September 17, 2011
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Question
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Hello Ken,
I am sure you have seen the news about the Cincinnati Bell sale to Guardian Alarm for $11MM. According to the story, Cincinnati Bell had 15,000 accounts, making the account value over $700 per monitored account. As I understand, Cincinnati Bell has no contracts for their customers (according to their website, they must earn their customer's business every day). Do you think having no contracts greatly reduced the value of this sale?
Vince Raia
EMC Security
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Answer
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No contracts or poorly written contracts should reduce the value of your company. Buyers should be discounting the multiple significantly. Contracts permit you to "contract away liability" and also cement subscriber relations through term contracts. If subscribers can cancel at will then alarm companies would not be assured of a reliable revenue stream. Past history of payment patterns is not as reliable and dependable as term contracts.
Large deals, and that would include $11 million in the alarm industry, often take into consideration other criteria than recurring revenue under contract times a multiple. Large deals may enable the buyer to corner a market, enter a market or compliment its existing business in such as way that the accounts are far more valuable than what the market would generally bear.
For the "average" alarm company you can be certain that well drafted contracts do enhance your business value and operations. I don't know anything about the $11 million deal, but the information reported in the question, 15,000 subscribers, $700 per account, equals a multiple of $23.34 times. That's low. Even at 30 times the price would be $18 million, and 30 is also on the low side if there are proper contracts.