Legal Briefing: Things You Ought to Know About Your Alarm Business

You should conduct your business — from start to finish — as if you’re planning to sell. You should be maximizing the equity in the business.

Legal Briefing: Things You Ought to Know About Your Alarm Business

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It’s surprising how many alarm dealers simply do not have a handle on their businesses. They can’t provide what I think would be information that they should have at the tip of their fingers at any given moment.

Although you certainly don’t need to know every detail or know your financial information in precise detail, you should have a pretty good idea of it. It strikes me as odd when someone says, “I have to ask my accountant.” The funny thing is, most who say that probably don’t even have a regular accountant!

You should conduct your business — from start to finish — as if you’re planning to sell. You should be maximizing the equity in the business. In the alarm business, this is typically done by increasing your recurring monthly revenue (RMR).

RMR is derived by charging for your “after-install” services. Those services can (and often do) include monitoring, repair service plans and inspection plans.

Per-call service and per-call inspection may generate better cash flow when you look at a single account, but, overall, getting all or most of your subscribers into an RMR relationship, rather than per call, will generate the same or more revenue. And, of course, it’ll be more reliable and steadier.

I’ll give an example: You have a fire alarm inspection subscriber for whom you perform an annual (or semiannual, or quarterly) inspection, and you get $1,200 a year. It’s a per-call relationship for the inspection service. When you sell, that customer’s inspection contract will be excluded from the sale purchase price because it’s not contracted RMR.

Now, take the same account, but, this time, charge RMR of $100 per month. It’s a term contract with automatic renewal. That contract is worth $3,000 or more when you sell the accounts.

All security systems — cameras, audio, intrusion, fire, environmental, medical alert, PERS and access control — are still valued and sold based on the RMR model; that is, as a multiple of the RMR.

RMR is generally determined by calculating the gross amount billed to the subscriber and then deducting sales tax and third-party monitoring charges. Often, the central station basic charge is not deducted — it depends on your negotiations.

Practical Questions About Your Business

As you might have noticed, K&K is active in the industry’s merger and acquisition market. We will broker a deal if we are the attorneys for one of the parties: either seller or buyer. A current list of sellers we are assisting is in The Alarm Exchange in the merger and acquisition category.

Recently, a seller engaged K&K. In order to properly list it on The Alarm Exchange, I asked a few questions that any potential buyer of accounts would want to know. I thought I’d share those questions because these are the ones you should be able to answer without too much effort.

Being able to do so is a sign you’re on top of your business.

  • number of accounts
  • percent residential
  • percent commercial security
  • percent commercial fire
  • RMR for inspection or service
  • RMR for monitoring
  • what central station you go to
  • how much you pay the central station each month (average for all accounts)
  • number of techs you have
  • whether employees are under employment contract
  • where most of the accounts are concentrated
  • what equipment you usually use
  • panels
  • software you use
  • contracts

If you have a firm grasp of how to answer these issues, you know your company well. Now, all you need to do is keep an eye on what direction the account base and RMR takes: up or down.

For quick valuation of your alarm accounts, go to Kirschenbaumesq.com/page/what-is-my-alarm-company-worth.

To increase the value of your accounts, be sure to use K&K Standard Form Agreements and keep them updated.

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About the Author

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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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