Seven lessons to take into 2016
I had a good year in 2015.
By Victor Harding
Not only did I close some good deals but I learned a few things. Here are some of my take-aways from last year.
1. I often get asked, what is happening with multiples? Where are they at today? My answer is always the same. Multiples will vary with many factors: the size of the account base, the average rate on the accounts, the attrition rate, whether the accounts are contracted and several other variables. But multiples will also vary a lot according to how many bidders there are and who is bidding on an account base.
2. Two key metrics to look at on all account bases are attrition and RMR creation multiple. Both of these metrics should be better on smaller companies than larger companies. Gross and net attrition on smaller companies should be about nine per cent and six per cent, and on larger companies 12 per cent and nine per cent. Gross attrition is RMR lost in a year as a percentage of average RMR during the year, but is different from net attrition which takes into consideration rate increases on existing accounts and resigns or moves. Regarding the Cost to Create (CTC) small companies should have a 20X RMR or under CTC while larger companies, which may rely on dealer programs and acquisitions, will have a CTC closer to 30X RMR. The cost to create new accounts/RMR today is going up due to cell back up and interactive services.
3. Most small companies that I look at selling today make good money on their monitored account operation but the installation and service side do not make money, particularly when the owner’s time/salary is costed into this section of the business. This fact is what makes it difficult for owners to get value for the installation and service side of their business when it comes time to sell.
4. Why do so many national players/dealers/private equity players want to buy monitoring accounts? What is the attraction? The answer is threefold:
• The average attrition rate on monitoring RMR (i.e. eight per cent) is less than the attrition rate on almost all other recurring services — cable, home phone, wireless.
• The penetration rate for security systems is only still at about 20 per cent of the total market.
• The margin on monitoring for larger companies comes in at about 70 per cent.
5. Today’s buyers of larger blocks of accounts tend to look at the concept of Steady State Operating Cash Flow (SSOCF) to determine what they are going to pay for a block of accounts rather than just a multiple of RMR. RMR multiples can vary too much and don’t tell the whole story. Steady State Operating Cash Flow takes into consideration the cost to replace attrition in the account base. A typical multiple of SSOCF might be something like 8-10X.
6. The monthly or annual costs attached to cell back up or interactive suppliers are increasing the cost to create a new account significantly and are becoming one of the biggest costs that an alarm dealer has to deal with. More and more monitored accounts have one or the other of these two services attached to them. Not only should alarm dealers make themselves very familiar with both services and offer them both but it pays to manage the costs and increased revenue attached to each carefully.
7. DIY is coming on strong and may well be here to stay. I am defining DIY here as any situation where the customer buys and installs the security equipment themselves but then hooks up the system to professional monitoring. All security dealers should be prepared to offer DIY services because it looks like it is here to stay and growing. Most of the larger players in the U.S. have set up a DIY process in their business.
I hope you will keep all these points in mind in 2016.
Victor Harding is the principal of Harding Security Services (www.hardingsecurity.ca).