Valuing your business

Ken Kirschenbaum, Esq. 
from Alarm-Security Industry Legal Email Newsletter, February, 2008

How do you go about valuing your business? I get several calls a month asking me that, and asking for a quick valuation over the phone. Just the other day I had a broker specializing in brokering alarm company deals in my office. We kicked around acquisition issues and it was clear to me that there are very different ways to approach the valuation of your business. Of course what a buyer is willing to pay is the ultimate value. There are things you can do to enhance that value, and there is no better time to start than now.

Recurring monthly revenue, RMR. You know that alarm companies sell subscriber contracts for a multiple of the RMR. But why is some company getting 12 times, others 45 times and more? Why are some companies surprised that there is no one interested in buying the subscriber accounts?

You should take some comfort knowing that you are in a business that deals with subscriber contracts as negotiable instruments. The contracts have intrinsic value, are assignable, tradable, and have real value. That $30 a month subscriber account can be worth $360 to $1500. If you have 1000 or 5000 or more of those subscriber contracts you have a valuable business to protect.

What makes certain subscriber contracts worth less? Here's a list of what to avoid or not do at all:

• Use equipment or installation techniques that are not customary. You decide to use some obscure panel or application that other companies don't use.
• Provide services that other companies don't or won't, such as 24 hour service, pick up cash, cash discounts, opening closing reports at no charge, pay the false alarm and permit fees and fines, etc.
• Don't use contracts
• Use old out of date contracts
• Let contracts go into renewal without new contracts and updates
• Don't bother carrying errors and omission insurance
• Don't have your own line at the central station
• If you are a central station, use obsolete technology to monitor the accounts
• If you're a central station, don't use three party contracts or have contracts with your dealers
• Finance or sell of your RMR as you struggle along; you won't have anything to sell.

Well, that's enough of a list of what not to do. So, what can you do to enhance the value of your business:

• Diversify your accounts, with a mix of residential and commercial
• Diversify types of alarms; burglar, fire.
• Lease commercial accounts; sell small commercial and residential; use service and monitoring contracts
• Use updated contracts and have all subscribers execute them
• All subscribers on your own line into the central station
• All systems remote programmable
• All systems compliant with code, UL, NFPA, trade custom standards
• Provide customary services; don't try and reinvent the wheel
• Get new contracts rather than rely on renewal terms
• Keep all subscribers geographically located. 
• Maintain good service records for subscribers
• Stay on top of your receivables; keep them current
• Keep your debt to a minimum; you'll end up with lots more at the closing.

The difference between 32 times and 38 times, where most small to mid sized companies can expect to sell subscriber accounts, can amount to a lot of money. To command 40 times or more you have to have paid attention and adhered to most if not all of the above recommendations. Or maybe you just get lucky.