11.14.22 – SSI – Ken Kirschenbaum
As a business owner, everything you have to spend money on now costs more. If you don’t raise your prices, you won’t keep pace or maintain your profit margin.
Alarm company owners who profess not to know their RMR or company valuation are either lying (maybe to themselves too), naive about business or simply overwhelmed in their job performance (i.e. growing like gangbusters, or chasing their tail staying afloat).
You should have a fairly good idea of your alarm company’s value, equity and potential sale price. However, what impact is recent higher inflation having?
As a business owner everything you have to spend money on costs more for labor, material, supplies and services. If you don’t raise your prices, you won’t keep pace or maintain your profit margin.
It’s hard to get a handle on the state of inflation due to the irrational politics that has affected just about everyone’s perspective and opinions. For example, Google explains that fossil fuels are 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 increase cost of goods. 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 expenses like 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. 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 several 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. Personally, if you are ending up with the same dollars as 2020 or even 2021 you won’t be able to buy as much. Figure you are losing 7% to 8%, so your dollar is worth only 92 cents.
Alarm companies are valued based on their RMR under contract. The multiple offered on that RMR has a wide range from under 15 to 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.
The multiple has been consistent through the years, with 35x a good starting point if you’ve followed best business practices. That multiple hasn’t really moved much, but how it’s applied has changed. One notable change 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, which are typically deducted to get to net RMR.
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. In order for your alarm business equity to grow you must have RMR growth.
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. 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.