Why Cash Flow is King

Security Sales & Integration

The Big Idea with Ron Davis
February, 2013

Why Cash Flow is King

Michael MarksIdea of the Month

If you had just one really great idea you could share with the alarm industry, what would it be?
This month’s great idea comes from Michael Marks, co-founder of SedonaOffice, a provider of financial software for security companies.
Marks’ great idea:
It is incumbent upon alarm dealers to mind their cash and in turn use that money to more effectively continue to increase cash flow.

The annual SedonaOffice Users Conference, held Jan. 14-16 in Marco Island, Fla., provided me the occasion to ask the firm’s co-founder, Michael Marks, a variation of the question I normally pose for this column: “If you were an alarm dealer and had extra money, what’s one great idea you could give to our readers about how to use money?”

It’s a particularly relevant question to ask Marks, considering his family was in the alarm business for many years before he became involved in launching SedonaOffice. Emphasizing the importance that cash flow plays in maintaining a sound and efficient alarm business truly is a great idea.

Marks was emphatic: “If I was in the alarm business and had extra money, I would invest right back into my business.”

Michael Barnes, founding partner of consulting firm Barnes Associates, was one of my fellow speakers at the SedonaOffice conference. He gave an amazing seminar on how to measure the value of an alarm company through various financial metrics. He also talked about the state of the industry and what some of the bigger players are doing. This topic dovetailed with Marks’ advice about cash flow.
Alarm companies today are selling for a multiple of recurring monthly revenue (RMR). Typically it’s somewhere in the mid-30s; for conversation sake, let’s call it 35x paid for an RMR account. If the monitoring is $20 a month, then $700 is paid for the account. So here’s the idea that coalesced for me: Say that you’re selling 10 accounts, four times per year, to invest back into your business. Ten accounts (at a 35x multiple) would net you $700 per account; selling 10 of them would mean you’re making $7,000 a quarter. Multiply that times the four quarters per year that you sell those accounts, and for 40 accounts you would get $28,000, which you would invest in your business.
Consider the Possibilities
Stop for a moment and think what an additional $28,000, bottom line, would really mean to your business. If you actually did sell those accounts, the chances are you would inject some additional urgency into your sales process to make up for the accounts you sold.
Since all of this is hypothetical, why not actually figure out a way to take a sum of money, maybe it is just $28,000, and invest it back into the company in a way that allows you to confidently look at a return on that investment of at least four times, in the next two years. What this will cause you to do is to set a short-term business goal, fund it, and then reap the rewards that come from the exercise.
How could you invest that money? Two things immediately come to mind, especially after attending the SedonaOffice conference: automation and systems. Improve the quality of your reporting and achieve meaningful information. Next, what would you do with $28,000 to improve your sales? The answer to that question will tell you whether or not you should be investing more money in the sales and marketing process.
There is a reason companies like Vivint sold for $2 billion. There is a reason that some of the best operators in the industry get the highest multiples when they go to sell their companies. They understand that buyers are interested in cash flow, and they utilize systems to give them the information they need in order to increase cash flow.
As business brokers, we see the results of what poor business reporting provides senior management and owners. That means everyone involved are making decisions based upon bad information. Why not invest in programs that will give you good information, thus allowing you to make good choices?

Ron DavisRon Davis is a SSI Hall of Fame inductee and President of Davis Mergers and Acquisitions Group Inc. Also known as The Graybeards, the company is active in acquisitions and mergers exclusively in the alarm business.