KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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Building equity in your company beyond the RMR model / K&K annual party announcement
October 30, 2019
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Party time:
K&K’s annual holiday party will be on December 5, 2019 at Pine Hollow Country Club in East Norwich, NY from 6:30 to 10 PM.  Casual Attire.  Space is limited so please RSVP by November 18, 2019 by emailing our office manager Amy at ALaVeglia@kirschenbaumesq.com  
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Building equity in your company beyond the RMR mode
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Ken,
    You have schooled us so well in the need to protect ourselves and build equity. Thank you for that.  Since we use your contracts, I know I am protected.  
    My questions pertain to building equity. As an integrator, we offer a wide variety of services beyond the basic "monitoring or monitoring plus services contract". The revenue stream brought in from a simple contract is typically many, many times in excess of the base contract. System & code upgrades, tenant improvements, emergency service, add-ons, that is where the bulk of the revenue will come from. Typically this additional revenue is not in an RMR type agreement.
    How then do we value this additional revenue? Does this additional revenue add any residual value to the company? If I am doing 100K per month in gross revenue with only 10% of it in RMR, is the company still only worth a +/- 35X multiple based on RMR?  Would it not be better for the long term picture to roll as much revenue as I can into an RMR type contract in order to build my long term equity?
Thanks again,
anon
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Answer
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    You are on the right track when observing that the typical model for the alarm business is RMR valuation. Be sure to remember that RMR means RMR under proper contract and really ends up meaning “Qualified RMR” or “Acceptable RMR” that meets a multitude of criteria defined in each transaction. Start off right by getting your updated contracts at www.alarmcontracts.com. The multiple certainly varies depending on the subscriber base and many other factors, but the constant is the RMR that your company has on its books and hopefully backed up by properly written contracts.  To get an inexpensive, quick, but accurate evaluation go to WhatsMyAlarmCompanyWorth.com.  
    The RMR valuation method will not of course fit every situation.  However, many companies who think they deserve to be evaluated differently than strictly a multiple of the RMR may not realize that the few characteristics of their company that may make it unique will be accounted for by adjusting the multiple used to value the RMR.
    Having said that, there are also circumstances where there are other reasons to use a different evaluation approach than multiple times RMR.  Your company may be uniquely positioned so that significant revenue is derived through non RMR avenues.  A company specializing in fire alarm installations that makes nice profits on the installations, assuming that book of business can be sold with the business, would be entitled to consideration on valuation.  EBITA calculation could be used and the bottom line is what a buyer could expect to generate and profit from the acquisition.  If you have 1.8 million in sales and you can figure out your profit, if there is one, then there would be a value assigned.  
    Alarm companies, now Life Safety Integrators, and sometimes home entertainment companies, may not be limited to the lease, monitoring and service RMR model, but that is still the traditional way to value an alarm company.  So when I get inquiries explaining that there are other aspects to the business that should be valued, that's fine, but those evaluations are different than the RMR evaluation.
    Finally, to answer your last question, yes.  In the alarm industry the RMR model is still by far the business structure and the most familiar way to value the equity and sell the business assets.
    Be sure to engage competent counsel, [we have a Merger and Acquisition Department in my office; call me, or Jennfier Kirschenbaum,Esq at 516 747 6700 x 302.   
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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301
ken@kirschenbaumesq.com
www.KirschenbaumEsq.com