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MORE ON ALARM CO VALUATION FROM SEPTEMBER 29, 2014 ARTICLE
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Ken
I read your recent daily posting on Alarm Company Valuation dated Sept 29 2014 with interest. I agree with most of you say but would add the following:
While many of us do in fact rely on “gut feel” in arriving at a multiple for a block of accounts, the bigger buyers have mathematical templates that they insert the key variables of an account base into to see what they can pay for an account base and still make a certain return on their money. Some of the variables that they look at are the average monitoring rate on the account base, the attrition rate, the cost to replace attrition and the attrition guarantee. It is all very mathematical for the bigger buyers. What cash do the accounts generate and what return can they get.
While having contracts on your account base is important, they are not as important in Canada as they are in the US and before a US dealer with no contracts panics, I have seen several good sized US alarm dealers with no contracts. Having no contracts is a situation that can be fixed either by the seller getting contracts signed or by the buyer with the seller’s help. Secondly dealers should realize that it is not critical that all their customers be signed up to multi-year contracts at any one time. Having more than 1 year left on the contract is useful but in my experience not critical.
What is as important to the value of an account as having contracts or in some ways more so is the average monitoring rate on the accounts. It is simple. Low rates as in less than $20/mth means lower gross margin for a buyer to be left with after monitoring and service costs which translates into lower multiples in offers. Many dealers do not realize this. My strong advice is to try to get at least $20/mth/acc for basic digital monitoring.
Regarding the comparative valuations of residential versus commercial accounts, my feeling is that the jury is out on which is more valuable. It will partly depend on what the buyer is looking for- commercial or residential- and also on the attrition rate on the account base.
Regarding the relationship with the central station, the two most important pieces of advice that I give alarm dealers is to firstly get your accounts programmed to your telephones lines and call forward those lines to your station. Having said this I think deducting 5X for not having your own lines as the article suggested is excessive. I would suggest 2-3X depending on what your rates are. Secondly be careful about signing long term contracts with your monitoring stations particularly ones that give the station the right of first refusal if you decide to sell. Rights of first refusals are a huge impediment to getting the best price for your accounts.
One important variable that is often not mentioned in articles about the value of alarm accounts is the importance of attracting multiple buyers when you sell. Over and over again I have seen sellers that put their account base out to multiple buyers (as in a mini auction) get better prices. But it is important that the buyers all know that they are bidding against other buyers.
Finally – and this is just my experience – telling sellers that they should expect to get 35X for residential accounts is perhaps misleading. If the account base is a decent size (1000 accounts or more) has decent rates ( $20/mth/acc or more) and good attrition ( net attrition at 7% or under) then 35X can be achieved- but certainly not all residential accounts go for 35X. I would say that small blocks of residential accounts ( 0-1000 accounts) 35 X might be at the high end of the range.
I hope these comments will build on what Ken has written in his article.
Victor Harding
Harding Security Services Inc
Toronto, ON
victor@hardingsecurity.ca
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INHERENT FINANCIAL RISKS WITH SERVICE CONTRACTS
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Ken
What's your opinion on selling a large account (16 locations) service contracts for each and then as soon as they sign them hit us up for multiple service calls for pre-existing problems? How do you avoid something like that - is there a provision in your service contracts? Thanks
Anon
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RESPONSE
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You should have tested and surveyed the systems before offering service contracts. The service contract is for ordinary wear and tear - are these calls for that? If you used the Disclaimer Notice you should also see the provision for "take overs" which this essentially is. Though "take overs" are typically associated with take over of monitoring, the same issue are in play, as well as the operation of the equipment. The Service Contract is part of the All in One form, residential or commercial, and should be signed when the system is first sold and installed. However the Service portion of the contract is perfectly suitable for use on a take over. The Service Contract language provides for labor and material to repair equipment rendered inoperable by reason of ordinary wear and tear. If the repair is caused by anything else then it's not covered by the Service Contract.
It should be obvious that you can't agree to a Service Contract without knowing the condition of the equipment. You won't be charging enough to risk the financial consequence of agreeing to repair a system you haven't surveyed and tested. It's hard enough to price a service contract when you've installed the system and you have the manufacturer warranty behind you [way behind you], but on a take over you really take a chance if you haven't done a careful inspection permitting you to reasonably anticipate your repair exposure in the future.
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Webinar Anouncement - no charge to attend
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Title: Learn how to design sales presentations using tablets and computers.
When: October 8, 2014 12 noon to 1 PM EST. Sign in on your computer and dial in to participate. Register here (space limited so register now): https://attendee.gotowebinar.com/register/2478859221657647105
Description: This webinar will introduce you to sales techniques and tools using tablets and computers to do sales presentations. Puffington will customize your sales tools utilizing our templates and proven sales presentations designed specifically for the alarm / security industry.
Presenter: Luke Goetting Luke@Puffingston.com; 312-620-0704 Puffingston is listed on The Alarm Exchange under Technology that increases or preserves your RMR.
Who should attend: Alarm company owners and sales managers and sales personnel
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TO SUBMIT QUESTIONS OR COMMENTS REPLY TO THIS EMAIL OR EMAIL Ken@Kirschenbaumesq.com. Most comments and questions get circulated.
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Speaking Engagements
If you would like to schedule a free live video/webinar presentation for your association meeting or event contact Eileen Wagda at 516 747 6700 x 312.
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Alabama Alarm Association. AAA's Fall Meeting and Trade Show - October 21, 2014 from 3 to 5 PM at DoubleTree Hotel 808 South 20th Street Birmingham, AL 35205 for more info contact AAA Executive Director: director@alabamaalarm.org (205) 933-9000
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