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Ken,
I think that both Dennis Cooke and Riley are correct to some extent [see September 12, 2012 article]. Security companies are typically valued based upon cash flow. During the valuation process it is important to determine the source of the cash flow. A company that has a high creation cost (loses a significant amount on installations) would typically have a lower value than a similar sized company that makes a profit on its installations. A company that also makes money on systems integration and other services may even have a higher valuation. Again it is all about cash flows, and future cash flows in specific. Dennis Riley is correct in stating that a company that is able to add installations at a low creation cost and at a growth rate that exceeds its attrition rate may have additional value. The huge disconnect in alarm company valuations is that they are all expressed in multiples of RMR. While many small to mid sized transactions are valued at a multiple of RMR (the acquiring company knows that they can add the selling company's RMR with little additional cost and isn't interested in the rest of the business) "platform" companies are typically valued more holistically.
Mitch Reitman
S.I.C. Consulting, Inc.
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Response
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Terminology that I am not familiar with. "Creation Cost" - thank you Mitch for defining that. The cost of "creating" the account, typically the installation cost that isn't paid for as well as any expense incurred in finding and obtaining the account. So what's a "platform" company? And they value "holistically"? You lost me and I doubt I am the only one.
Most alarm company owners aren't sophisticated in the details of a sale of their alarm company. They pretty much want to know how much is the buyer offering, what guarantees will I have to give, what can I do for a living after I sell if I need to continue working. Everyone in the alarm industry knows about RMR, and they know that a multiple times the RMR is how the alarm company is going to be valued. That will apply in 95% of the transactions with slight deviation time to time.
But the real question is, what is the multiple. There isn't a listed market maker that sets a multiple day by day like an interest rate. If there was selling would be easy. As negotiable alarm contracts are, they aren't bonds or listed public ally owned stocks. How is the multiple arrived at? I suppose there are at least two ways. A complex financial and accounting analysis, or a gut price. The gut price method is most common in this industry. Sure, I am not talking about multi million dollar transactions, but most alarm company transactions aren't that large. If I had to guess I'd say that most deals are under one million, and probably 90% under three million. Some of the brokers who participate in this forum may have a better guess or the statistics, but I"d be surprised if I am off by much.
The gut method takes into account most of the criteria the complex method does, it just doesn't paper the thought process. Since the buyer of most alarm companies or company accounts are already in the alarm business, they understand what they are buying, much the accounts will cost to maintain, how the acquisition will fit with their existing business, how long it will take to recoup their investment, and whether in the long run they will turn a profit on the deal. An experienced alarm owner may not know what creation cost and a platform company means, but he can sure smell and good deal and one that stinks.
Not sure what multiple you should be asking or willing to pay? Find out at WhatsMyAlarmCompanyWorth.com If you have some time before you need to be thinking about selling your RMR then consider this. By using the Standard Form Contracts you will be able to increase that multiple by as much as 10 times. [before some of the critics response, think about going from no contract or a poorly written one to the Standard Form Contract]
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Ken;
A few more comments and thoughts in regards to selling your Alarm Company.
There are many Owners of Alarm-Security Businesses that wish to pass the business on to a family member. I loved being in the Alarm-Security Business, but my children could see other alternative for their lives, that did not require them being in a 24 hour business. I have worked with many family situations where one or more family members have had the business given to them. I favor the sale of the business to the family member rather than giving it to them. If the family member has worked in the business for a long time, then the price can be reduced by a percentage of what that family member put into the business. The retiring Family member if she or he were the founders or have ran the business for many years, they need to get there cash out and put it in a safe investment. I represent many “Investment groups” that will give the “Retiring Member” all cash for the accounts (the retirement fund). The continuing family management continues to service all the sold accounts and receives all of the referral business from the sold customer base. The new management starts rebuilding their account base, and keeps the ownership of those accounts. I am working with several families right now to help resolve these difficult areas. Other experienced Business Brokers can tell you many stories where the new management ran the Business into the ground. You can be in big trouble with your retirement when more than one person in the family is given the business, major disagreements will arrive. You should get advice from more than 2 advisers when making these decisions. Consult with a Broker-Coach-Consultant who has completed many of these transactions. Ken Kirshenbaum and his associates can give you quality advice.
Recently (August 30,2012) I sent Ken My comments on “Selling Your Business Twice”. A reader indicated that my comments were “Flawed”, most do not think so. Most everyone in the Alarm Security Business today knows they can sell their accounts to one of over 1,000 plus Buyers. When I say you can sell a Business twice, it is happening every week. Buyer will and are Buying accounts and they do not want to buy the Operation side of the business. The Operation side of the Business is sold for its ability to create accounts at low costs and is producing good income from Integration sales. This part of the Business is worth about 3 times the earnings plus added value for the number of new accounts added each month. You do not buy a company that puts on accounts at a cost over 20 times the R.M.R. A reader made a comment about some companies have a problem “The creation multiple may exceed the Purchase multiple”. If that is happening the company owner should hire a good Coach to help correct the problem.
Dennis Riley Broker
“Coach” & Consultant to the Alarm-Security Industry
www.beltwaybrokerage.com
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comment on using contracts
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Ron Petrarca, that is the most reasonable, and sound email I have seen
from any of Ken's readers from years past. I agree some of these
alarm companies cannot see past making a dollar for the day. I know a
dollar today is worth more than a dollar tomorrow. However a dollar
today will cost you for many more dollars tomorrow when you are less
than diligent about your contracts. [Ron's comment was in the September 13, 2012 article]
Eddie Harden, Prestige Alarm
Birmingham Alabama
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Here's Ron's comment; it's worth repeating
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Ken
It is unfortunate that a lot of small companies cannot comprehend the importance of having good sound contracts. Their field of view is limited to getting the job done and receiving payment. The ramifications of being pulled into a law suit because of a loss can be devastating. To me fire alarm installation is even more frightening because the possibility of the loss of life is even greater than intrusion security. Many of your posts reflect that fact quite clearly.
I read your posts every day and I'm amazed at the comments from readers about doctored contracts, neglected service and in some cases their care free attitude towards protecting their business and their lively hood.
No one should attempt to survive in this industry without good contracts and insurance to protect themselves from this lawsuit crazy society.
Regards
Ron Petrarca
Electronix Systems
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