KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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Comment on how to value Contract for repair and inspection service RMR
January 16, 2023
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Comment on how to value Contract for repair and inspection service RMR from article on January 3, 2023
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Ken,
Reading the January 3, 2023 inquiry from Name Withheld who has an opportunity to get a $30,000 repair and inspection agreement from a customer. I did a calculation of the net present value of that agreement. If it has the typical 35% margin for service, renews, and continues to renew, for 12 years, it would be worth $650,835 or 22X RMR. If it only lasts for the original term of 36 months, it is worth around $360,201 or around 12X RMR. The reason why the multiples are so low is that margins on service and revenue are typically much lower than those on monitoring.
As Ken mentioned, the margins on monitoring are fixed, but the cost of service can be unpredictable. While you are correct that service and inspection RMR often changes hands at multiples similar to RMR, a contract this large is going to stand out.
We have participated in transactions in which the RMR was over $3 million and the buyers looked at the large RMR service, inspection, and even monitoring. Customers signing an agreement this large also don’t usually sign the alarm company’s standard agreement, in fact, they hardly ever do. If they even consider the alarm company’s agreement, they will typically make numerous changes to it. Typically, a customer with a monitoring or service agreement of this size will have their own for the alarm company to sign. This is no time to DIY contract negotiations.
We encounter hundreds of “Customer Agreements” during due diligence, and rarely are they acceptable to the Buyers. This is because most Buyers understand the legal ramifications of getting into an agreement that favors the customer. Instead of asking Ken what the Multiple is, Mr. Withheld should be asking him how to negotiate an Agreement that both the customer, and alarm company, can live with.
From a business perspective, these agreements can be a goldmine or they can set your entire company back years. $30,000 per month is a lot of service. At that level of RMR, the customer is going to have huge expectations. If the margins are there, great, but if the customer has negotiated the price down, and it forces you to take technicians out of the field who could be working on other projects, then there is a cost to this as well. How about parts; does the customer require you to maintain parts on hand so that you don’t have any service delays, and, if so, how much is that going to cost?
Most companies with RMR in excess of $100k have some large service agreements and by large I mean greater than $1,000 of RMR. Typically Buyers have issues with these agreements, they are typically prepared by the Customer’s attorneys and have unacceptable provisions, such as unlimited liability, non-assignability, short response times, or other provisions that the Buyer simply won’t accept.
To answer Mr. Withheld’s question what is the multiple, I would answer “depends.” Get a good, enforceable, and marketable, Agreement with the customer. One that you can live with and clearly demonstrate a margin on; then we can tell you what it is worth.
Mitch Reitman
Reitman Consulting Group
Fort Worth, TX 76133
817-698-9999 x 101
http://www.reitman.us
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Response
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This issue presents the opportunity to raise a broader and very important issue for a seller or buyer of alarm accounts, which is, is there any value to Repair Service and Inspection Revenue?
Without benefit of a formal survey, my hunch is that most alarm companies do not offer a Service Plan or Inspection Service for a fixed monthly [annual or for the term of the agreement, whatever that may be] price. Any of these type deals would fall within the RMR model since we would simply divide the Charge by the billing cycle to arrive at recurring monthly revenue. Most alarm companies [especially most alarm companies who do not use the Standard Form Agreements – the All in One agreements] provide Repair Service and Inspection Service without contract or with a contract but on a per call basis.
Absent special circumstances, Repair Service and Inspection Service revenue that is not paid pursuant to a written contract on a recurring basis [monthly or otherwise] is generally not worth anything on a sale of the customer accounts. This is often received as harsh news by a Seller who either doesn’t have a clue why or thinks that surely there is someone who wants to buy the “great opportunity being offered for sale”. Well there might be but evaluating that asset is what we would call sui generis, which means ”unique in its own way”. So that asset would have to be something a buyer really wants, for whatever reason. Very large service or inspection RMR would be evaluated using EBITDA and the revenue would have to be supported by several years of historical payments. Even then the continuation of the relationship is likely to cause a buyer of the account to insist on a revenue sharing arrangement with the seller rather than an outright buyout with the risk of continued revenue from the account shifted to the buyer.
There really can’t be a hard and fast rule on what multiple to apply to specific account or accounts. The variables are many, which is why those of us doing valuations can only offer a range of value. Only a potential buyer can offer a firm multiple, and even then the buyer can impose criteria for what assets that multiple will be applied to and when a reduction, or increase, in multiple may apply.
Finally, there really is no right or wrong multiple or number when considering an offer or trying to figure out the equity of your alarm accounts and alarm business. There are ranges of likely value and sometimes when you’re selling or buying you just need to get lucky.
If you want a inexpensive and quick valuation go to https://www.kirschenbaumesq.com/page/what-is-my-alarm-company-worth
Here’s wishing you much luck in 2023.
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To order up to date Standard Form Alarm / Security / Fire and related Agreements click here: www.alarmcontracts.com
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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
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