtime, we have training expenses, we have uniforms, the recruiting and onboarding expenses, hiring, drug testing, the background checks.

I mean, all these costs factor in and it is very competitive. Unfortunately with, low barriers to entry with an asset light business model, which security is, you have these smaller companies that can just make a very low ball offer to some of the purchasers of security services. And that forces a very tight market, a very competitive market.

And it's something that you, like you said, we have to be very vigilant with our costs. Cost containment and understanding the key drivers, revenue drivers, cost drivers of our business to make sure that we're maintaining that margin because, it can go lower than that. It can be negative. It can be higher than 10%.

Usually it's when you can package a few different types of services, maybe some video monitoring or alarm installation. Some of that can help boost margins, but ultimately, when you're just looking at the labor base aspect of 10 percent margin. We also invest quite a bit in what we call our senior management, or mid level management, our ops teams, local ops teams that are providing the customer service, the supervision, the support to our people in the field and our clients. 

It's one thing that differentiates us from our competitors. Where if you have a problem with our company, with an officer on post or an issue comes up and you need to get ahold of a senior leader or a supervisor, we're available. We've invested in that layer of management. Many of the big competitors don't have that. And it's very frustrating to the clients. But there's a cost to it, right? So you have SGNA and management that, that you have to factor into RP and L, that also can drive margins down and it's just something we have invested in, but it's important to our business model and our brand.

[00:32:37] Ronald Skelton: So, what's the failure rate of some of these startups? But like, I imagine they're, you're wanting them to be at least like $5 million in revenue or, 500, 000 in EBITDA or seller discretionary earnings before they get there. How many of these security companies with a 10 percent, it's like restaurants, restaurants fail all the time, but a good running restaurant with, with service, meaning that there's waiters and stuff involved.

I think the industry average is three or 4 percent profit margin on those guys. There's some differences out there. I think sandwiches and pizza are high, but, and bars are high. But everything else, if you're doing a full menu and stuff, it's a tough business. So a lot of them fail. I have to imagine a lot of these small security companies, they don't ever make it to that $5 million mark and that $500, 000, they never became, they'll never show up on your radar.

[00:33:25] Scott Kaeser: That's right. And I'm sure many of them don't make it. I don't have great statistics. I think it's probably similar to any other business, small businesses, they are difficult. They you know, without a significant amount of capital, usually more than a lot more than you think you need to start a business there's many that are gonna fail and I'm sure that's common in the security industry as well.

[00:33:46] Ronald Skelton: I imagine then what other value adds? You're in the corporate development officer. I know you do acquisitions and mergers. You also look at what else you can do to add on to that. I'm thinking, there might be something along the lines of, like you said, the security cameras, the entry point stuff. But, I'm wondering if there's anything else out there that fits in your scope of business that would be like, Hey, if we brought this on now, we can get another two points on our profit margin.

If we sell this to most of our clients. I don't know what that would be in this space. I'm kind of curious. 

[00:34:19] Scott Kaeser: Yeah. Well, like I said, the, the camera installation and monitoring and alarm installation and monitoring is a big aspect of that correlated component. We have another product called a mobile surveillance unit.

It's like a trailer that has oftentimes a generator and a, a mast with cameras, lights, speakers, on the top of that mast and it can augment the security services, especially in parking lots, in large campuses or areas.

[00:34:46] Ronald Skelton: And stuff like that. I've seen those.

[00:34:48] Scott Kaeser: You just need a lot of, ground to cover. And it may be more difficult for a security officer to be there. It might be a rural area or on the middle of nowhere. So,those are aspects that we incorporate into our services. With Tarian, there's been a push in our industry to just go to what's called integrated security, right? And when I say that, it's that broader holistic view of security, but the push has been to add all sorts of technology, robots, cameras. All this stuff that people think, oh, this is going to replace security officers, and they've invested heavily in it.

And we've been hearing about these things for decades. We're pretty confident that this industry is still based on a manned security officer in uniform, doing their job, being proactive,following post orders, doing rounds, things like that. Much more proactive if there is an incident on post than a camera or a robot or something like that, that can at best just notify a client or the police.

So we've really built our company and are continuing to build our company with the, getting the manned and human capital aspect of our business correct. Everything from hiring, recruiting, training, supervising, uniforming, culture building. Those are things that we're focused on and we will add the technology and the cameras and the mobile surveillance units when it's appropriate, because it does help with margin improvement.

But that's just an ad, an ancillary aspect to our business. And we really focus on leading with, with the human capital, manned officer for Tarian. 

[00:36:16] Ronald Skelton: I can see those mobile units also being what a, in the transport business, what do they call hot shot. Basically, somebody could get something there within a few minutes.

I think if you had those mobile units in key areas around big cities and stuff, being able to deploy that you could augment everything from like a security system going down at a major facility, right? Like they, even augment it. If you think about it, like I live in California, but in Oklahoma, that's Oklahoma had the number two or three in the world for States with casinos. 

Security everywhere on those cameras everywhere on those. Power goes out or something weird goes out and they need something now. You could deploy that pretty quickly or they're going through like I remember when they were going through upgrades and updates they had it like very systematically you watched them do them.

I'm always curious in business. That's one reason I do the podcast. I'm what I call insanely curious about everything. Yeah, I was playing poker and watching them change the cameras and they could only do two or three at a time because they couldn't lose coverage of areas. And when they did the parking lot and stuff, they actually closed down sections of the parking lot when they were changing cameras because they didn't, they just didn't want uncovered areas.

You could be able to pop these things up and go, okay, we got this covered. You do this whole area, then we'll move it to this next area. So I think there would be a play for that. I just don't know how often, right? Or if you think about it, big events like, especially with this defund the police. A lot of times the local police department don't have the equipment that you would have.

And there's a marathon going through town or a parade or something coming through town. They should be able to contract somebody like you for a reasonable cost and come up, say, Hey, put cameras up. Here's the channel we're on. You can't engage, but tell us anything you see, right? Here's what we're looking for.

Like, tell us where we need to be. If you see anything that we should be paying attention to, give us a heads up. 

[00:37:58] Scott Kaeser: That's exactly right. And actually the Boston marathon is a client of ours, which we're very proud of. And we're there to, usually with manned officers or, event staff to augment the police force that's there, but we're representing the race organizers to make sure the race is safe.

Obviously after the marathon bombing that occurred there, became highly critical, highly visible, highly important to the marathon in Boston, as well as marathons all over the country. So those are events that we do. It's more of a one time, client or generation of revenue for us.

Or a couple of days, versus kind of the standing contract security that might be 24 hours a day, seven days a week. But those are things we'll do. Will oftentimes what you were describing, if it's an emergency or there was a break in or there's a heightened risk, we'll have manned officers supported by mobile surveillance units or cameras. But ultimately they still need the manned security officer.

That's going to be the foundation of a security program for a company or a client of ours. 

[00:38:56] Ronald Skelton: I'm a little setback by your profit margins. But hey if you guys can make it work, then that's a barrier to entry, that's a moat, right?

If you look at different things some businesses you say it's, it's easy to get in this there's no barrier to anybody can do it. Well, the barrier to entry is it's not easy to do right? Like a content business, anybody can get into it, but, to start generating five figures, I'll look at you.

Six figures, I'm interested in you and higher revenue profits. That's not as easy as, Oh, I put up a blog and I write every day for the last six years. Like, anybody can do that. So the moat in, in that is money. The moat with you guys is clean operations. So there is a moat, there is a, Not everybody can do this. Not everybody could do this at a, 5, 000 employee level. 

[00:39:36] Scott Kaeser: Yeah. And that ends up being great acquisition targets for us as well, because there are some stages of companies where they get, there aren't huge moats, like I said, because it's an asset light business.

So you can get some contracts and hire some people and start a security business. And even grow that security business. As you get to certain sizes, maybe that five or $10 million, you get to a point where you really need to start professionalizing your business. You need to add finance and accounting.

You might need HR, hiring, recruiting, onboarding, terminations, recordkeeping. You might need a professionalized sales force. The word of mouth might not do it for you anymore. All sorts of various functional areas that you're gonna start to need real expertise in, and many business owners just aren't interested or able to make those investments to take the company, let's say, from, 10 million of revenue to 100 million.

I mean, it sounds great, but it's much harder than that you might think. And so that's when owners start to consider an exit as well. Maybe it's just age related. Maybe it's because they don't want to make that investment. It's an investment in time and money. So those become good targets for us because those owners kind of have a good self understanding or, self realization of the where their business is.

And how much work or money it might take to get it to the next level. And they say, look, I need some support. I need back office support. My invoicing process has gotten out of control. My payroll process is taking too long or is costing too much. My insurance costs have gone through the roof now.

Let me think about a way to exit. Get value for what I've built. And that's where we can come in and be a great partner so that we can take those clients, those employees, that business, help add those resources, because we already have them in many cases and then take, and be a good home for the clients and the employees. Those end up being good transactions for us.

[00:41:21] Ronald Skelton: So one more question before we do a little wrap up here. And that is, what sets you apart and what advantages, like if I've got the company, so I'm doing 10 million in revenue, doing a, a million in, in profits as sellers discretionary and EBITDA, whatever you want to call it. And I'm thinking about exiting.

Why talk to a strategic acquirer like you as opposed to, one of the other unfunded sponsor type of buyers. Like just somebody who, they've sold their tech company, want to buy a security company or, they're funded otherwise, but they're not backed by PE and they're not backed with the growth strategies you have.

What advantage do I have selling to a strategic acquirer? 

[00:41:59] Scott Kaeser: Yeah, it's a very good question and it's a pretty complex and broad answer. The primary, start to that is that we have the back office resources that are oftentimes going to be able to support the client base, the employee base to make sure that the business stays on the books. That the business does well and continues to grow.

Many of those unfunded sponsors or small time investors or somebody else may not have those resources. And or may not be willing to invest them in the sense that they may need the seller to do more work for less reward after closing than they would if they were able to sell their business to a company like mine.

And so that, as long as a seller is going into it eyes wide open, they're selling their business. They're not going to have the long term upside. And they may have to do more work because the folks buying them don't have the expertise. They don't have the resources. They don't have the back office support.

That's something a seller needs to know before they conduct a transaction. Because we're well resourced, we have some of that back office staff. Oftentimes, there are some synergies. Maybe it's just, we have better rates for our insurance. Or we're already, we already have a payroll provider that we're paying for.

And so we have some costs that are going to come out of the business once we're merged together. And that allows us to maybe pay a little more than what an unfunded sponsor or just another acquirer might be able to afford. Then there are some very big strategic acquirers in our industry that are much bigger than Tarian, but they have a really bad reputation for stripping everything out.

Almost getting way too aggressive in their exaction of synergies. So all the management might get fired. The clients are going to see that and they're going to get pissed off. They're probably going to leave the employee and all the employees at the, on the ground floor. The security officers are going to get run through a very cold orientation process and hiring and onboarding process.

And they may leave. So you have, operational deficiencies. So the very big strategic acquirers sometimes lose focus of the client retention and culture that exists in these small and medium sized companies that I'm proud of Tarian, because we are getting it right. We're filling a great niche in our industry where we're able to spend the time and energy and focus on these smaller and medium sized transactions.

So that they are successful for the seller and for us and the clients and the employees as well. 

[00:44:26] Ronald Skelton: Awesome. Awesome. Well, if you had to, take a look back at the show and think about the questions we talk about, what would be one or two key points you want somebody to remember from the show? And, or did we miss anything?

Is there anything we should have been talking about that we totally missed? This is our takeaway. We're gonna use this and make it its own little, probably gonna put it on TikTok and make it our takeaway. So this is your, the lead into what you want people to remember you by. No pressure.

[00:44:49] Scott Kaeser: Yeah, no, great. I feel like we covered a lot of great topics on this conversation. So thanks for having me. One thing I would mention to prospective sellers out there. Just coming from the other side of the coin. I'm the buyer, the due diligence process is very rigorous. The contracting process is very rigorous.

Prepare yourselves adequately for that. It takes a lot of time. It takes a lot of resources. There is a light at the end of the tunnel. That's usually a big check and a payday. So it's worth it. Hang in there. My advice to a seller is that be truthful, be honest. So much of a transaction is building trust between the buyer and the seller.

And businesses can be ripe for sale for various reasons. Sometimes it's because it's grown too fast and just needs a new home. Sometimes because it's lost customers. There might be financial difficulties. There might be cashflow problems. There might just be retirement needs. There might be human resources needs.

Their business might be losing key people, that are hard to replace and therefore the seller might want to transact. Be honest with a buyer, especially a strategic buyer. We can solve all those problems together. We're going to find those problems as in due diligence, what I don't recommend is trying to hide those things, from a buyer. 

Try and pull the wool over someone's eyes. The buyer is going to find those things. The good, the bad and everything in between. So be honest, be upfront with your motivation, your reasons for selling. Be candid with yourselves as a seller and build a good partnership with that buyer and the transaction process will go much smoother. 

And you're more likely to get all the way to closing with that transaction and that payday at the end, if you've been truthful and built that trust and that relationship on both sides of the transaction. 

[00:46:28] Ronald Skelton: Awesome. That's a great key takeaway. Well, I want to thank you. How do people reach out to you if they want to chat with you?

I know I have some stuff in the show notes there, but if somebody wants to reach out to you, how do you want them to, and maybe they got a security company or maybe they have a question about something in this realm. How would you want them to contact you? 

[00:46:44] Scott Kaeser: Yeah, I appreciate that. We're requisitive. So if you have a security company, you're a business owner that of a security business that you're interested in talking to us. I can be reached at scott at tarian group dot com. So it's just my first name, S C O T T at tarian group dot com, spelled T A R I A N G R O U P dot com. You can also look us up on our website.

My contact information is there. It's tarian group dot com is the website. www dot tarian group dot com. I'd be happy to, have a conversation with you. I'd look forward to speaking with you and learning more about your business. So I welcome communication. 

[00:47:24] Ronald Skelton: Awesome. Well, I want to thank you for being here today. I learned a lot and, it was kind of eyeopening and fun. So thank you. 

[00:47:31] Scott Kaeser: Thank you, Ron. I appreciate the time and I enjoyed our time together as well. 

[00:47:35] Ronald Skelton: Awesome. We'll call that a show.