Davis: “For investors, the order of importance in most instances is management team, business opportunity (i.e. contracts, telephone lines, etc.), financial metrics (attrition rate, RMR, etc.) and the ability to ease the acquisition into the portfolio. In other words, an investor is looking for a solid, well-managed company that has dramatic growth potential both organically as well as through acquisition and investment in the platform.”
SD&I: What types of simple things can alarm systems integrators or central station companies do every day to boost the value of their company overall or in the eyes of the investor—or even for the bank where they might be going to for a loan?
Barnes: “Document, document, document. One can generally think of this in three areas, the first being customer agreements. Customer contracts must be current and enforceable. Information (i.e. names, addresses, etc.) contained within must be accurate, with clearly defined responsibilities for all parties. Next, documents that support internal processes should provide accurate and actionable information for managing the business with maintained underlying supporting data for verification. Lastly, financial statements should be in a standard format and have been professionally reviewed or audited.”
Schmidt: “The number one thing that an operator can do to increase the value of their company every day is to have excellent internal systems and reports. These benefits will be twofold. First, operations that are measured are typically better managed and improved; Second, measured operations are easier to demonstrate to third parties. A lack of proper internal reporting can affect a company’s ability to demonstrate financial and operating performance.
When it comes time to sell the business (or obtain external capital of any nature), any amount of uncertainty in the operating metrics of a business will be interpreted in as conservative (negative to the operator) a manner as possible.”
Davis: “As part of the process for selling a business or borrowing capital, it’s important for the owner to understand the financial mechanics. Both alarm companies and central station companies are sold/valued on a multiple of recurring monthly revenue. Typically for alarm companies of average size it’s in the mid-30s and for wholesale monitoring companies of average size it’s in the mid to upper teens. For integrators, it’s generally a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization).
To secure financing, the number one qualification is that the company can pledge assets that are greater than the value of the loan/investment. With regard to securing bank loans, lending sources will typically provide anywhere from 20 to 24 times the recurring monthly revenue even though the value of the accounts may be more. It’s important to note that banks differ from venture capitalists in that they are not looking for a return on their investment but rather only the pay back of the loan and interest charges.”
SD&I: What other kinds of things should integration companies be doing to add value to their business?
Barnes: “Getting the right support in place at the start of the process can save time and energy down the road. Industry professionals such as lawyers, accountants and advisors, who are skilled in this area, can be a valuable asset to an alarm company for helping to manage expectations or market the sales opportunity to the right people. A clear path to the finish line, achieved with the proper documentation and experienced support, adds to the company’s value and makes the process less stressful and time consuming.”
Schmidt: “Alarm integration businesses should be looking to increase the amount of recurring revenue derived from the installations. While the recurring revenue component for most integration businesses will usually be a minority of the company’s revenue, the value of the RMR base can quickly become important in terms of market value and operating cash flow.”
Davis: “When looking at the value of an integration company, one of the most important considerations is bottom-line profitability. Is the integrator making money on the systems and products they are selling? And secondly, does the integrator regularly negotiate for service contracts on the installations they perform to increase profitability from recurring monthly revenue? This latter item is probably the single most important consideration in relation to valuing an integration company.”