Much has been written about how security dealers, with their profit-rich recurring monthly revenue (RMR), are valued in the marketplace, but the factors that go into valuating systems integration companies has been covered to a lesser extent.

RMR — if any exists in the integrator business — certainly plays a role in determining value, but a distinction is made between RMR from monitoring and RMR from service. There are other similarities in how the two types of businesses are valued, such as service efficiencies and the composition of customer contracts.

Differences exist in the type of technology the integrator offers and the vertical markets that comprise the client base. According to Bill Polk, managing director, CapitalSource, Chevy Chase, Md., the primary driver of valuations is the liquidity of capital markets.

While the current economy has restrained the flow of capital to a degree, Polk believes low default rates characteristic of the security industry have and will continue to lead to rising valuations.

“We’re in an environment where debt markets have come back,” Polk says. “The high-yield bond market has been extremely active over last 12 months and this is driving up value. Falling default rates, more competition, and generally favorable economic reports are driving pricing down, which is making it cheaper to borrow.”

Polk adds that in such a market, “the security industry has proven over the last 24 months a safe port in a storm.” […]