How to Actually Calculate Company Value Based on RMR
Buying or selling accounts? RMR is defined in different ways, and you need a very careful understanding of how it is going to be calculated for your deal.
When selling or buying alarm accounts do you need to know more than the multiple? The multiple is only one of the factors in the purchase price equation. The other factor, equally important and less certain, is the actual recurring monthly revenue (RMR).
The multiple is really not all you need to know about the deal. Obviously the multiple is used as a multiplier of some number. That number is the RMR. It’s great to hear that the multiple is 40 times, but 40 times what?
The agreement to acquire the accounts will typically provide for a formula to arrive at the purchase price; the multiple times the RMR. What constitutes RMR is usually defined in the agreement. It’s defined in different ways, and you need a very careful understanding of how RMR is going to be calculated for your deal.
First you should see the term RMR, then the term net RMR. It’s the net RMR that you need to focus on. You know your gross RMR; it’s the invoice you send the subscriber. It includes all charges including sales tax, if applicable in your area.
No buyer pays based on gross RMR. So every deal will have a provision that describes the net RMR (even if the term net is not used). Sometimes the agreement will simply say this is the RMR and the definition will not include parts of the invoiced RMR that the buyer isn’t going to apply the multiple to.
Secondly, there will likely be another provision that excludes RMR from the deal. This is typically accounts that are too far in arrears (90, 120 or more days) or accounts that have other identified issues (e.g. 2G, work in progress and not completed, accounts on mingled central station lines, accounts needing repair).
This part of the ultimate equation for the purchase price is an exclusion from the RMR. So you have inclusion of what’s included in the RMR and then you have what’s excluded from that calculation.
Now the direct answer to the question, how is the RMR calculated? It’s a matter of negotiation, and if you’re not skilled at those negotiations, or your attorney has no idea what you are even talking about, you’re going to end up leaving money on the table.
Here’s an easy one; sales tax is not included in the calculation. Years ago the central station charges were also not included, but it’s more common now to include those charges in the calculation. If the monitoring invoice to the subscriber is $24 and you pay the central station $4, typically the $24 will be the RMR used for the calculation.
What if the central station charge is not $4 for basic monitoring, but $14 because there’s a pass-through for a third-party vendor, such as Alarm.com or radio charge or guard response charge? These third-party vendor charges should not be included in the RMR calculation; a buyer is going to want to pay based on those charges.
That’s not to say that no deal includes those charges; it’s a matter of negotiation. Keep in mind that because there are two components to the calculation, the RMR and the multiple, a buyer can manipulate the purchase price by allowing an inflated RMR (by including pass-through billing items) and then reduce the multiple.
The reverse is also possible: offer high multiple but then reduce the RMR. Once the included RMR is decided there will likely be exclusions, such as accounts in arrears and other items mentioned above.
You should know what your RMR is, the RMR that a buyer is likely to accept and pay for applying a realistic multiple. You should also be sure to use skilled counsel to navigate the deal. You need to line up counsel before you start making commitments that will affect your deal.
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