QUESTION:

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Ken,

    Can you please clarify what the 32 to 38, on average, is multiplied by:

     monthy revenue of your contracts

     annual revenue of your contracts

     annual gross margin profit of your contracts

     annual EBITDA profitability of your company

     other?

     Thanks

     Michael Martin

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ANSWER:

     The multiple is based on recurring monthly revenue under contract.

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Ken:-

 

           There have been many valid and worthwhile comments about purchasing accounts.  I would like to add a couple of things to consider for those who are thinking about buying.  Determine up front the vendor’s relationship with his customers in regard to service calls.  Of all the acquisitions that I have done the greatest cause of attrition are those customers who were never charged for service calls.  When we do service and send them a bill they kick and scream and complain that they never had to pay for service before and they don’t intend to do so now.  And they leave.  And I have to assume that they are finding some other character out there that will include service for free.  Always ask about the vendor’s policy of charging for service and if they don’t charge walk the other way or cover yourself with a significant holdback over an extended period of time.  Otherwise you will pay for accounts that bail out first time you do a service call, and you may not even be paid for the service work.

            The second thing is avoid those vendors who don’t have contacts with their customers.  Those of us who are even a little savvy about the business know and understand the need for contracts.  If you buy a block of customers who have never had contracts and you send them an agreement way too many of them will kick up a fuss and refuse to sign.  In Ontario we use the valid excuse for residentials that the Consumer Protection Act requires contacts for services valued in excess of $ 50.00, or for services to be provided in the future.  Obviously both conditions apply to alarm monitoring services.  But they still refuse to sign!  As always – buyer beware!

Dave Currie

Damar Security Systems

Sarnia Ontario Canada.

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QUESTION:

Ken

   How is account paying $30 a month worth $1500?

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ANSWER?

    More than likely it's not.  The range for multiples is 32 to 38.  To get top dollar see the article below.  You start by using updated proper contracts, which you get at www.alarmcontracts.com.

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    How do you go about valuing your business?  I get several calls a month asking me that, and asking me to give 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 some 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 then right 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

dont 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.