News Lessons Learned Opinion
25 years of alarm deals

In honour of SP&T News’ 25th anniversary, I am going to focus on how alarm company acquisitions have changed over the last 25 years.

I completed my first purchase of alarm accounts in 1996 while working for Alliance Security. The deal involved about 150 accounts bought from an Alliance dealer in London, Ont.

At the time, some dealers were falling behind in their wholesale monitoring payments to us. This was primarily because the pricing for alarm systems had dropped significantly over the preceding 12-18 months. For the first time ever, dealers were offering a basic system for next to free in exchange for a three-year monitoring contract. What amazed me was how quickly this new low-down pricing affected a typical dealer’s cash flow. It only took about six months of sales and a dealer could already be behind in their monitoring bills.

By 1996, larger Canadian alarm companies had already started to buy alarm accounts in bulk. They quickly recognizing the hidden value that alarm monitoring had, i.e. high-margin recurring revenue that had a potential life span of eight to 10 years on average. Put that recurring monthly revenue (RMR) into a Return on Investment template and it quickly became obvious a buyer could pay anywhere from 24 to 36 months of RMR and still make a good return. This was the basis of the M&A market for alarm accounts. American private equity got into the act quickly and bought into a couple of the larger Canadian alarm companies.

That year was also about the time that authorized dealer programs began to spring up — first in the U.S. — based on the same principle as bulk acquisitions. Pay a dealer a multiple of monitoring revenue of anywhere from 24 to 36 months in exchange for a new three-year monitoring contract. Soon there were several high-volume marketing companies selling and installing 100 new systems per month in exchange for large amounts of money paid to them monthly.

As can often happen when growth is emphasized over profitability, some of the bigger Canadian buyers of alarm accounts started to pay too much and spent not enough time on managing their attrition. Multiples in the late 1990’s went up to the high 30s; attrition climbed to 10 per cent and above.

But despite some setbacks, the bulk buying and dealer programs has carried on from 2000-2020 primarily because there were dozens of alarm companies out there as potential acquisition targets. If you were an owner being offered $800,000 for your 1,000 alarm accounts, it was too tempting an offer to ignore.

How have alarm account deals changed over the last 10 years? Truthfully more has stayed the same than has changed. Most deals now deduct the fixed line costs of cell or Alarm.com from the gross RMR before calculating the purchase price. Most deals take some kind of deduction for deferred revenue. And finally most deals take a 10-15 per cent holdback for attrition.

However, it is important to note this market for accounts would have developed more if it was not so difficult for a midsize alarm company to get access to acquisition financing to grow their account base.

For the most part, the Canadian chartered bank system does not attach much value to alarm RMR. Not so in the U.S. where there are many sources of financing. This has bothered me so much over the years that I began working with one of the Canadian chartered banks to help them understand the unique value of alarm RMR.

Allow me to comment on a couple of other practices that have developed in the last five years or so. I think it’s unfair that so few of the bigger buyers today will buy the shares of alarm companies. This was not the case 20 years ago. The difference in take-home pay between a share and asset deal for a seller today is enormous (well over 30 per cent) and for alarm account buyers to deny an owner the opportunity to use their one time capital gains allowance is grossly unfair, in my view. Take a small hold-back to cover undisclosed liabilities if you must and lower your multiple offered a little to reflect the fact that you cannot write off the purchase price — but do the share deal. In the fire and guarding industries, share deals are done all the time.

Secondly, I don’t like the U.S. approach of having every single account contracted. For many years, some of the larger companies operating in Canada bought account bases where some or even many of the accounts were not contracted and nothing bad happened. Buyers generally have liability insurance and if necessary, can contract the accounts after.

Finally, I think billing most of your accounts annually (as opposed to using monthly PAP) is antiquated, and I don’t agree with buyers taking a full deduction for deferred revenue on their deals.

But in summary, the alarm account acquisition market, just like SP&T News, has done quite nicely over the last 25 years.