Have the accountants got it all wrong after all? That’s a question some custom integrators are asking as they depressingly realize “outsiders” deem their long-term, highly successful businesses to be close to worthless from a valuation standpoint. Instead, the market is solely focused on “multiples” of recurring monthly revenue (RMR) from either service agreements or security monitoring contracts.

How can an electronic security integration company with success in every area possible be worth squat? Are years of satisfied and repeat customers, profitable operations, a beautiful showroom, pristine vehicle fleet and consistent upgrades valueless? According to the pundits, it’s worth zippo…nada.

Several integrators recently vented about this issue to security legal expert Ken Kirschenbaum of Kirschenbaum & Kirschenbaum, and a columnist for Security Sales & Integration.

“Somewhere along the way, possibly with the introduction of ‘multiples,’ the buying and selling of alarm accounts became a big business,” notes Lee Hearn, president of Allegiant Security in Stuttgart, Ark. “I am not implying that there is anything wrong with selling one’s account base at generous multiples, but there are many in the industry whose sole purpose has become originating (or acquiring) as many accounts as possible in the shortest amount of time possible so that those accounts can be turned for a quick (and sizable) profit. Again, nothing wrong with that if that’s your business model. It’s a proven money-maker.”

Hearn frustratingly adds, “Unfortunately, many in the industry now think that’s the ONLY business model and that anyone who isn’t focused solely on building the number of RMR-generating accounts held is foolish. Call me a fool, then. I own a security integration business in which integration revenue accounts for roughly 85 percent of our business, with the remaining 15 percent consisting of alarm system installation and monitoring revenues. According to the experts in M&A who subscribe ONLY to the model in which the relentless focus on RMR acquisition is the Holy Grail, my business has little value.”

Hearn goes on to point how that his business model has been very good to him, to his employees and to the market he serves.

“Those of us who make a good living with integration are generally happy with the business model we have chosen. And our businesses do have considerable value,” he adds.
Meanwhile, another anonymous integrator tells Kirschenbaum the zero-value of his custom integration business is “hard to swallow. It is a bitter pill to realize that for many of us, myself included, our business model has not been geared towards cashing out with a big payday! I have always, put off the instant gratification of spending and re-invested back into my company. I thought it was going to pay off in the end. Perhaps I should invest my money in a different area.”

He goes on to mention how he recently garnered a $500,000 sale from a small account. He notes that under the current means of valuing companies, that future $500,000 upsell would have indecipherable.

Will the RMR focus someday reach a point where every piece of equipment simply has a monthly value placed on it? $20 per month for a projector? $10 per month for a receiver? $1 per month for a remote control?

Kirschenbaum admits the RMR valuation model is “too simplistic,” but notes the multiples paid for RMR itself fluctuates (from 12 to 45 recently) based on some of the factors that integrators covet, such as a solid management team, good list of repeat customers, consistency of equipment, etc.

“The reality is that there is no reason to rely on just one extreme model of the other. In other words, ideally you should strike a balance between profitable sale, installation and service, and recurring revenue. Competition may influence how you price your services and whether you are forced to lean more to one model that the other. And yes, if you have a history of making a great living but haven’t developed RMR you may still be able to find a buyer. It’s just going to that much easier if you have the RMR, which hopefully has been flowing in long enough for you to be making a very good living on your way to the retirement package,” he notes.

What are your thoughts? Do the M&A brokers have it all wrong? What would be a better valuation method for the custom electronics industry? Please comment.

If you enjoyed this article and want to receive more valuable industry content like this, click here to sign up for our FREE digital newsletters!

Related Content