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more on How much can you expect to get for your alarm contracts June 30, 2018

KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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more on How much can you expect to get for your alarm contracts
June 30, 2018
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Note: I just want to remind you that you are getting two duplicate emails from me daily because I am trying out two bulk email service companies. I may end up with only one of them but that's not decided yet so please do not unsubscribe from one. That may be the one I end up staying with. So far the two companies seem to reach different addresses. Feel free to delete one email. If you want to unsubscribe you should do it from both emails. You can always read our emails on our website at https://www.kirschenbaumesq.com/page/alarm-articles
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more on How much can you expect to get for your alarm contracts from June 22, 2018 article
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Ken,
    Your recent post on account value [June 22, 2018 article] obviously hit home with quite a few readers and I am certain that you have gotten quite a few replies. We do quite a few valuations each year for divorces, partner disputes, estate planning and other reasons. Business valuation is a profession, there are rules, approaches, methodologies, and other factors to consider when setting a value. It is interesting to see the ongoing opinions and commentaries regarding ‘multiples.’ It reminds me of teenage boys talking about engine size and horsepower. 
    The Valuation Profession recognizes the IRS’ opinion of Fair Value, stated nearly 60 years ago in Revenue ruling 59-60. 
    Fair market value is defined as the price at which property would change hands between a hypothetical willing buyer and a hypothetical willing seller, both being adequately informed of the relevant facts and neither being under any compulsion to buy or to sell.
    This is it, the general definition of value. How we get to value is a process and much more complicated than comparing account multiples like the teenagers above comparing horsepower. When we value a company (or a group of accounts) we consider the following:
· The nature of a company's business and its history since its inception;
· The outlook for the economy in general and the company's industry in particular;
· The financial condition of the company and the value of its underlying net assets;
· The past earnings and future earning capacity of the company;
· Prior transactions of the company's stock, and/or assets, and the size of the block to be valued;
· The ability of the company to distribute earnings;
· Whether the company has goodwill or other intangible value; and
· The price of the stock, and or assets, actively traded in a free and open market for comparable companies in the same or similar line of business.
      A 40-year-old fire company would be valued differently than a 3-year-old mass market company. A systems integrator with millions of dollars in sales and a small pool of RMR would be valued differently than a commercial security company with most of its revenue from monitoring. 
    We performed a valuation for a large company years ago. It wasn’t just a pool of RMR; it had trademarks, an in-place workforce, distribution channels, a franchise network, and many other components of its operation. Approaching it as an “RMR valuation” would not have worked. In the case of ADT, its stockholders had already performed a de facto valuation. The stock was trading daily at a price, so it was a good indicator of an aggregate value.  Additionally, Apollo was able to purchase the stock for a certain price. There are few publicly held companies in the security business, so we typically value companies based upon their cash flow. For most companies, this correlates to RMR. When we are valuing RMR we analyze the quality and expectations regarding that RMR. Various factors such as attrition rate, the age of accounts, services offered and others enter into our methodology. 
     Buyers typically buy a company’s accounts and the underlying monitoring agreements. If a company has well written, executed, and unmodified, monitoring agreements, a Buyer will have more confidence that the customers will continue to be engaged, continue to pay, and, most important, be less likely to sue in the event of a loss. A Seller with poorly written, unexecuted, and missing (or no) Agreements, gives the Buyer a very low level of assurance of former payment, and, again, most important, a high possibility of litigation with a customer (or their insurance carrier). This is why it is so important to have high quality, executed, and unmodified Monitoring Agreements.
Mitch Reitman
Reitman Consulting Group
Fort Worth, TX 76133
817-698-9999
http://www.reitman.us
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Response
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    As always, thank you for your input and valuable advice. Valuing an alarm company is very different than selling one. If you are valuing for a divorce action, partner buy-out, estate tax or any reason other than a sale of the business or assets of the business, you do have to take many factors into consideration, all those mentioned above by Mitch, and more. But for most of us mere mortals, is that valuation process really worth it - the time, effort and money - when the end goal is to find a buyer and sell the assets [which means almost always, the alarm contracts]? What's the difference?
    We do a quick valuation of the company based on RMR. Sure, the multiple could range from under 30 to over 40 depending on several factors, but if we start at 35 it's going to be close once we factor in the variables. Engage someone to do a more exhaustive analysis and the number might be different, a lot different. In the end, the value is going to be what potential buyers offer and then actually pay.     For the most part, buyers in the alarm industry are not unsophisticated; they have a pretty good idea what your company is worth - how much those contracts are worth, because, in the end, it means "how much it's worth to them - the buyer", and that might be more, or less, based on the buyer's circumstances. Maybe a buyer is desperate to break into a particular market and the seller has a good hold on that market. That company is worth more to that buyer. 
    When the company or its assets are not being sold, only being valued, it's a lot tougher to be confident of the final figure. In divorce, for example, valuations are prepared in very different ways. 
    If you're getting divorced from your spouse or your partner [and I don't mean your significant other] you can call me for the litigation, but call Mitch for the valuation. If you just want to figure out what your alarm company is worth or what offers you should seriously entertain, you can go to www.WhatsMyAlarmCompanyWorth.com and get a quick valuation for as low as $80. For a reasonably detailed analysis select the $350 option. 
    If thinking about selling the best time to reach out to me is right now, not after you shook hands on a multiple and other terms. By the way, I suppose you can call me after you work out the deal, but don't then ask what I think about it - it's too late - you made the deal. Yes if it's not in writing you can withdraw from that crappy deal, but it's a lot easier to call me in advance and find out what you should be looking for.

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THE ALARM EXCHANGE

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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
516 747 6700
www.KirschenbaumEsq.com