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Follow up to inflation and alarm account valuation

June 17, 2022
Follow up to inflation and alarm account valuation from article on May 20, 2022
          My take on inflation and its impact on the alarm industry, your business, was expressed in the article on May 20, 2022.  Of course I’m an attorney, not an accountant or economist or even tax lawyer.  I suppose I was rather pessimistic in the article about inflation, and now that a month has gone by I’ve considered reassessing our direction.  I think we are headed from inflation to recession.  So how will that affect you and is there anything you can do to prepare, other than vote this November and in 2024. 
          Recession is defined as “as two consecutive quarters of declines in quarterly real (inflation adjusted) gross domestic product (GDP)”  "During a recession, the economy struggles, people lose work, companies make fewer sales and the country's overall economic output declines.  During a recession, a lot of people tend to lose their jobs." Here’s how Google recommends that you prepare for recession:
          “Here are tips to help make sure your finances are recession-proof, as recommended by experts.

1.    Pay down high-interest credit card balances. ...
2.    Assess your individual financial situation before paying off other debt. ...
3.    Build a substantial emergency fund. ...
4.    Identify ways to cut back.”
          And here is what Google says about preparing for the “Covid” recession:
5 Ways to Prepare for the COVID-19 Recession
·       Reassess your financial priorities. ...
·       Prioritize debt repayment. ...
·       Make use of community and government aid programs. ...
·       Put away as much cash as you can into your emergency fund. ..
·       Stay on top of your financial situation — and take advantage of the guidance we have on hand.”
          Here’s what I think.  It’s a Biden recession and it was caused by cutting off supply of fuel, oil and gas.  He shut down the pipeline and production in the US.  He [and by he I mean all his advisors and those calling the shots, for the moment] had to have known that cost of everything would go up; had to have known that US would have to depend on foreign supply.  Everything else is falling like dominos. 
          Your costs are going to go up in inflation and you may have other steps you’ll need to implement if recession hits, like laying off workers and trying to cut other types of expenses; discretionary perks you may take come to mind.  You’re not going to get much relief from your vendors; they too have their own operating issues.  So don’t expect your central station to reduce your monitoring charges; don’t expect your E&O carrier to reduce your premiums; don’t expect equipment cost to go down, they will go up.  Vehicle expense and fuel will go up.  Utility expense will go up.  Your employees will be clamoring for more compensation because they have their own recession issues to deal with. 
          If you’re on the fence about selling out and retiring or finding something else to do, like go into politics, you may consider giving up the fight.  Is this the right time to consider selling?  Well, what impact will recession have on your sale price? 
          So far it looks like the multiple is steady.  All things being equal, we basically start with 35 times Recurring Monthly Revenue and move up or down.  That’s because we still have an RMR valuation and not EBITDA calculation.  A buyer using the RMR valuation won’t be checking, at least too closely, your expenses and bottom line.  I can’t tell yet if there will be change in how “qualified accounts” are evaluated, but that could certainly affect the formula on the RMR calculation by reducing the gross RMR to get to Net RMR. 
          If you have an RMR deal you should resist the buyer’s efforts to evaluate your EBITDA, no matter what argument you hear.  Sure this may meet serious resistance from the hedge funds buying or banks funding the deal, and those buyers are out there, so if the deal is big enough plan on having a microscope shoved in all the places looking for all the aspects of your operation no matter how irrelevant they should be to the buyer.  I say this because you will hear a buyer explain how it needs to justify paying “your” multiple considering your expenses, but you won’t hear the buyer explaining that it knows that by folding your accounts into the buyer’s accounts your operating costs are essentially irrelevant and the buyer’s net profit on the accounts is much higher than your profit.  At least that’s the buyer’s plan. 
          So unless we see a major turnaround come November, and I wouldn’t count on it, we are going to continue in inflation or recession or whatever the economist want to call it, and we know that everything is going to cost more.
          Your existing customers paying RMR can be increased by 9% per year [if you left that in the Standard Form Agreement].  May as well exercise the option; it’s not likely to make or break any customer and the increase will likely cover the few accounts, if any, that you lose.  And, any accounts you lose were probably going to be lost anyway, even without the increase.  You’re not going to make much headway leaning on your vendors and suppliers, but you might be able to save some expense by being more careful.  Carefree days and free-for- alls are over for a while until this economy crawls back to the good old days.

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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