It is quite common for owners of contracts that produce recurring monthly revenue (RMR) to consider selling the contracts at some point in their business cycle. If this sounds like you, then remember that a little foresight and planning can add a great deal of value.
First, you should know that quite often when the after-tax proceeds are distributed from the sale of RMR contracts, the former owner of those contracts wonders if the true value of RMR contracts might have been the good job security he or she once had. Sure, they have money in hand, but they no longer have that trusted chair to sit upon that we call RMR.
Job security, of course, is one of the reasons for the very wide gap between buyer and seller expectations when considering a sale, and I would argue that it is a common reason why so many deals do not get done. And this is partly why the United States still has such a large number of small local alarm security suppliers, a.k.a. “dealers”. What we see also in the variance between seller and buyer contract valuations is that a seller might feel the need for a multiple of 40 to justify the sale, even if the real market value to a buyer might be a 20-times multiple.
RMR contracts can be encumbered by many different entities, so the asset value of the contract can be fragmented too, just as our industry is fragmented by a high number of independent alarm dealers. Generally the factors that can come into play to affect the multiple value of an RMR contract include the following:
- The Customer
- Billing & Collection
- Warranty & Service
- Employee Agreements
- Federal/State/Local government
- Private Response
- Local Police Response
Each of the listed parties to the contract could have a tether to the contract value and its liquidity. The more pieces of contract performance that are provided or controlled by a single source, the greater the asset value for the single source is. For example ADT, Stanley/HSM, Brink’s (now Broadview Security) provide and control most of the performance roles, whereas many of the smaller alarm suppliers only control one or two of the roles. Consequently the market value of the contract and net worth of the alarm supplier can be vastly different.
What I’ve found is that there are some basic “myths” that are generally believed in our industry when it comes to selling your RMR. Let’s take a look at four of these myths, because by dispelling them, you can be more realistic about purchasing or selling alarm contracts.
Myth #1 -- The buy/sell prices are determined by “multiple of RMR”.
False. The foundation of the buying and selling price will generally be “ROI”, which is the traditional accounting formula of return on investment by the buyer. ROI answers the question of “Can I make money from this deal, and how much money over what period of time?” Multiples of RMR is a sloppy benchmark for measuring the transaction when it has been completed, but is not practical for measuring a sale before it is closed. It is a sloppy measurement because the raw number does not deliver the whole story. For example, a multiple of 40 paid out of earnings over 10 years could be the same as a 20-times multiple of all cash at closing. Basically, a high multiple with future obligations could equate to a much lower multiple, all cash, without any legacy responsibilities.
Myth #2 -- Money is the primary motive to be a buyer of RMR contracts.
False. Other motives can have equal or greater value to a buyer than money, including buying a company for key employees, or to take out a competitor, or to expand geographically, or to achieve difficult licensing requirements. Of course these motives also relate back to ROI. Due diligence by the seller is just as important as due diligence by the buyer. The seller and buyer should have equal advantage in the negotiations.