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Question

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Ken, 

    I have a question for you, but for obvious reasons, if you decide to post it, please make it anonymous.

    When selling a security company, the prevailing wisdom is that it is unlike selling most other kinds of businesses. The value is established upon some negotiated multiple of the business's RMR. The rest of the business's assets, it's good name, ongoing sources of sales leads, trucks and inventory, longevity, etc. are simply cast aside as the purchasing company simply adds the accounts to it's customer base and takes over the RMR. The reason is, as I understand it, those other assets are in most cases already part of the purchasing company's existing assets under it's own roof. It (presumably) already has a good name, ongoing sources of sales leads, etc. When selling other kinds of businesses a general rule of thumb is some multiple of the annual gross receipts or some multiple of gross profit. It seems to me this could result in a much higher return. The problem is, an existing security company would laugh you out of the room, because they may have companies lined up waiting to cash out for a simple multiple of RMR. That makes sense if your company makes 90-95% of it's income from RMR.  That's not the case with my company. We've been around over 25 years, are (relatively) very small, about 450 accounts. But we make a significant portion of our income, not just from RMR (and we are very good at adding service plans, 30% of all accounts, as well as cell and texting fees) but from the initial sale of equipment and ongoing service.

    For instance, in 2013 we had gross receipts of $244K from RMR (monitoring, cell fees and service plans) and $220K from Sales and Service. We are not a company that offers free or low cost systems. Our systems range in price from $2500 to $12,000. Although we're almost purely residential, in that sense we're more like a commercial fire alarm company. We make a very high profit on sales and service, which is not reflected in a simple multiple of RMR.

    Could it be that for those of us in this position, we're looking at the wrong market to sell our company's assets when retirement day rolls around? Perhaps, rather than selling to a competitor (which has inherent issues all it's own) we should be looking at an entrepreneur interested in entering the industry. To someone in that position, our other assets would certainly have real value, at least they would to me. All things being equal, I would much prefer to buy a business that had been around many years, enjoyed very high regard and recognition in the community, and a steady stream of incoming sales leads based on that. If I didn't already have my own company, I would pay significantly more for that business than one without those assets but with the same RMR. Your thoughts please.

anon

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Answer

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    You have a few erroneous assumptions.  While a buyer isn't going to pay extra for "good will", your phone line, web site and domain name and other intangibles, there is no reason you can't receive consideration for your inventory, equipment. vehicles and perhaps other tangible as well as intangible assets.  Every situation should be evaluated carefully looking for its distinguishing issues.  

    Having said that, I cannot emphasize enough that the alarm industry values itself using a formula, and that formula includes the RMR.  The multiple that will be applied to that RMR is going to vary from low to high depending on many factors [which are not the topic of this article, but I'd be remiss and disappoint so many if I didn't mention that using the Standard Form Contracts will bring top dollar].  

    Selling based on a monthly RMR isn't altogether unique in the business community.  Other industries rely on recurring monthly revenue, although I can't think of many that have the strong contract foundation as the alarm industry does.  [one reason for that is that other industries may not need the contractual protection that alarm companies need.  The other reason is that I've been pounding away at the alarm industry about contracts for getting close to 38 years - maybe time to find another industry to harrass !!].  Lot's of businesses sell on the basis of a multiple, typically expressed on annual gross rather than monthly RMR.  So a restaurant may sell for one year's gross.  

    Now for the tough love.  You can sing and tap dance about your successful company all you want.  Your market for exit strategy is going to be another alarm company, and it isn't going to be receptive to your business model [of course there are exceptions and you may find a great buyer, maybe your employees, so this opinion is very general and not specific to your situation].  But someone outside the industry has many hurtles to clear, licensing being the first.  It's going to be a hard sell for you to convince a buyer that your solid reputation and customer referral history is worth as much or more than properly drafted and executed RMR subscriber contracts.  

    That bring me to my final observation.  At the risk of sounding brutal, $20,333 RMR is nice, but after 25 years?  That's less than $1000 RMR growth a year.  Clearly your priorities were [hopefully you have enough steam to change course] misplaced.  I know you think you're in the security business, and you are, but it would be better if you had the mindset that you're in the business of selling recurring revenue contracts.  Had you started that way 25 years ago I am certain your RMR would be in the 6 figures.  That means the difference of a company worth $700,000 instead of $3,500,000.  Planned properly you should not have had to sacrifice the installation from installations or other one time sales.  Your service RMR revenue would probably cover more than 30% of your subscribers.  

    I know this advice isn't what you hoped to hear, and after 25 years in this business may be too late for you to change.  But there are young business people entering the alarm business every day, others still green enough to accept some advice from an old country lawyer.  So, this Bud's for you.

 
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TO SUBMIT QUESTIONS OR COMMENTS REPLY TO THIS EMAIL OR EMAIL Ken@Kirschenbaumesq.com.  Most comments and questions get circulated.

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Webinars

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Topic:  Trade Secrets and Restrictive Covenants. The webinar will focus on trade secrets and restrictive covenants as follows:

                1. will courts enforce the covenants?

                2. what standard must be met in order to obtain relief?

                3. legal strategies for enforcing covenants

                4. definition of trade secrets

                5. required security efforts

                6. non-compete agreements

 

When:   Wednesday, April 2, 2014 12:00 PM - 1:00 PM EDT.

Register here: https://attendee.gotowebinar.com/register/2621949660828025601

Presenter:  Judge Ruth B. Kraft, Chair, Employment Law Group, Kirschenbaum & Kirschenbaum, P.C.

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Speaking Engagements

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SentryNet's 19th Annual Dealer Conference.  April 22 - 24, 2014 at Harrah's in Tunica, MS.  register at http://www.sentrycon.us or call Peggy at 800-932-3304 for more information.   www.sentrynet.com

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Northeast Security & Systems Contractors Expo  Thursday, May 22, 2014 10 am to 5 PM at  Royal Plaza Trade Center,  Marlborough, MA.  registration  https://www.expotracshows.com/neacc/2014/  Presentation on Alarm Law issues and Q&A will be at 2 PM.  For more info contact Gary Spaulding, NEACC President

207-384-2420 gary@spauldingsecurity.com
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Alabama Alarm Association.  AAA's Fall Meeting and Trade Show - October 21, 2014 from 3 to 5 PM at DoubleTree Hotel 808 South 20th Street Birmingham, AL 35205  for more info contact AAA Executive Director: director@alabamaalarm.org  (205) 933-9000 

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Electronic Security Summit for 2014.  October 22-24, 2014  at the landmark Broadmoor Hotel. Colorado Springs, CO.  For more information contact Alexander J. Quirin, CEO & Managing Partner, Advisory Summit Providers, LLC.,  (786) 999-9738    alex.quirin@aspsummits.com    www.aspsummits.com