Selling alarm accounts today
The market may be active, but there are always some key variables to consider before a sale
By Victor Harding
The market for selling alarm accounts is quite active today in Canada but along with that is the need to remind sellers about a few important topics.
It is critical that as a seller you pass on accurate information about your account base to the buyer. When it comes time to sell, don’t just ballpark your number of accounts and their RMR. Look at your most recent wholesale monitoring bill and your last 12 months monitoring revenue to get at your RMR. Overestimating accounts/amount of RMR by five per cent may not seem like a big deal, but when you are multiplying the actual RMR by something like 36X, a $2,500 difference in the account base RMR equates to $90,000.
Holdbacks percentage most likely will be higher these days. Fifteen per cent (as opposed to 10 per cent) is a reasonable holdback to expect these days. Why? Contrary to what you may read, many dealers are losing more accounts in these virus shut-down days than they normally would. Secondly, for the buyer, it is all about risk. When times are more risky, holdbacks go up!
Your average monitoring rates are critical. Do the math. Higher average rate accounts mean higher gross margin per account. Higher gross margin means the buyer can pay more and get their money back faster. If your average rate on your account base today is below $20/month when lots of accounts have cell and interactive service, you won’t likely get the best price when you sell. In some cases, the buyer may pass altogether.
Which panels you have installed matters more than ever. Buyers do not want to buy old “clunkers,” regardless of how well they work! They want panels that can take cellular and interactive service, because that is way the industry is going. If a buyer sees a bunch of older panels, they immediately think upgrade costs and that could mean a lower price or no deal at all. In addition, a buyer will place extra value on downloadable panels that are actually being actively downloaded. Who wants to roll a truck today if they don’t have to? Finally, as alluded to above, today an account base with 50 per cent cell or interactive service on them is worth more than an account base with only 25 per cent.
Very few alarm account bases these days are growing. In fact, based on what I am seeing, many account bases are actually shrinking. This could be partly due to the pandemic, although I think this was happening before the virus hit. Shrinking bases mean less money when you sell because you have fewer accounts to sell but also because buyers don’t like to buy shrinking bases so they pay less. Unless you are a high-volume door-knocker or are very good at selling custom-designed smart home security, it is tough to grow an alarm account base today. Note to dealers: compare your alarm account base today to what you had a year ago and ask yourself, is this pattern going to continue? My guess is that it is only getting worse as the telcos step up their campaigns.
Commercial accounts are more attractive than residential these days. For the most part, commercial accounts have higher rates, generate more service and upgrade revenue and are less likely to cancel. Moreover, in Canada the telcos are making it almost impossible to compete in the residential market. If I had a middle-of-the-road-priced residential account base today, I would definitely be thinking of selling.
Every seller of alarm accounts will have to produce a detailed listing of their accounts, with all the monitoring and billing info. So be prepared to compile one no matter how big or small you are. I call this list the Acquisition Spreadsheet. Each buyer has their own format for this spreadsheet but they all get at the same information. This spreadsheet not only helps calculate the purchase price but also gives the buyer all the billing info for the accounts once they take them over. The problem is that not only is it critical that the list be totally accurate and include every account, but it can be very time-consuming to do.
Be realistic about the multiple you will get. Multiples are simply not as high as they were 18 months ago. This is partly due to the pandemic, but also partly just a general pull back coming from buyers. Moreover, I am not seeing any crazy high multiples from any of the bigger buyers. I have not seen any deal go beyond 40X in at least 18 months. Alarm accounts still hold great value and are still very saleable, but I would describe the market today as being more discriminating and more restrained.
Victor Harding is the principal of Harding Security Services (email@example.com).