KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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How buyers figure value of alarm account acquisition / Special Contract Sale Ends Today
December 9, 2022
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Contract sale ends today - see below
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How buyers figure value of alarm account acquisition
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Ken,
I wrote a response about using the Discounted Cash Flow (DCF) from RMR related to monitoring accounts to determine their value. This is a basic explanation of how we determine DCF and apply it to the valuation of accounts.
DCF is used to estimate the value of future cash flows and is based on the concept of the Time Value of Money. As Ken has pointed out numerous times the value of a dollar received a year from now is less than the value of that some dollar received today.
A group of contracts should generate consistent RMR for a number of years. Of course the payments will be received in future periods, so a payment received five years from now is not as valuable as a payment received today. Attrition also enters into the equation; the customers aren’t necessarily going to pay forever, so we have to reduce the future cash flows to account for cancellations. In addition to the Time Value of Money we have to determine a Discount Rate, which is the return that a buyer of accounts desires to make in their investment.
Think of DCF as a brother in law who needs money. If you can spot him some dough today, he can make monthly payments. You may have concerns over being repaid, and even if you do get repaid, it is going to be in future dollars, and, you have other investments that you can make that pay interest or increase in value. This is not much different than an investor evaluating $30,000 of RMR. The 1,000 customers paying $30 per month each are similar to 1,000 brothers in law each repaying your loan at $30 per month. How much should you give to them?
The first thing to determine is the attrition rate or how many brothers in laws will keep paying you. If there is one thing nice (maybe the only nice thing) about having 1,000 brothers in law it is that you can spread out the risk. If one quits paying there are others who will continue to pay. You believe that 10% of them will quit paying you each year so you set your attrition rate at 10%.
Next is your expected rate of return you will be getting repaid in the future, and dollars in the future aren’t worth as much as dollars today, so you have to take this into account. While computing this you should also take into account that lending money to your brothers in law has a degree of risk, plus, if you just put the money into savings bonds or CDs, you would be guaranteed to get your interest payments, so you expect a higher interest rate on your money to compensate you. You determine that 15% is an acceptable rate of return. Finally, this cash stream isn’t going to just happen. You have to call each of these guys to remind, them, and you have to take time to deal with the payments, so that is going to average $3 for each payment (similar to monitoring costs).
So if the 1,000 brothers in law pay you $30 per month, you will receive $3,000 the first month. At the end of the year 100 brothers in law have quit paying you and your monthly payments are down to $27,000 per month. Not only are you receiving less than the $30,000 that you expected to receive, you will be receiving it in the future and you need to make money on this “investment” so your actual cash received will only be worth $24,394. Let’s say that you expect this to continue for 12 years. Using the computations above, your $30,000 of RMR will be worth a total of $1,125,432 or approximately 38X the total RMR. Based upon this calculation you might be willing to lend each brother in law 38x their $30 payments or $1,140.
These calculations are very much dependent upon attrition rates and inflation. Increase the attrition rate from 10% to 15% (150 brothers in law quit paying during the first year) and the multiple falls to 32X. If inflation causes you to increase your expected rate of return to 16%, the multiple falls to 31X because the value of the future payments is worth less in today’s dollars.
Mitch Reitman
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Response
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No doubt some buyers go through the above process or something like it, either formally on paper calculations or intuitively in their head. I kind of like to ……keep in simple, stupid. You want the accounts or what? They are worth something to you for a myriad of reasons. Some guys need to own a restaurant, others a clothing store, candy store, real estate business; some guys want to own an alarm company. Maybe their grandfather or Dad started it; maybe they fell into the industry on their own.
When you own an alarm company you have choices, maybe more than some other businesses. You can decide your comfort level on size, growth and what ends up in your pocket, and be happy, or not so happy, in which case you should be figuring out how to get happy [and stay in the alarm business].
The alarm business offers tremendous opportunity, growth potential, comfortable financial rewards and ultimately wealth if you navigate the industry successfully. If you think you have all the answers, you don’t. If you think you can’t do any better, you can. If you think the way it’s been done is good enough, it’s not. Trust me, your forefathers will be proud of you when you build the business to more than they ever dreamed possible. You can’t do that if you’re still using foil. And you can’t do that if you run the operation like it’s always been run and, [you knew this was coming] use the same handshake or old contract forms because that’s how you like it.
Alarm deals are active all over the country and the multiples are higher than ever. I think there’s a lot of OPM out there pouring into the alarm industry. I am not suggesting you cash out. You should if you have something else you want to do or you’re burned out. But you should be positioning for sale, always. You do that by listening, learning, participating in the industry and growing. Reading these emails daily is a pretty good start. Thanks to all who contribute and participate on this forum.
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NOTE: DO NOT CONFUSE THIS SALE WITH THE ANNUAL CONTRACT SALE [WHICH WILL BE IN JANUARY 2023]. NONE OF THE BELOW CONTRACTS WILL BE INCLUDED IN THE ANNUAL SALE
Special Holiday Contract Sale on select contracts / 50% OFF / see details and save thousands
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The following Standard Form Agreements are on holiday sale through December 9, 2022. Order any of these contract forms and we will discount the price by 50% off the published price*. Concierge Clients will get an additional 10% off the discounted price.
* The full list price will appear when you order but we will discount before processing the order; no need to call us
These contracts are not discounted in the Annual Sale and have never been discounted before. Total savings up to $3,822.50. [another $382.50 for Concierge Clients]
All of these Standard Form Agreements are up to date, will be customized with company name, address, phone and license, and delivered by end of this year by email. All contract forms are found on K&K’s contract order page at www.alarmcontracts.com
SAVE ON THESE CONTRACTS TODAY THROUGH DEC 9
DIGITAL SIGN AND DISPLAY SALES, HOSTING AND SERVICE list price $875 Your saving $437.50
Includes installing of digital box and media player, hosting and administrative services and repair service. Design creation also included. This is for commercial customers. This is for digital signs and displays
HOME WATCH SERVICE list price $995 Your saving $497.50
Provide home watch service for vacant home; itemized list of inspection and service areas. This is for residential consumers; customized state by state. Come with Rider for special instructions and additional services
VIRTUAL DOORMAN list price $1,250 Your saving $625
VIRTUAL DOORMAN STANDARD SUPERVISORY VIDEO, AUDIO, AND ACCESS CONTROL, SALES, MONITORING & SERVICE AGREEMENT. Cameras with two-way audio for access control and "escort" service throughout a building or property under surveillance
CONFIDENTIALITY AGREEMENT FOR ESTIMATES AND SPECIFICATIONS list price $675 Your saving $337.50
Tired of your customer using your estimate and information to put out a bid or negotiate with a competitor. use this confidentiality agreement to protect your estimate and specifications
ANSWER SERVICE with questionnaire list price $500 Your saving $250
Standard Answering Service agreement with client questionnaire
COMPUTER CONSULTING list price $725 Your saving $362.50
Consulting only; no repair service
COMPUTER CONSULTING, SALE, SERVICE, HOSTING list price $875 Your saving $437.50
Computer consulting sale, service, per call or service plan, website hosting
PBX SYSTEM AND HOSTED COMMERCIAL SERVICE list price $875 Your saving $437.50
Select sale or lease format. Select residential or commercial. Voip telephone system equipment sale and installation. Over-ride on VoIP hosted service and RMR for extended warranty and repair service. Generic form. Call K&K Contract Administrator Eileen Wagda for selection of form: 516 747 6700 x 312
GPS MONITORING list price $875 Your saving $437.50
[single state only] vehicle or personal
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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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To order up to date Standard Form Alarm / Security / Fire and related Agreements click here: www.alarmcontracts.com
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CONCIERGE LAWYER SERVICE PROGRAM FOR THE ALARM INDUSTRY - 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.
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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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