Contracts Critical in Calculating Company Valuation

Traditionally, alarm companies are valued based on periodic recurring revenue, referred to as recurring monthly revenue (RMR). Once that number is confirmed a formula is used to reach a value. There are numerous variables to be considered, and financial experts, some business brokers and attorneys have the acumen to do the calculations with some degree of precision. For the rest of us, much reliance is placed on gut feeling and general issues that are common enough to establish a method of valuation. So for us commoners, let’s look at some considerations.

Before we do, let me stress that the single most important asset of your business, and one we focus on, is your contract with your subscriber. This is because when we talk about RMR we are really saying, “RMR under contract.” The contract you use will influence the multiple applied to the RMR. How much? I just completed a valuation (for your company valuation, go to and deducted 1 times (x) RMR because the alarm company didn’t have Standard Form Contracts ( and 90% of the subscribers had contracts 10 to 15 years old. I was going to deduct up to 5x RMR but considered that the subscribers were longtime customers and likely to remain so, provided the transition to a new buyer was handled properly.

What else are we looking at besides the form of contract? The subscriber base; we are interested in the number of residential and commercial subscribers. The type of subscriber needs to be considered because longevity is necessary to justify the multiple being paid. A buyer shelling out 40x the RMR will need at least 45x to recoup the investment, and that’s on a monitoring contract; a service contract carries more risk and may require more time.

It’s important to look at the type of subscriber – whether we are looking at mass marketed low-cost systems or more selective type sales with high-end subscribers. Again, what we are looking at is likelihood that subscriber will continue making the payments well beyond the multiple used to calculate the value. The same goes with commercial subscribers, and it’s not hard to see that a startup mom-and-pop operation is going to be a more risky subscriber than a real property owner installing a mandatory fire alarm system or environmental system.

What contracts and relationships the alarm company has with its vendors is another significant consideration, and perhaps No. 1 in this category is the deal with the central station for monitoring accounts. While valuation may not be affected if a potential buyer is in the same central, or it’s the central buying the accounts, if you lock your alarm company into a bad deal with the central it can impact your valuation. A recent valuation I did was for an alarm company that did not have its own lines into the central station. I deducted 5x the RMR when doing the valuation. Sure that can be corrected, but not without a lot of work, time and expense.

So where do the numbers generally fall for the “average” alarm company? Close to 35x for residential monitoring; 30x for service. For commercial fire monitoring, 40x is a good starting point, though the upside is limited; service is around 30x.

If the alarm company being evaluated has an attrition rate outside the norm (3% to 8%), then it’s not “average” and adjustments have to be made. An alarm company that uses equipment that no one else does is also not “average.” But if you’re operating within the classic model for the alarm industry, your company valuation is going to fall within the 35x range, give or take 5x either way. Keep in mind that’s a 10-point spread from low to high. You know your RMR, so do the math and decide if you want to be on the high end. If so, get with the program.

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About the Author


Security Sales & Integration’s “Legal Briefing” columnist Ken Kirschenbaum has been a recognized counsel to the alarm industry for 35 years and is principal of Kirschenbaum & Kirschenbaum, P.C. His team of attorneys, which includes daughter Jennifer, specialize in transactional, defense litigation, regulatory compliance and collection matters.

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