comment on How much can you expect to get for your alarm contracts June 22, 2018

KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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comment on How much can you expect to get for your alarm contracts
June 22, 2018
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comment on How much can you expect to get for your alarm contracts from June 15, 2018 article
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Ken
            I think you are misleading readers in several places in what you have written in your article on June 15, 2018.
            Firstly you appear to suggest that most Sellers of alarm accounts can expect to get a base 35X for their accounts as long as they have signed contracts which is not true nor should sellers expect that to happen. For example a Seller with 200 accounts priced at $20/mth is not likely to get 35X for his or her accounts even if every one of his accounts were on your contract. If there is a base value to alarm accounts – and I don’t think there really is- it is more likely to be closer to 30X.
            Secondly this article below implies that as long as you have a contracted contract, you can expect to get a very good multiple. This is simply not the case. The value of an account depends on so much more than just having a signed contract. Issues like the size of the base, the average rate on the accounts, the attrition rate and whether they are on call forward lines are also very important.
            Finally you throw around multiples like 45, 50 and 60X RMR as if these are multiples that Sellers might be able to achieve when selling their account base. This is misleading. Those kinds of multiples only happen in very special cases. My experience is unless you have 100,000 accounts and are very strategic to a buyer, you should simply forget about multiples that begin with 5 completely. It is simply not going to happen.  Apollo bought all of ADT for a multiple at 50X or less. Even getting multiples beginning with 4 require the stars to be aligned- an attractive, large account base with fairly high rates, all on contract and call forward line and one that is considered strategic to the buyer. Think about it. In what circumstances would you wait for 45 month before getting paid back a cent on your investment?
Victor Harding
Harding Security Services Inc
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Response
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            Obviously there are many factors to consider when arriving at an asking or offering multiple.  The contract you use is one of the factors, one of the top 2 or 3 factors out of a longer list.  The first question any buyer asks is "what is your recurring revenue under contract?"  The second question is "what contracts do you use?"  A bunch of questions follow:  how many and what kind of accounts?  how much RMR, how is it billed, what is your attrition history, what central station are you with, do you own your own lines, and lots more.
            I have found that companies that have operating procedures that include updated Standard Form Agreements are also careful about most of the other aspects of the business.  In other words, the company has positioned itself to answer potential buyer's questions with answers that will maximize the multiple that will be offered.  When the selling alarm company starts with "no contracts", "old contracts" poorly written or poorly executed contracts", generally, lots of other issues will be present, such as multiple central stations with accounts scattered over lines owned by the central stations, high attrition, unusually high claims history, outdated systems, etc.
            So when I suggest that if you have the Standard Form Agreements you can expect to start your negotiations at 35 times, I meant it.  Whether the multiple will be higher or lower will depend on other factors, but you have a starting point.  I had a call just yesterday from a seller who asked me about another company offering 34 times.  Without knowing much more than he used fairly updated Standard Form Agreements I told him he should get at least 35 times.  
            As far as higher multiples, into the 40s and even higher, there are deals in those ranges.  Those numbers are a lot higher than 35 times, and yes they are not the norm, but those selling companies obviously have done a lot right and have a valuable account base and perhaps operation to sell.  They were built for success and now they are cashing out.  It took long-term planning and discipline to build a successful company, and believe me, using proper contracts was part of the lure that attracted the higher than usual multiple.
            As far as multiples in the 40s and higher are only "very special cases", I can only look to my own experience.  In the last two years I would say that more than 50% of the deals Kirschenbaum & Kirschenbaum represented the seller or buyer as attorney the multiples were over 40 times.  Maybe I'm the common factor. 
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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
516 747 6700
www.KirschenbaumEsq.com