Why Software Makes It Less Hard to Succeed

Michael Marks, co-founder of Perennial Software, provides insights into how installing security contractors can gain newfound business efficiencies and boost RMR by retooling their back-office operations.

Michael Marks is co-founder of Perennial Software, maker of the SedonaOffice and AlarmBiller software platforms. He joins the conversation to discuss how security dealers and integrators can operate more efficient organizations, among other related topics.

How does your software help organizations keep pace with a fast-evolving marketplace?
That is an important question. If you think of the pressures on businesses today you have to deliver higher value services for less dollars. How do you do that? You have to do that by being very efficient in the way you run your business. If you have to do that by making sure that you’re doing everything fast with as few people as possible and correctly.

We do that by using automation and efficiencies within our applications. Take for example AlarmBiller. If I am a small business owner, there are things I have to do on a routine basis and I have to spend three or four hours a day doing those things that’s taking me away from selling, installing, servicing my customer base. As a lean, small business owner three or four hours a day is a lot of money.

We have automations tools to automatically send out the invoices on a recurring basis to the customers — whether it’s email, mail or print. The system will automatically deliver the invoices to the customers. It will also automatically settle the payment charges for those recurring services by credit card or e-check, based upon whatever date the customer wants that settled. It will also automatically post those payments to the customer’s account and make the deposit for me.

That can save somebody tremendous amounts of time. By doing that not only do I free up their time but I take care of the most important issue that any small business owner has — even large businesses ― which is cash flow. Making sure I have money in the bank.

I’ve worked with small dealers who were two months late in getting their bills out to their customers. They just didn’t have the time to do it and the paper work piled up. Now everything is automated. If you can improve cash flow for a small business owner, you can free them up to grow their business.

Another great use of technology is what we call our e-forms module to electronically deliver contracts, get electronic signatures, to automatically save them into the customer’s file. If you don’t have a good contract it is a liability risk. Not only it is a liability risk, but it is also the valuation. At the end of the day, the beauty of the security industry, even for a small alarm company, is the value of that recurring revenue. Anything we can do to preserve that value is so important. If you don’t have good contracts on file, the value of your recurring revenue is probably down 25% to 50% right out of the gate.

The Three Ps Defined

What are the makings of a great organization and where does Perennial Software fit in to the equation?
The first thing I would tell any company or any entrepreneur to make a great organization you have to start with the three P’s. People. You have to have the right people. If you don’t have the right people, get rid of them and get the right people on your team. You can’t build a great organization without great people.

Process. You have to have the right processes in terms of running your business. If a customer calls, how are you going to handle this? How are you going to get an invoice out the door? How are you going to do your service schedule? You have to create processes. If you just make up everything on the fly, you are going to have inconsistencies. That is a company that’s being more reactive than proactive.

Product. You have to have a great product that you are selling and offering. You have to sell state of the art security systems. If you are still selling digital dialers in this industry you are behind the 8 ball. You should be selling smart home systems, interactive systems. You should be using technology to your advantage.

Where does our software fit in? We fit in by helping you put together the best processes to manage your customers. This industry is all about that customer relationship. Not only do you want to gain a customer, you never want to lose them. You want to out service the competition, and where we fit in is our tools allow you to best manage your customer base, service you customer base, grow your customer base.

Minding Creation Costs

Why is understanding how creation costs are calculated so important to dealers?
It is extremely important. Let’s break it down into two buckets. There are two main ways to create recurring revenue. One is organic and the other is acquisition. If I do an acquisition and I buy an alarm account for 30x that’s easy, that’s 30x creation cost. Maybe its 31x if I add in my legal cost and closing cost and all that. But it’s 30x. So if I know I can go off and buy recurring revenue for 30x, what’s my organic cost to generate that? It is a very important metric to know for a few different reasons. No. 1, if it is costing me more than 30x then why would I ever make it organically? I’d rather go spend the money and buy it for 30x then to create it organically for 35x. That’s my first benchmark.

Now, 35x organic creation cost would be very high. There are different kinds of recurring dollars. Is it residential? Commercial? Monitoring? Fire? Inspections? Those all have different creation costs. But let’s just take your standard burg/fire monitoring. Some people might say a great creation cost is somewhere between 12x and 24x. If you are within that range you are doing really, really well. Then you also have to look into factors such as, “Am I high volume or low volume?” If I am high volume I am trying to build up as much RMR as I can, as fast as I can. I am going to have marketing costs — sales costs; installation and equipment costs. I put all that in to generate recurring dollars. I want to take my total revenue that I might receive, because maybe I do charge a little money upfront, subtract all my expenses and divide that by my profit or loss which is typically a loss, divide that by my recurring revenue and that is going to give me my creation cost at a very basic level.

Having that metric is very important to know how you are growing your business. It is also going to tell you based upon your financing. So if you are organically funding the recurring revenue and you are adding $1,000 a month, and it is costing you 20x, that is $20,000 you know you are going to subsidize you’re growth of that $1,000 at a 20x multiple. So how much cash flow do you need?

If I am a bank and I am lending money to you, usually I have a covenant in the loan that says what multiple I can borrow at. So maybe the bank says you can borrow up to 15x of new recurring revenue. Well, if it is costing me 20x I know I still have to come up with $5,000 and the bank will cover $15,000. If it is costing me 12x, I am within the covenant. I can really grow much faster.

So, there are a lot of different reasons why that multiple is important from a key performance, knowing how you’re doing and measuring yourself against your peers and measuring your own business growth.

It’s also very important to use and this is where the banks will come in and the lenders is knowing what is called steady state cash flow. In order to really generate steady state cash flow, you have to know what your multiple flow is. What a steady state cash flow is really telling you is if you have $100,000 of recurring revenue, you are going to naturally have let’s just say 8% attrition so if you started the year at $100,000 and a year later if you had made no sales you’d you have $92,000 of recurring revenue because you lost 8%. If I am going to replace that 8%, the first $8,000 of new recurring revenue I gain, keeps me at $100,000 of RMR. That is my steady state. Steady state means to stay at the level of RMR. Steady state cash flow tells me how much cash is it going to cost me because now I have to go out there and replace $8,000, what does it cost me to replace that $8,000. That is your steady state cash flow.

If I am a bank I want to know what that is because if I am going to lend to a company, worst case scenario if they don’t grow anymore I want to know how do I keep them in a steady state. If they don’t have the ability to measure their creation multiple they can’t measure their steady state cash flow.

The nice thing is if I am a small, independent security company who doesn’t have a bank behind them, I don’t really keep track of creation multiples and steady state cash flow because my bank doesn’t require me to give them the reporting on it. But if I am that same operator and I understand that and I begin measuring my business using those same metrics, I am going to have insights into my business that my peers will not have and it is going to allow me to grow my business better, faster, with a higher quality base and better RMR than they could do it without that.

Is it essential they do it? No. Most of them don’t, but I will tell you those that start reporting on this and understanding the numbers they are the best run companies in the business.

Investing in Business Efficiency

Do you see some commonalities among dealers that are making the same mistakes running their organizations?
Let me put it this way: Over the past 10 years there has been a whole new breed of entrants into the security industry — businesspeople who come in from outside the security industry. They usually come in with an acquisition. Some of them do it from a start-up perspective, but these are people who went to business colleges, studied businesses, identified the security industry as a business they want to go into and they go into it.

The traditional company, if you go back 20-30 years ago, these companies have been very successful, don’t get me wrong. They came in because they were an installer or a salesperson from another company. They go off and they bought a truck and they are in the alarm business. They went to ADI and they buy their parts. The difference between those two paths are when person who came in through the business school and they are business oriented, they come here to run their company as a business right from day one. They want to have the systems and tools in place, the efficiencies, the financial reporting, the KPIs to run the business, such as the creation multiples and understanding the steady state cash flow, they might even have a bank from day one, they come in to run it like a professionally run business.

The guy who came from another security company who started from scratch and built his business, he’ll hit different milestones like 100 accounts and go, “Wow, I’m doing really well.” Then he gets to 250 accounts and goes “cash flow is starting to become good.” He’s hiring more people. He might even get up to 500 or 1,000 accounts and then he realizes he was doing this using Quickbooks or using off the shelf software. They weren’t thinking about running a business. They were thinking about starting an alarm company and installing alarms. Now they have to transition from the start-up company to creating an organization, creating a business behind it.

When we see that and they are ready to invest and put that in place that is ideal for us. That is a really good fit. Because now they want to gain the benefits. They want to take the problems they have — like processing service tickets with the paper flow, improving the cash flow, tracking inventory — and they want to create it so that it is a business that continuously runs. Any entrepreneur who starts a business ultimate goal is to have the machine running without them there. At the same time I am building new RMR so that is the value of my company. That is improving the equity in the company. That is where we fit in best. We love companies like that.

There is an investment in our software, but there is more investment they have to make into running their business. When they make that leap the return on their investment is the greatest return they will ever get.

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About the Author


Although Bosch’s name is quite familiar to those in the security industry, his previous experience has been in daily newspaper journalism. Prior to joining SECURITY SALES & INTEGRATION in 2006, he spent 15 years with the Los Angeles Times, where he performed a wide assortment of editorial responsibilities, including feature and metro department assignments as well as content producing for latimes.com. Bosch is a graduate of California State University, Fresno with a degree in Mass Communication & Journalism. In 2007, he successfully completed the National Burglar and Fire Alarm Association’s National Training School coursework to become a Certified Level I Alarm Technician.

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