2.4.22 -SSI
How do you measure the growth of your business? Legal expert Ken Kirschenbaum boils it down to just one calculation that’s not too hard to find out or remember.
What your alarm business is worth is probably something you think about often. If you don’t, you should. Most businesses, the alarm industry included, either grow or shrink. Stagnation is not good for business.
How is this measured in the alarm industry? There could be several answers, different ways to measure growth.
- How much did the owners put in their pocket this year compared to prior years?
- How many customers does the business have paying recurring charges; more or less than prior years?
- What’s the net RMR for monitoring?
- What’s the RMR for inspection, and what’s the cost of providing inspections?
- What’s the RMR for service, and what’s the cost of providing service under RMR?
- How many new installations this year com-pared to prior years and what is the profit margin?
A lot to think about, especially when you’re trying to get to sleep. Let me make it simple and boil it down to just one calculation that’s not too hard to find out or remember, so that anytime you’re asked you’ve got the numbers. It’s your recurring monthly revenue.
You should know your gross RMR and net RMR, and once you know it you should break it down for a few different categories: residential; commercial security; commercial fire; leased systems; monitoring RMR; service RMR; and inspection RMR.
Most, not all, alarm businesses work with the RMR model. Those that don’t focus on sale and installation and per call service, a model favored by those selling cameras and access control, though even those systems can be folded into the RMR model.
Subcontractors working for other alarm companies don’t typically have RMR built up and their success is measured by the monetary bottom line at the end of the year.
Alarm companies that don’t use the RMR model can sell only one way, EBIDTA (earnings before interest, taxes, depreciation, and amortization). EBITDA is a measure of a company’s financial performance and profitability. High EBITDA is better than lower EBITDA.
Industries vary widely in their financial performance and the best way to determine whether a company’s EBITDA is “good” is to compare its number with that of other companies of similar size in the same industry and area.
Again, most alarm companies use the RMR model, and their valuation is based on the “going multiple” for RMR alarm accounts. That multiple can have a wide berth from low to high based on many factors that potential buyers of alarm accounts consider.
I’ve addressed many of these considerations in prior articles and they haven’t changed. What I really want to address here is where today’s multiples stand. Once you know your RMR, what can you anticipate in the way of offers if you want to sell your business? And what business are you selling?
You will find that potential buyers are interested in your alarm accounts that pay RMR. They may be willing to buy your vehicles and new inventory, but that’s about it. Don’t expect a separate number for your phone number or domain name or website.
In my opinion the multiple hasn’t changed the past many years; it’s still 35 times your net RMR. That doesn’t mean you’re going to get that multiple because you may have done more or less than adhere to recommended best practices.
If you’ve done more then perhaps you will get a multiple of 44 or more; if you’ve done less, perhaps you will hear offers of 18 or less. That’s a big swing in price because not all alarm owners run their business the same way. You should be careful to make sure you are headed to the higher multiple, always.
It’s not if, but when, you’re going to sell and there’s no reason you shouldn’t be prepared. Trying to change your operation and your account base once you’re ready to sell is hard to do; improbable because you won’t have the time. For an instant assessment of what your alarm business is worth, go to kirschenbaumesq.com/page/what-is-my-alarm-company-worth.
KEN KIRSCHENBAUM, SSI Contributor
Security Sales & Integration’s “Legal Briefing” columnist Ken Kirschenbaum has been a recognized counsel to the alarm industry for 35 years and is principal of Kirschenbaum & Kirschenbaum, P.C. His team of attorneys, which includes daughter Jennifer, specialize in transactional, defense litigation, regulatory compliance and collection matters.