Creating Alarm Account Value
By Peter Flynn, Managing Director, Mark Sandler, Managing Director, Security Performance
Patners, LLC
(This was first published at GraybeardsRus, a division of the Davis Marketing Group.)
From time to time, all business owners are interested in what the value of their business, or
their alarm accounts are worth. There are several factors that contribute to the value of
business, and accounts in our industry.
By definition the market value of a company’s assets, including alarm accounts, is the most
probable price which they should bring in a competitive and open market under all conditions
requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and
assuming the price is not affected by undue stimulus. There are several factors which impact
what a buyer is willing to pay.
In our industry, valuations are often measured by multiple of recurring monthly revenue, or
RMR. However, the critical financial factor in valuation is the cash flow that the assets of a
business generate. One common measure of cash flow is EBITDA, Earnings Before Interest
Depreciation and Amortization. This is a measure that calculates the cash generated by the
assets before the payment by the owner or business for interest on debt, taxes, and accounting
adjustments. It is the measure of the cash that the assets would generate for a buyer. Buyers
may make additional adjustments to this number for the creation costs necessary to replace
attrition in an account base. The buyer may also calculate incremental cash flow, or the cash
that the accounts or assets will generate after economies of scale are realized post closing.
Sellers should not expect, and it is unusual for buyers to give, the full benefits of these
economies of scale when valuing assets.
Because the key financial factor in valuation is cash flow, there is often not a significant
distinction made between the valuation of all of the assets of the business and the primary
assets being acquired: the recurring revenue accounts. In the instance where a significant foot
hold is being established in a market, which a buyer could not otherwise efficiently achieve, a
premium of multiple may be applied. In this case, a buyer may require the purchase of all of the
assets of the business, in order to be able to service the accounts on an ongoing basis. In any
event, in most acquisitions, the buyer may require a minimum amount t of asset (inventory,
vehicles, etc.) be included in the sale to eliminate the need for additional cash expenditures by
the buyer post closing to service customers. In addition it is important to note that all RMR is
not equal. RMR associated with monitoring creates more cash flow than monitoring that is
associated with service agreements
Because cash flow is the key metric the quality of RMR and customer accounts (the key cash
flow generating asset) is critical. Several factors are considered in evaluating the quality of
RMR. Accounts Receivable aging is a key indicator of RMR quality. Buyers will evaluate the
accounts receivable based on the numbers of days from due date that customers take to pay
their bills. Typically buyers will consider customers aged fewer than 60, or 90 days as having
good or “qualified RMR”. Typically RMR with aging over 90 days is not valued. In addition,
account bases that have large numbers of customers that continually are over 30 days tend to
be discounted in terms of value.
The quality of the underlying contacts for a customer accounts is also critical. Written, signed
contacts with key legal language are critical. Contract lengths vary, but buyers typically will look
for minimum terms of 36 to 60 months with evergreen or automatic renewal language in
jurisdictions where this is legal. In established companies, buyers may accept shorter lengths
of contracts for customers that have excellent payment histories for several years. Owners
should consult an industry attorney if they have questions with respect to their contracts.
The key measure of RMR quality is attrition. Cash flow is reduced by the cost to create
replacement accounts. Attrition is indicative of several quality characteristics in a customer
base including the initial consumer underwriting done at sale, quality of service, and quality of
installations. The lower the attrition in a customer base the higher the cash flow and the higher
the valuation.
The ability to have access to meaningful, well organized information also impacts the value of a
businesses assets or account. The ability to obtain accurate and information regarding an
account t base gives a buyer confidence that they know what they are buying and eliminates the
fear of the unknown. Owners of businesses should invest in accounting and financial reporting
systems well in advance of contemplating a sale. In addition, contracts and service files should
be up to date and kept in accessible, organized fashion.
Other operational factors will contribute to value. Consistent, quality installations with quality
product reduces service cost and increases cash flow. In cases where a third party central
station is used, accounts should be exclusively programmed to phone lines controlled by the
account owner. In the event of a sale, the transition cost of reprogramming accounts if it is
necessary will reduce the value of the accounts.
All of these quality factors will also impact the terms at which a buyer will purchase assets or
accounts. Holdbacks and RMR guarantees are typical in transactions in the market today.
However, the amount and length of the holdback, and the terms of the guarantee, are all
impacted by quality factors.
Owners of alarm businesses that focus on these quality factors will have assets that generate
good cash flow. These types of businesses will always be of premium value to buyers.
By Peter Flynn, Managing Director, Mark Sandler, Managing Director, Security Performance
Patners, LLC
(This was first published at GraybeardsRus, a division of the Davis Marketing Group.)
From time to time, all business owners are interested in what the value of their business, or
their alarm accounts are worth. There are several factors that contribute to the value of
business, and accounts in our industry.
By definition the market value of a company’s assets, including alarm accounts, is the most
probable price which they should bring in a competitive and open market under all conditions
requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and
assuming the price is not affected by undue stimulus. There are several factors which impact
what a buyer is willing to pay.
In our industry, valuations are often measured by multiple of recurring monthly revenue, or
RMR. However, the critical financial factor in valuation is the cash flow that the assets of a
business generate. One common measure of cash flow is EBITDA, Earnings Before Interest
Depreciation and Amortization. This is a measure that calculates the cash generated by the
assets before the payment by the owner or business for interest on debt, taxes, and accounting
adjustments. It is the measure of the cash that the assets would generate for a buyer. Buyers
may make additional adjustments to this number for the creation costs necessary to replace
attrition in an account base. The buyer may also calculate incremental cash flow, or the cash
that the accounts or assets will generate after economies of scale are realized post closing.
Sellers should not expect, and it is unusual for buyers to give, the full benefits of these
economies of scale when valuing assets.
Because the key financial factor in valuation is cash flow, there is often not a significant
distinction made between the valuation of all of the assets of the business and the primary
assets being acquired: the recurring revenue accounts. In the instance where a significant foot
hold is being established in a market, which a buyer could not otherwise efficiently achieve, a
premium of multiple may be applied. In this case, a buyer may require the purchase of all of the
assets of the business, in order to be able to service the accounts on an ongoing basis. In any
event, in most acquisitions, the buyer may require a minimum amount t of asset (inventory,
vehicles, etc.) be included in the sale to eliminate the need for additional cash expenditures by
the buyer post closing to service customers. In addition it is important to note that all RMR is
not equal. RMR associated with monitoring creates more cash flow than monitoring that is
associated with service agreements
Because cash flow is the key metric the quality of RMR and customer accounts (the key cash
flow generating asset) is critical. Several factors are considered in evaluating the quality of
RMR. Accounts Receivable aging is a key indicator of RMR quality. Buyers will evaluate the
accounts receivable based on the numbers of days from due date that customers take to pay
their bills. Typically buyers will consider customers aged fewer than 60, or 90 days as having
good or “qualified RMR”. Typically RMR with aging over 90 days is not valued. In addition,
account bases that have large numbers of customers that continually are over 30 days tend to
be discounted in terms of value.
The quality of the underlying contacts for a customer accounts is also critical. Written, signed
contacts with key legal language are critical. Contract lengths vary, but buyers typically will look
for minimum terms of 36 to 60 months with evergreen or automatic renewal language in
jurisdictions where this is legal. In established companies, buyers may accept shorter lengths
of contracts for customers that have excellent payment histories for several years. Owners
should consult an industry attorney if they have questions with respect to their contracts.
The key measure of RMR quality is attrition. Cash flow is reduced by the cost to create
replacement accounts. Attrition is indicative of several quality characteristics in a customer
base including the initial consumer underwriting done at sale, quality of service, and quality of
installations. The lower the attrition in a customer base the higher the cash flow and the higher
the valuation.
The ability to have access to meaningful, well organized information also impacts the value of a
businesses assets or account. The ability to obtain accurate and information regarding an
account t base gives a buyer confidence that they know what they are buying and eliminates the
fear of the unknown. Owners of businesses should invest in accounting and financial reporting
systems well in advance of contemplating a sale. In addition, contracts and service files should
be up to date and kept in accessible, organized fashion.
Other operational factors will contribute to value. Consistent, quality installations with quality
product reduces service cost and increases cash flow. In cases where a third party central
station is used, accounts should be exclusively programmed to phone lines controlled by the
account owner. In the event of a sale, the transition cost of reprogramming accounts if it is
necessary will reduce the value of the accounts.
All of these quality factors will also impact the terms at which a buyer will purchase assets or
accounts. Holdbacks and RMR guarantees are typical in transactions in the market today.
However, the amount and length of the holdback, and the terms of the guarantee, are all
impacted by quality factors.
Owners of alarm businesses that focus on these quality factors will have assets that generate
good cash flow. These types of businesses will always be of premium value to buyers.
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Security Performance Partners, LLC
