It does not have to be all about the RMR
Most alarm dealers are reminded over and over again that, when it comes time to sell, it’s all about the recurring monthly revenue (RMR).
When you work for a big, national alarm company, there isn’t a staff meeting that goes by that you are not reminded how important RMR is. I can’t count the times that owners told me they did not want to “just sell their accounts.” They wanted to sell everything, with the implication that “everything” included their installation and service revenue. Together, this made the company worth a lot more than just the alarm accounts. Despite this, I always wondered why most small- to medium-sized alarm companies didn’t get much credit for their installation or service revenue when they sold. Nobody had explained this to me.
It took one short session with the VP of a major alarm company to show me why installation revenue was not as valuable as I first thought.
We were working on a deal to buy an alarm company outside Toronto with 1,300 accounts and good installation revenue ($300,000). The seller wanted value for this installation revenue. It seemed like a reasonable request, at first glance, the margins on this revenue were 30 per cent.
After I had bugged the VP Finance enough, he showed me why it was going to be difficult to pay much for the installation revenue. It wasn’t because the buyer could not count on this revenue repeating itself under a new owner. It was because, when you broke the company’s income statement down into various categories of revenue (monitoring, installation and service) and matching costs, it became apparent the installation and service departments were actually losing money. It was the monitoring revenue that was keeping the doors open. Many owners intuitively know this and rightly do not sell their alarm accounts.
Is this the picture with all smaller alarm companies? No, not all — but many. Are there situations where value can be attributed to the service or installation side of the business? Yes, definitely, but this value will tend to come post-closing, not up front. The buyer’s attitude is “prove it to me, and I will pay you.”
The good news is that sellers can and are getting value for healthy revenue that’s not RMR. More and more now, I am getting involved in deals where the seller feels they have value in the installation or service side of their business. Often, some method is being worked out to pay the seller on post-closing performance.
The best example of this was a deal I worked on three years ago where the company’s accounts produced extraordinary amounts of high margin service and add-on revenue. The owner justifiably felt that this made his accounts more valuable. In the end, we agreed the buyer would pay the seller extra multiples once the accounts proved capable of producing the same high margin service revenue under the new owner. The accounts did produce the same amount of high margin service revenue after the deal was closed, and the seller got paid his extra multiples. In this case, it was not about the RMR.
Published in Editorials