KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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Alarm account valuation and inflation
May 20,2022
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Alarm account valuation and inflation  
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            Many alarm company owners [like most business people] keep an eye on their business equity.  Taking account of business worth and self-worth is a natural phenomenon among business people.  Alarm company owners who profess not to know their RMR or company valuation are either lying [maybe to themselves too], naive about business [to put it nicely] or simply overwhelmed in their job performance [which may mean they are going and growing like gang-busters, or just chasing their tail staying afloat].  Simply said, you should have a fairly good idea of your alarm company's value, equity, potential sale price [and if you really don't then get a simply valuation every year from What's My Alarm Company Worth. The least expensive option is $80 and just filling out the order form questionnaire and getting a quick response should be enough to satisfy your curiosity and encourage best business practices to grow the equity. 
            So what's going on with our economy today?  Inflation.  What is that? Simply, an increase in money supply and rising prices.  As a business owner you will find that everything you have to spend money on will cost more, from labor, material, supplies, services.  If you don't raise your prices [doing your part to contribute to inflation] you won't keep pace and you won't maintain your profit margin.  Interestingly government makes out because it collect more in taxes because everything costs more.  Of course everything the government buys or supports also costs more too.  Borrowers theoretically make out because they are paying back their fixed rate loans or payouts with "inflated" money.  Lenders can't raise the cost of borrowing if it's a fixed rate loan.  Floating rate loans are of course inflation proof for the lender since it just raises the interest rate and the payment. 
            It's hard to even look up what inflation is because of the seemingly irrational politics that has affected just about everyone's perspective and opinions.  The ability to present one's personal agenda is hide in mass communication.  For example, in looking up "inflation" Google explains that fossil fuels is a major contributing factor.  Well, if you cut off supply costs go up.  If the product you are cutting off and causing price increase happens to effect just about every product either made or sold in this country then of course that contributes to higher cost.  Trucking costs alone significantly increases cost of good.  Employees need more pay if they are commuting to work and buying lunch at the local deli, where prices have also increased.
            You have to increase your charges for alarm installation and service because your cost has increased.  You are paying more for labor and supplies; you are paying more for all your business expenses from gas, rent, insurance premiums, advertising, vehicles, accounting fees, legal fees, monitoring charges, equipment and material.  Either you eat the increase or pass it on to your customer.  Your commercial customers will try and pass on all their rising costs to their customers, just like you're trying to do.  Residential customers don't have that ability but they can try and get increases in their employment compensation.  Unfortunately the government hand-outs over the last few years has only made things worse in the long run, though it no doubt offered welcome relief to the recipients.     
            So is your alarm business growing?  What was your RMR in 2018, 2019, 2020, 2021?  How's the graph look for those years, up, down or flat?  You should have the first 4 months of 2022 under your belt; what does that graph look like for RMR?  Run two graphs, gross RMR and net RMR, because you're only hanging on to the net RMR. 
            Especially because of inflation, cheaper dollars, you should see a rising graph.  Unfortunately the "cost" graph is also rising.  When all is said and done you can calculate what ended up in your pocket.  Here's how inflation matters to you personally.  If you are ending up with the same dollars as 2020 or even 2021 you won't be able to buy as much.  In fact, figure you are losing 7 to 8 percent, so your dollar is worth only 92 cents.  You need to see your own net income rising in order to keep pace or get ahead of inflation.
            Alarm companies are valued based on their RMR under contract.  The multiple offered on that RMR has a wide range from under 15 to over 40.  How the RMR is finally calculated has different criteria as well, so that one potential buyer of your accounts may be willing to calculate the RMR at ABC while another potential buyer is willing to calculate the RMR at XYZ.  It would be overly simplistic to look at the multiple.  I think the multiple has been rather consistent over the years.  35 times is still a pretty good starting point if you've followed best business practices.  So that multiple hasn't really moved much.  But how it's applied has changed over the years.  One notable change that I've noticed is basic central station charges.  Those charges used to be deducted from gross RMR to get to net RMR.  The trend over the years has been not to exclude those charges.  That essentially increased net RMR.  But then third party vendor monitoring charges arrived, and those charges are typically deducted to get to net RMR, and for many companies these third party vendor charges are part of most of the monitoring account charges. 
            So while the overall methodology of valuation remains consistent there are new categories and considerations.  It should not be surprising to learn that in order for your alarm business equity to grow you must have RMR growth.  For most of you it won't take an accountant or consulting firm to enlighten you.  Check your gross and net RMR, check your debt if you have any, check what you're taking home and whatever perks you take.  You end up with more or less in your pocket [assuming your personal work remains the same; ie you haven't taken on the work of two technicians or the office clerical help you let go so you reduced expenses and increased your bottom line].   With inflation you need to end up with 10% more than last year just to stay even.  Same goes for the valuation of your alarm business.  Staying even in years of inflation means 10% growth. 
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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