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Comment on Net or Gross RMR, what should you expect buyer to pay for your alarm accounts
December 20, 2021
Comment on Net or Gross RMR, what should you expect buyer to pay for your alarm accounts from article on December 7 2021
          I agree that the RMR used to calculate the purchase price is a matter of negotiation. In the days of yore the only item that got deducted was the telephone line charges (remember those) which were substantial.  That cost has now basically disappeared with the advent of the digital era, even those line charge costs were the subject of negotiations.  
          But I don't recall any transactions where items like sales tax or general costs of providing monitoring services were deducted.  If one goes down that slippery path then why not deduct income taxes allocated to the revenue generated by the RMR,  the cost of servicing contracted for fire inspection services, or an allocated part of the cost of billing and collections, etc.? 
          It seems to me charges like are reasonable requests for a deduct from the purchase price calculation.  As to other items, they may be the result of negotiations, but I find it hard to understand why any other type of expenses would constitute a valid deductible. Aside from the multiple buyers need to run pro-forma financials to ascertain that the multiple they are offering makes sense in the long term, namely at a 40,36 etc. multiple.  Will the new business generate enough profit to pay for itself in those periods of time and hopefully beyond; if not, then the real price for the purchase will be increased by the amount of additional capital the buyer will have to put into the acquired business.  The calculation should also reflect any cost savings due to integration of the operations assuming they are in the same market.
Dennis Stern, Esq
Merger Acquisitions
Kirschenbaum & Kirschenbaum PC., of counsel
(516) 747-6700, ext.323
          It really doesn’t make much sense for a buyer to pay a multiple on part of the invoiced RMR that is easily identified as a “pass along”.  There is no greater example than Sales Tax, which is quite different than income tax.  Not all RMR is subject to Sales Tax, but when it is, here is how it would play out.  Seller invoices its subscriber $21.74 per month for monitoring, which in the seller’s jurisdiction is subject to sales tax.  Buyer has agreed to pay 35 times RMR.  So, one way to calculate the purchase price for this contract is $760.90.  The other way is to deduct the sales tax from the equation, so the purchase price is $700.00.  That’s $60.90 for each account.  If there are 1000 accounts the increase to purchase price amounts to $60,900. 
          Other charges can be considered pass along also.  Back in the day there were no “third party vendors”, who I’ll define as manufacturers [of equipment but usually of software platforms for monitoring].  There was the phone company and there was the central station.  Alarm dealers who didn’t have their own central station [some of which amounted to a receiver on their bedroom night table] would generally deduct the central station charge from the RMR.  I’m not sure when, but most deals now don’t deduct the basic central station charge.  However, the charge for third party vendors is another matter because those charges can be substantial.  For example, guard service was a charge that was, and still is, routinely deducted from the Gross RMR to arrive at Net RMR.
          The issue is that a buyer doesn’t want to calculate a price based on a pass along.  Seller charges $20 RMR.  There isn’t any sales tax in this jurisdiction, but the account is an “ account”.  That means that alarm communication passes through’s portal on its way to either the central station, to the subscriber, or both.  In any event, charges a fee for providing it’s communication pathway.  Let’s say it’s $5.  Signal goes to a central station who charges $4.  Seller wants 35 times RMR, but is the RMR $20 or $11 or $16?  It’s a big difference.
          If a buyer knows that the seller is adamant on 35 times the buyer will negotiate to reduce the Net RMR.  If the buyer knows the seller is adamant on its RMR the buyer will reduce the multiple.  In the end you get pretty close to the same purchase price, though there can certainly be a very wide range in purchase price because a lot of factors go into deciding that purchase price the accounts are ultimately worth. 
          If you’re selling or buying K&K is here to help.  Contact Ken Kirschenbaum at 516 747 6700 x 301 or for assistance.

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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