KEN KIRSCHENBAUM, ESQ ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE You can read all of our articles on our website. Having trouble getting our emails? Change your spam controls and white list ken@kirschenbaumesq.com ************************************ comments on deferred revenue / a thank you / comment on selling business / webinars April 27, 2019 ************************* Free Webinars - starts in 2 days. Register today *********************** Topic: How to fill out the Commercial or Residential All in One – Sale or Lease form When: April 29, 2019 Time: 12 PM to 12:30 PM New York time Presented by: Ken Kirschenbaum,Esq Who should attend: all sales people who work with these contracts. You should have updated All in One Agreements. The Commercial and Residential forms, in sale or lease format, are filled out in similar manner. Update your All in One now to take full advantage of this webinar. This webinar will be recorded and made available to Concierge Clients [those signed up for our Concierge Program]. Sign up here:https://attendee.gotowebinar.com/register/3023700255575508739 *********************** Topic: How to negotiate the guarantee and holdback in the APA When: April 30, 2019 Time: 12 PM to 1 PM New York time Presented by: Ken Kirschenbaum,Esq Who should attend: owners thinking about buying or selling Sign up here:https://attendee.gotowebinar.com/register/924497262641412354 *************************** Topic: Negotiating terms in Dealer Agreement with your central station When: May 7, 2019 Time: 12 PM to 1 PM New York time Presented by: Ken Kirschenbaum,Esq Who should attend: dealers and central stations Sign up here:https://attendee.gotowebinar.com/register/1815847150023705858 ******************** comments on deferred revenue ******************** Ken, Your response to Ron in your April 16, 2019 email who asked for a definition of deferred revenue was correct, but a bit complicated. It reminded me of the joke, “What do you get when you cross the a lawyer and the Godfather?” “You get an offer you can’t understand.” In your defense, Ron confuses deferred revenue with the treatment of certain components of a transaction. Most accountants live by the KISS principle (Keep It Simple Stu___). The simplest way to explain deferred revenue is to call it what it really is, Unearned Revenue, meaning revenue that has been billed but not yet earned. Here is a very simple example. A customer pays $30 per month and is billed quarterly for $90. The customer is billed on January 1 for the months of January – March. At January 31, the Company has earned $30 of the $90 billing, the remaining $60 is deferred, or, unearned, revenue. If the Company sells on January 31, the Buyer would typically reduce the proceeds (not the selling price) by $60 to account for the portion of the $90 billing that the Seller has not yet earned. This is it. Buyers and Sellers can agree to deduct the unearned revenue or not, but that doesn’t change the definition. The deferred revenue is not a reduction in the selling price. The sales price is the same, the proceeds (what the Seller actually receives) are just being reduced by deferred revenue. As a side comment, most accountants don’t realize this and treat the deferred as a reduction in selling price and the deferred as ordinary income, causing the Seller to pay more taxes (yes, this is complicated but that’s why people like Ken and I are around). If you are selling and your accountant doesn’t understand this, find another accountant. Even if you are not selling, the concept of deferred revenue (again, unearned revenue) is important. Let’s say that you have $30,000 of RMR, $10,000 is billed monthly and $20,000 is billed quarterly and on calendar quarters. On January 1, you bill $70,000, $10,000 monthly and $60,000 ($20,000 x 3 months) quarterly. This doesn’t mean that you have $70,000 of RMR, because on February 1 you would only bill $10,000 for the monthlies (the quarterlies have already been billed). I’ve lost count of how many alarm company owners believe that they have $70,000 of RMR in January and $10,000 of RMR in February. This causes very confusing income statements because their revenue goes up and down depending on the billing cycle. Most of the specialized industry software performs the earned / deferred calculation and lets you know exactly how much recurring revenue you earn each month, but, if you are still using QuickBooks, we can show you how to easily make this calculation. Additionally, if the company is cash basis for income tax, and they bill on November 1, they would pay tax on the billing as it is received instead of when it was earned. This means that they are probably paying tax on most of their January revenue in December. Companies that bill a lot of quarterly customers might get a one time tax deferral by switching to accrual accounting (this depends on the case). Yes, the second part of my response was confusing and complicated and I am waiting for Ken’s tongue in cheek comment. My point is that the concept of deferred (unearned) revenue is simple, but the implications of not fully understanding it, can be costly. Mitch Reitman ********************* Response ********************** Well Mitch, I am certainly glad you cleared that up. Huh? The problem isn't calling it deferred revenue or unearned revenue; the problem is how do handle it at the closing. Keep in mind that too often the reasoning behind how to handle the deferred-unearned revenue defies logic. It's a hard line position demanded by seller or buyer. Why should a buyer allow a seller to keep the deferred revenue without deduction. And, there is only 2 places that deduction can be taken from, the purchase price at closing or from a hold back or deferred purchase price payment, so despite how you bean counters tax it, it reduces the purchase price. Why should seller be charged with all of the deferred revenue. Much of that deferred revenue hasn't been paid. Customers get new bills from the buyer and are told to pay the buyer. Does seller and buyer expect the customer to sort out who gets paid, because the simple answer for the customer is, no one. That would be OK, except the seller has already been charged with the unpaid deferred revenue and it's been deducted from money paid at closing. Why shouldn't seller and buyer agree that they adjust as of closing date and allow buyer to collect all the outstanding receivables, including the deferred revenue [billed buy unpaid] and then pay it over to the seller? This is how I like to do it. On accounts receivables, why should buyer get to buy the A/R at a discount? Why should seller take 30% or 50% or 70% of the A/C at closing. Again, why not just adjust as of closing date, let the buyer collect it and turn over to seller the seller's share, which is the revenue for pre-closing period. Alarm companies confused about their RMR is interesting. I can confirm that too many alarm company owners don't know their RMR or think their RMR is their annual revenue. There are 2 things every alarm company owner needs to know at all times: 1. What the RMR is and how it's broken down for categories 2. That the Kirschenbaum TM contracts used by the company are up to date and every subscriber is signing one, at least one. By the way, Mitch is my tax advisor for the alarm industry go-to guy. K&K Concierge Clients are provided with a free consult with Mitch, so thanks for that Mitch. Contact our Concierge CoordinatorStacy Spector, Esqto sign up for the Concierge Program and take advantage of all the industry perks. ********************** a thank you *********************** Ken Thanks for distributing my two answers over the last few days. I meant to come and see you at ISC West a couple of weeks ago but just did not get there. Your daily blog is a useful tool for most security personnel. You are to be commended for continuing to produce it. Regards, Victor Harding Toronto, ON M4T 1A3 416.925.7474 Cell: 647.290.7902 victor@hardingsecurity.ca www.hardingsecurity.ca ********************** Response ********************** Thank you for participating on this forum and sharing your expertise. ISC 2019 was very productive and I am looking forward to ISC 2020. Hope to see you there. ********************** comment on selling business ********************** Ken Thank You again for all the valuable Information you and your Reader provide in your Legal News Letter. Many Months ago you published an E-mail I sent to you about information your readers should know about “SELLING THEIR BUSINESS”. This e-mail addressed the fact that When They Sell, they need to Sell their Businesses twice. Anyone can SELL the R.M.R. (Reoccurring Monthly Revenue) and get them a fantastic multiple on that most important asset that is not on the Balance sheet. Most of the Better Buyers now will pay an additional price for the Operational side of the Business. In most cases that should be 3 to 5 times the Earnings for that side of the Business. I have helped Seller get $300,000 to $1.5 million for the Operational side of their Business. I would hope that your Readers would spend a little more time looking at their “EXIT STRATEGY” each year, well in advance of their expected selling year. Every Owner of an Alarm-Security Company, or Life Safety Business should spend a couple of hours every year working with a knowable Attorney and a Coach-Broker who knows our Industry. They should get a FREE valuation of their Business each and every years and focus on that most important figure “YOUR EQUITY GAIN FOR THE YEAR”. Your best Business Brokers and Consultants will do that for FREE each year. They will tell you what your Business should sell for today and I would give them a list of Ten Suggestions that will improve their Business in the next year and make it more Valuable. Dennis Riley ******************** Response ******************** I think Dennis' comments are more applicable to the Fire Protection industry where valuation is through EBITDA. The alarm industry [except may the super large deals] are based on a multiple of RMR under contract. Some alarm companies can sell assets other than the contracted RMR, but I think there will need to be unusual circumstances. ********************* CONCIERGE LAWYER SERVICE FOR THE ALARM INDUSTRY PROGRAM You can check out the program and sign up here: https://www.kirschenbaumesq.com/page/concierge or contact our Program Coordinator Stacy Spector, Esq at 516 747 6700 x 304. *********************** NOTICE: You can always read our Articles on our website at ww.kirschenbaumesq.com/page/alarm-articles *********************** THE ALARM EXCHANGE
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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
