KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
You can read all of our articles on our website. Having trouble getting our emails? Change your spam controls and whitelist ken@kirschenbaumesq.com
******************************
Comment on Is RMR enough to survive in alarm business
August 3, 2024
**********************
Comment on Is RMR enough to survive in alarm business from article on July 18, 2024
***********************
Ken,
I read Joe Pfefer’s comment in your July 1, 2024 email. Joe makes some interesting points. It is important to make a profit (or at least some margin) on installs and service, but these are just a part of a business plan, even for a “traditional” alarm company. While I am not a believer in the “free” or $99 alarm system, there are some companies that have found a way to make it work. And hundreds that haven’t.
The RMR model isn’t unique to the Alarm Industry. In 1990 I was driving around with a $2,000 “car phone” and paying $30 per month for service and another 30 cents a minute to make a call. Cell phone providers realized that they could make more money (a lot more money) by subsidizing the equipment and charging more for monthly service. I was also getting cable TV service for $45 a month but the cable company had spent thousands of dollars to run the cable to my home.
The larger alarm companies started subsidizing mainly residential alarms by installing minimal systems at a low price and charging 1.5 to 2 times the going monitoring rates. The result was that more people purchased alarms and monitoring rates as a whole crept up until they stagnated in the late ‘90s.
I value alarm companies for divorces, partner disputes, and various other purposes. In valuing an alarm company I have to consider the Steady State Model, which determines if the company would be more or less valuable if it quit providing installation and service and simply monitored the accounts it has until they all cancel. It isn’t unusual for an alarm company with $100k of RMR and $10,000 of central station monitoring cost to generate over $1 million in cash flow from monitoring alone, but have less than $500,000 of net income. This is because of economies of scale. This is typically because the competitive nature of alarm installation and service forces the company to accept lower margins for these services. These companies aren’t “losing money” on install and service, they just aren’t making enough on them to cover their overhead. As a result they unwittingly rely on high margin RMR to cover the overhead. Barnes and Associates monitors financial trends in the Alarm Industry and they have determined that the “Creation Cost” of new RMR is 27.7X. This means that the typical cost of installing a new $30 account is $831. If a company is installing a residential system for $1,000 its true margin would only be $169. Compare a dollar of monitoring that returns as much as 85 cents in margin to a dollar of install revenue that returns only 17 cents, then think of how easy it is to monitor an account through a third-party central station.
This may sound a bit complicated and “bean counterish,” but it is a fact of running an alarm business. The solution for the traditional alarm company is to keep installing systems, and servicing them, at a profit, but also to understand that RMR is the “gold from your mining.” As you and Joe both point out, low cost systems are capital intensive. Not only that, but customers with money to pay for the system upfront may be a better risk, as they may be less likely to leave over price. As Joe says, “hard work keeps subscribers satisfied” so traditional companies should focus on quality.
As for ADT being “weeks from going Chapter 7,” as Mark Twain once said, “The report of my death was an exaggeration.” ADT is huge, but they only control 18% of the market. Six other companies account for 24% of the market, and thousands account for 54%, nearly half of those being local companies. ADT’s attrition rate for the first half of 2023 was only 12.5% so their average customer is lasting 8 years. That’s a lot of RMR that they acquired for multiples in the 30’s that is throwing off cash for close to 100 months. The national companies have found a way to make it work. While the $99 system may not work for a local company, keep in mind that that building RMR should be the focus of any alarm company.
Mitch Reitman
817 698 9999 XT 101
Reitman Consulting Group
http://www.reitman.us
*************************
Response
*************************
As always, thanks for your information and advice.
At the end of the day, or decade or career, all you have to sell is the RMR. It’s so disappointing to find out that your phone number, website, domain name, and trade name have little or no value on their own. Of course they are important factors when a buyer considers what multiple it will pay for the RMR accounts, but it’s only the RMR accounts that a buyer can rely on to keep generating revenue.
Like any business the goal is growth for survival. Particularly in a business that has some level of attrition there needs to be a level of growth just to keep even. It’s true that revenue need not be RMR alone because the bottom line at the end of the year simply adds up all the revenue left over after expenses, but if there is going to be an expectation of selling the business eventually or creating a valuable business that can be sold, it’s the RMR revenue that adds value, not profit on installation or repair service. So we can agree that growth is a goal; the question then is what the best way to achieve that goal is?
Creation cost versus purchasing accounts are options. Obviously there are many issues with either approach and which is cheapest way to grow is probably not the primary consideration. It’s would be nice to enter the alarm industry with $100,000 RMR and 30,000 accounts; all you’d need is lot’s of money, an available operation to buy and take over. It would take many years to achieve that growth by creating it. In most situations the choice is made for you because you don’t have the wherewithal to do it both ways. Maybe you have the money to buy your way in [or can get it] or you don’t. Maybe you’re young and just entering the work market or seasoned and looking for something to take over, some business built by someone who had the time to build it. The statistic of 27 times RMR is interesting, though I guess it’s more of a guide than precise in all cases. It sort of substantiates the general thinking about what multiple should be offered to acquire accounts. While most deals have multiples above 27 times RMR there are so many other factors to consider it almost makes the creation cost irrelevant, mainly because it just may not be an option for a buyer.
I don’t think the alarm industry is a unique industry in the sense that all businesses need to grow in order to just stay even. With my debtor-creditor background and experience representing alarm companies for almost 50 years, I can’t help but be leery of growth by acquisition, especially since it almost always requires financing. Debt service coupled with attrition and increased operating costs is a sure recipe for financial difficulty, hardship and going out of business. With that perspective, growth by creation cost is slower [usually unless you’re lucky enough to land a bus load of expertly trained and skilled door knockers] but surer and less risky. That doesn’t mean instant or definite success. You need to follow plenty of advice, from lawyers, accountants, consultants, marketers, insurance brokers and alarm associations. Check The Alarm Exchange regularly for proper advice and opportunities. Join the Concierge Program and cement a relationship with the leading law firm in the alarm industry. Especially if you are using the creation method be sure to build your accounts with solid foundation using the Standard Form Agreements. And a final tip worth remembering, watch for the annual mid-summer “birthday” discount on contracts which is a one day event on this Monday, August 5.
************************
STANDARD FORMS Alarm / Security / Fire and related Agreements
click here: www.alarmcontracts.com
***************************
CONCIERGE LAWYER SERVICE PROGRAM FOR THE ALARM INDUSTRY - You can check out the program and sign up here: https://www.kirschenbaumesq.com/page/concierge or contact our Program Coordinator Stacy Spector, Esq at 516 747 6700 x 304.
***********************
ALARM ARTICLES: You can always read our Articles on our website at ww.kirschenbaumesq.com/page/alarm-articles updated daily ********************
THE ALARM EXCHANGE - the alarm industries leading classified and business exchange - updated daily
*************************
Wondering how much your alarm company is worth?
Click here: https://www.kirschenbaumesq.com/page/what-is-my-alarm-company-worth
******************************
Getting on our Email List / Email Articles archived:
Many of you are forwarding these emails to friends or asking that others be added to the list. Sign up for our daily newsletter here: Sign Up. You can read articles and order alarm contracts on our web site www.alarmcontracts.com
**************************
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
|
