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Question
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Ken,
I've been involved with our alarm company (usually ou of necessity) for the past 15 years. I think it's time to pass it on. We would like to keep 350-380 of our monitored accounts for our retirement and pass the business on to our son. Two generations of "chiefs" are at best difficult to work with. I feel like the referee. I realize that we have to do this with more than a handshake.
Is there a formula to determine what we would pay our successor to service our group of accounts should we not be available to do this?
We or would like to "gift the name and goodwill to our son and his wife. I just want to be sure that we dot our i's and cross our t's so that there are no issues that come up. All of these little things that come up- such as if we lose a customer due to them not being serviced in a reasonable amount of time should we expect to be re-imbursed by having him transfer one of his accounts to us? Are we better off hiring someone to do the monitor billing for our customers or to pay our son a certain amount to do it. We are an LLC and have our books split into 2 different parts(not companies) 1 that does the installs, service etc. and one that does the monitor billing quarterly. We do use your contracts for our customers. If you can point me in a direction I would appreciate it.
anon
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Answer
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Transferring part of your alarm business, retaining part, engaging another company [even one owned by your son] to service your subscriber accounts and perhaps do your internal bookkeeping, turns out to be a rather complex matter, certainly one you can't accomplish without competent counsel and accountant advice. You start with gift tax issues, which at the moment are very percarious because of the possibility that tax laws are going to change in 2013. This year may be a most opportune time to effectuate a transfer and take advantage of the life time unified gift and estate tax of $5.2 million. A tax attorney or accountant with CPA is your best professional to provide advice in this area.
Establishing a contractual relationship between your alarm company and your son's is another matter. There is nothing wrong with that relationship. I doubt there is a formula for pricing; it's more a matter of negotiation. The company providing the service will want its costs reimbursed and you will want to make some profit. You know the cost of providing the service so you are in a good position to figure out what expense your son's company is likely to have servicing your accounts. You will need a lawyer to properly document your business plan. You can rely on the Acquisition Team at Kirschenbaum & Kirschenbaum PC. Contact Jennifer Kirschenbaum,Esq., at 516 747 6700 ext 302.
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comment on article on August 39, 2012
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Dennis, your logic is flawed. Almost all of us in the industry have a creation multiple for RMR. The creation multiple may exceed the purchase multiple. The P&L tells the story. Only a fool would buy the same profit or cash flow twice.
Denis Cooke, President
All-Guard Alarm Systems, Inc.
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Response
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I think what this comment is in response to is that when selling an alarm business the typical deal is structured around a multiple times the RMR. EBITA is another way of valuing a business. You can't really use both valuations and add them together for a purchase price, at least not a full value. Here is the article from August 30, 2012
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Ken
I read most of your daily e-mails. Your e-mail on August 17, 2012 on Selling accounts or your Business is most interesting. I have been in the Alarm-Security Business for well over 35 years. I have owned built and sold 31 Alarm-Security Businesses in 17 cities. I am a Broker & Coach that helps people Buy & Sell Alarm Businesses. I have acted as the Broker on over 100 transactions that were sold to about 50 of the most active Buyers. I have used your contracts in my companies for years, and never had a lawsuit, where your agreements were used.
A key suggestion to many of your clients, make sure “THEY SELL THEIR BUSINESS TWICE” Most brokers and Buyer are focused on selling the account base and the “Reoccurring Monthly Revenue (R.M.R.). They do not spend the time needed to sell the Operation side of the Business. Many owners of Alarm-Security Businesses today are focused on The “Integration” side of their Business, and not the R.M.R. As a Broker I find many reasons why my Buyers will pay the top Dollar for the R.M.R., but most of my time my energy goes into Selling the operation side of the business. I get the Buyers to focus on each and Every Profit Center of the Business. The Operation side of the Business is worth 4 to 5 times net earnings after you remove all income and expenses related to the R.M.R. Most Buyers will tell you that when they pay you top dollars for their R.M.R., they are including the operation side for free or an amount about 10% of what it is worth.
A key element that I make very clear to my Buyers is a key Item that is not on the P & L or balance sheet. Most monitored accounts that produce an average of $30.00 per month are worth $1,000 to $1,200. If you add 15 new accounts per month, that is an Equity gain of about $15,000 per month or about $180,000 per year. This type of volume and activity should add about another $300,000 to the purchase price.
Dennis Riley
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Response
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Good points. Although certainly the most common criteria for alarm company valuation, RMR is not the only one and often companies have characteristics that call for other creative ways to value and package the business for sale. A knowledgable broker in the alarm industry should be able to assist. Remember the time to seek advice and assistance in the sale of your company is right now. Why now, even if you're just getting started in the business? Because one day you'll want to sell and if you've conducted your business with that in mind from the start you will be in a much better position to maximize your company value.
Once ready to sell, engage competent counsel and other professionals to guide you, before you make a deal with someone. The Acquistion Department in my office will assist you before you commit to things you shouldn't, and guide you to ask for things you haven't thought of. We're always available. Call me, Jennfier Kirschenbaum at 516 747 6700 x 302 or Dennis Stern at 516 747 6700 x 323. And while you're at it, upgrade your contracts. It's going to be the first question I ask you.

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On February 27, 2012 I circulated an article of what buyers would be interested in when looking for a company, the reverse view of what a seller should be presenting to potential buyers. The article can be read at
https://www.kirschenbaumesq.com/article/what-buyers-of-alarm-accounts-should-consider-february-27-2012

Keep in mind that the Acquisition Group at Kirschenbaum & Kirschenbaum PC is skilled in the alarm industry and here to represent you in either buy or sell alarm transactions. Give me, Jennifer Kirschenbaum, Esq or Dennis Stern, Esq a call.

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