Deal Mechanic: ECN

When an intermediary flagged Emergency Communications Network (ECN) to The Riverside Company in May 2011, partner Chris Jones was immediately attracted to the opportunity. “It’s a beautiful business model,” Jones says. “It is a software-as-a-service business model with nearly 100 percent recurring revenue.”

ECN, which is headquartered in Ormond Beach, Florida, provides a system that enables state and local governments to send time-sensitive, geographically-targeted notifications to their constituents. If they need to let the residents of a few streets know about a broken water main or a neighbourhood about a missing child or a whole city about an impending storm, they can use ECN’s platform.

ECN was owned by three founders who had already transitioned out of the day-to-day operations, appointing a management team to run the business.

“Within the notification market ECN was the clear national leader serving the state and local government segment, and it was an industry that we thought had a lot of growth potential organically through additional adoption,” Jones says.

“We saw great customer diversity; the company served well over 1,000 customers, and the top customer was around 1 percent of revenue on acquisition.”

State and local government entities sign up to ECN’s platform on multi-year contracts. In 2011, around a third of US government organisations subscribed to a system such as ECN's and Riverside's research indicated that these would be joined by a significant number of additional cities over the next five to 10 years.

Riverside acquired a significant majority of the business, which at the time had a trailing 12-month EBITDA of $7.4 million, in October 2011 using capital from the $1.17 billion Riverside Capital Appreciation Fund V.

1 RE-ENERGISING MANAGEMENT
ECN had a highly competent management team in place on acquisition. However, its growth had been constrained by its founders, who had chosen to reap the benefits of the company’s financial success rather than reinvesting aggressively in the business’s development and growth goals.

As well as bringing both the capital and the appetite needed to accelerate the company’s growth trajectory, Riverside incentivised the management team to get behind its objectives by putting in place a stock option plan providing equity and gain-sharing opportunities as ECN hit its goals.

2 INTERNAL OPERATIONS
As a founder-run business, one of the first objectives was to implement operating and management best practices and to augment ECN’s talent pool.

“There were a lot of ‘firsts’ that we had to put in place,” Jones says. “This was a company that had never had a budget, had never had a financial forecast, had never had a strategic plan, had very limited sales and marketing management practices. It was a very lean business.”

Riverside introduced monthly financial reporting and annual budgeting processes, as well as sales and marketing practices. Incentive and performance management systems were also put in place to oversee the sales team and better assess productivity.

Riverside also brought in two external directors to sit on the newly-created board of directors.

3 TECHNOLOGY INVESTMENT
As a software-as-a-service business, ECN’s technology platform was a central component of the organisation. During Riverside’s hold period the firm worked with ECN to completely ‘re-platform’ its service offering.

“We invested in a full update of the technology platform, the service engine of the business, to improve its capabilities and enhance the service levels provided to customers,” Jones says.

“During the first six months of ownership we finished development and launched one of the first notification mobile apps for the industry.”

4 NEW ACQUISITIONS
ECN was the national leader in the state and local government sector, and it was clear from the outset that the company would make an ideal platform onto which to bolt smaller players.

“We met with more than a dozen potential acquisition targets in the first 90 days of our ownership period [and] we acquired our first two acquisitions within the first nine months,” Jones says.

“This was a management team that had never considered or pursued add-on acquisitions before, so we really had to explain the acquisition process, evaluation, due diligence etc.”

Most of ECN’s competitors were subscale and therefore operating at much lower margins.

“Five of the six add-ons were direct competitors in different parts of the country where we acquired the business and were able to consolidate the revenues and the customer base into the ECN business. They were very accretive in terms of providing growth as well as attractive earnings synergies,” Jones says.

5 DIVERSIFYING REVENUES
As well as increasing ECN’s footprint within the state and local government market, Riverside had an additional aim when it embarked on its add-on strategy: diversifying into different parts of the notification market.

“Going in, we knew that we wanted to sell a business that was not only bigger and better run, but also served more than just the state and local government market,” Jones says.
All of the additional businesses acquired during the hold period had some presence in the commercial notification market. These were systems used by clients such as hospitals and dentists’ offices to notify patients of impending appointments, and by small and medium-sized businesses looking to communicate with their customer bases.

“The commercial market was bigger than the government market, and it was growing even more rapidly,” Jones says. “Part of our thesis was to expand in the commercial market and to create a business that served a bigger addressable market where we could sell a bigger addressable growth opportunity for the next owner.”

As well as doubling revenue during its hold period, Riverside diversified that revenue stream so that more than 10 percent resulted from the commercial notification market, with substantial growth forecast for the future.

***

Riverside laid out a five-year growth plan when it acquired ECN; just three years later it had achieved those goals through double-digit organic growth, six add-on acquisitions and doubling both the headcount and the EBITDA of the business. It was time to sell.
Riverside hired William Blair as advisor and ran a full auction process.

“Larger private equity firms saw a lot of the attractive industry dynamics and business-model attributes that attracted Riverside to the business, it was just a bigger and better-run business,” Jones says.

ECN was acquired by Veritas Capital in June 2015. At the time of exit, ECN had plenty of room to grow; adoption by government entities had reached around half during Riverside’s ownership and the firm left the new owners with a substantial pipeline of potential add-on acquisitions.

BY THE NUMBERS
$7.4m

EBITDA on acquisition

$15.3m
EBITDA on exit

46
Employees on acquisition

101
Employees on exit

33%
Organic growth