EBITDA Mystery Made Simple- September 4, 2013

The article below by Dorsie Mosher of the Davis Group explains EBITDA. As you know in the alarm industry valuation is almost always based exclusively on a mulitple of RMR. One reason for this method of valuation is that alarm companies don't generally sell their on going business, they sell their subscriber accounts. The buyer therefore is not taking over an operation but purchasing subscriber accounts that will more than likely be integrated into the buyer's operation, hopefully consolidating and reducing expenses. We have a general idea of what RMR is worth, though the range is fairly wide based on a number of factors [whether you're using the Standard Form Contracts being one of the important variables]. The valuation of RMR is a function of this multiple times the aggregate monthly charges. When valuation is done on EBITDA you come up with a number that is multiplied by a factor of 3 to 6 times. The EBITDA method may be suitable for the very large transactions and financial institutions may be more accustom to this valuation method, but for now we will stay with the RMR method in this industry for the forseeable future. Get a quick valuation of your company at WhatsMyAlarmCompanyWorth.com

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The EBITDA Mystery Made Simple

It's not some new motion detector, but an excellent measure of company value.

EBITDA is a measure of a company’s financial success. The acronym means Earnings Before Interest, Taxes, Depreciation and Amortization. The formula used to calculate EBITDA is:

EBITDA = Revenues – Expenses (excluding Tax, Interest, Depreciation and Amortization)

EBITDA is essentially net income with interest, taxes, depreciation, and amortization added back to it. The formula can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. Investors tend to rely on EBITDA in preference to RMR because EBITDA provides insight as to how much cash will be generated to pay debt and fund growth. By contrast, a company can have $1 million of RMR and still be losing money, which is certainly not what the investor is looking for.

Integrators have traditionally had to rely on EBITDA to create corporate value because they had minimal contracted RMR.
The astute integrator has figured out how to make money on the install and how to create Recurring Revenue. Alarm companies need to do the same.

Dorsie Mosher

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