The Legal Side: Valuing your alarm business

How do you go about valuing your business? I get several calls a month asking me that question, and the prospective seller almost always ask me to give a quick valuation over the phone. Just the other day I had a broker specializing in brokering alarm company deals in my office. We kicked around acquisition issues and it was clear to me that there are very different ways to approach the valuation of your business. Of course what a real buyer is willing to pay is the ultimate value and the only true measuring stick. However, there are things you can do to enhance that value, and there is no better time to start than right now.

It's all about the recurring monthly revenue, the RMR. You know that alarm companies sell subscriber contracts for a multiple of the RMR. But why is some company getting 12 times RMR, and others are even commanding 45 times RMR or more? And why are some companies surprised that no one is interested in buying the subscriber accounts?

You should take some comfort knowing that you are in a business that deals with subscriber contracts as negotiable instruments. The contracts have intrinsic value, are assignable, tradable, and have real value. That $30 a month subscriber account can be worth $360 to $1,500. If you have 1,000 or 5,000 or more of those subscriber contracts you have a valuable business to protect.

What makes certain subscriber contracts worthless or at least worth less? Here's what I think is a good list of what to avoid or not do at all.

The 10 Things Not to Do

• Use equipment or installation techniques that are not customary. This happens when you decide to use some obscure panel or application that other companies don't use.
• Provide services that other companies don't or won't, such as 24-hour service, cash pick-up, cash discounts, opening/closing reports at no charge, paying the customer's false alarm and permit fees and fines, etc.
• Not using contracts -- yes, some companies actually do this!
• Use old out-of-date contracts
• Let contracts go into renewal without new contracts and updates
• Not carrying errors and omission insurance
• Lack of your own line at the central station
• (For central stations) Using obsolete technology to monitor the accounts
• (For central stations) Not using three-party contracts or having contracts with your dealers
• Finance or sell of your RMR as you struggle along (you won't have anything to sell).

Well, that's enough of a list of what not to do. So, what can you do to enhance the value of your business?

The 10 Things to Do

• Diversify your accounts, with a mix of residential and commercial
• Diversify types of alarms: burglar, fire.
• Lease commercial accounts: sell small commercial and residential; use service and monitoring contracts
• Use updated contracts and have all subscribers execute them
• Ensure all subscribers of your own line into the central station
• Make all systems remote programmable
• Get all systems compliant with code, UL, NFPA, trade custom standards
• Provide customary services; don't try and reinvent the wheel
• Get new contracts rather than rely on renewal terms
• Keep your subscribers geographically located
• Maintain good service records for subscribers
• Stay on top of your receivables; keep them current
• Keep your debt to a minimum; you'll end up with a lot cash more at the closing.

The difference between 32 times and 38 times, where most small- to mid-sized companies can expect to sell subscriber accounts, can amount to a lot of money. To command 40 times or more you have to have paid attention and adhered to most if not all of the above recommendations. Or maybe you just get lucky.

About the author: Ken Kirschenbaum, Esq., is a New York-licensed lawyer practicing with Kirschenbaum & Kirschenbaum PC, a Long Island legal firm with a rich history of assisting clients in security and alarm related matters. Ken can be contacted via email at ken@kirschenbaumesq.com. His website, www.kirschenbaumesq.com, features a great supply of legal information and court rulings relevant to the security industry. You can also sign up for Ken's discussion list from his homepage.

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