The alarm industry is picking up speed
I want to pass on some information I have learned from the security market over the last year.
December 9, 2014 By Victor Harding
1. If you are a Canadian alarm dealer, have more than 750 alarm accounts and are looking to sell, there are U.S. buyers (other than just ADT) interested in your base as well as Canadian buyers. These U.S. buyers will likely want to leave you and your company in place, paying you to service the accounts and buying new accounts that you put on. However be prepared for a much more rigorous due diligence process than you would get from a Canadian buyer.
2. Some dealers forget there is a double benefit in having monitored accounts with higher rates when it comes time to sell. Not only is your purchase price higher because your rates are higher, but often you will get a higher multiple on those higher rates as well.
Selling 1,000 accounts at $20/month might attract a multiple of 32x RMR or a gross selling price of $640,000 before any deduction for prepaid revenue. But the same 1,000 accounts monitored at $25/month will get you 1,000 x $25 x 32 = $800,000 just from the higher rates but most likely a higher multiple as well — e.g. 1,000 x $25 x 34 = $850,000. That is an extra $210,000.
3. The conventional wisdom that alarm dealers should always hang onto their alarm accounts is not always true. If I owned a sizable block of accounts (say 3,000 or more) I would look at two factors every year to determine my course of action: my attrition rate and my cost to create a new replacement account. The numbers that I see indicate that attrition numbers are creeping up, probably because of the recession.
As annual attrition rates climb, it becomes less attractive to hold onto an alarm account base because it takes more replacement accounts to stay even. A company with 3,000 accounts experiencing eight per cent attrition has to replace 240 accounts very year.
4. From now on, I am going to suggest to all my sellers that they think about negotiating a one-time, purchase price reduction for attrition up front with their buyer rather than go through the hassle of managing a holdback of 10-15 per cent over the year after the deal is done. This process can cause friction between the buyer and the seller.
5. The future for the alarm industry looks good. The industry weathered the recession better than most. The number of monitored accounts in the U.S. rose substantially just in the last year. There are new players coming into the industry — cable companies and telcos. Average monitoring rates are climbing primarily due to new interactive panels. Penetration rates are going up beyond the magic barrier of 20 per cent. The Internet is proving to be a reliable conduit for alarm signals. Finally, there is a lot of outside money interested in the alarm industry today.
Victor Harding is the principal of Harding Security Services (www.hardingsecurity.ca).
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