Comment on how buyers figure value of alarm accounts for acquisition / best practice suggestions December 24, 2022

KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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Comment on how buyers figure value of alarm accounts for acquisition / best practice suggestions
December 24, 2022

Comment on how buyers figure value of alarm accounts for acquisition from article on December 9, 2022

Ken,
          In the bulk sales and acquisitions that I have supported and engineered (mostly from the seller side), I have observed a high-level pattern over and over:
  Methodologies like Discounted Cash Flow (DCF) influence the high-level valuation that gets the process started and fills in the LOI.
  Then that high level valuation is converted into the familiar multiples per account. An ideal account may for instance be 26 multiples.
  Next, as due diligence progresses, the population of accounts is analyzed and categorized into buckets based on quality metrics. Accounts that end up in the highest quality bucket get that example 26 multiples.
          The different defects that other accounts experience result in lower multiples. These are the standard issues like “no contract”, “not on autopay”, “collections history”, “hardware age”, “does not own central station number”… with each having decreased amounts (20 multiples, 16 multiples…).
          The “defects” listed above are the areas where a prospective seller can increase value by focusing effort in the months and years leading up to listing their company for sale. The better the data that a seller and their broker/lawyer/accountant have, the better protected they are from abusive re-trading and higher earn-outs/holdbacks. Every time variability is added to the equation, the buyer counters with re-trading and/or higher earn-outs/holdbacks to protect themselves. You avoid adding variability to the transaction with clear and consistent data. If 15% of your customers are not on autopay but that metric is accurate, disclosed up front, and verified in DD, no additional variability is added to the transaction. Hiding things that inevitably come up in DD is always a bad idea.
          This baseline outlook also provides a good context to set yourself up to protect your earn-out/holdback as the sale completes. It’s rare that a customer will experience zero changes upon closing. Every change provides an opportunity for an otherwise good customer to fall through the cracks and end up decreasing the potential to earn-out/holdback. This means building your processes to minimize your dependence on the customer needing to take any action. From a PCI perspective, credit card tokenization is a great way to minimize risk until you can’t get your customers’ payment methods out of your provider to give to your seller. Build forward looking processes from the start to minimize those pitfalls. Many will say “we can just replace the account”, isn’t it better to not have to give that replacement account up in the first place and have it either increase the deal or keep it for yourself?
Justin W. Steigerwalt
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Response
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          Thanks for contributing Justin.  Your comments suggest several best practices ideas which all alarm companies should pay great heed to.  Observing best practices not only ensures a smooth operation but ends up preparing you for an ultimate sale.  So many alarm company owners end up unprepared for a sale and not all of them have the luxury to straighten out in time for a sale.  Inevitably that means a reduced sale price; sometimes rather significant reduction.  It’s not that complicated to understand the consequences of reduction; in fact my son in law Wharton grad probably would grimace at how simply I explain it.  If you use a K&K Standard Form Agreement, execute them properly, have your own lines at the central station, use auto pay for your customers, use common equipment, do quality work, know your RMR and have a customary margin, have proper licenses, keep accurate service records, keep you’re A/R to under 90 days, pay your bills up to date and your tax obligations including filings and taxes, no employee issues, sufficient staffing in case the buyer needs your staff, and your overall reputation for integrity and honesty, expect 35 times multiple, more or less.  As you question whether you can check each box for the above issues you can start deducting from 35 times, until you get closer to under 25; if you get under 25 you will also lose most of the interested buyers, further frustrating your efforts to sell for a “top” price [and one you most likely think you deserve, despite ignoring all of the best practices].

To order up to date Standard Form Alarm / Security / Fire and related Agreements click here: www.alarmcontracts.com
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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301
ken@kirschenbaumesq.com
www.KirschenbaumEsq.com