Why a Max Valuation Requires Thinking Beyond Just RMR

Revenue and margins relating to installations, upgrades, service and other ancillary items could be the catalyst toward attracting an above-average valuation and sale price.

Why a Max Valuation Requires Thinking Beyond Just RMR

Most won’t argue that a driving force and focus of most owners and executive management is to build companies that will eventually return above-average valuations. Various segments of the business contribute to this goal in a variety of manners depending on their responsibility and department within the business.

For example, sales management would focus on more sales, which presents greater profitability. If you’re an integrator, you are seeking profitability on the installation, sale of equipment, monitoring and service and maintenance contracts related to a system.

If you’re a security dealer it’s very similar although you may also have to consider additional elements regarding the subsidy of acquiring your recurring revenue on these new accounts.

An organization’s chief operating officer or vice president of operations is focused on efficient and effective installations and service. A chief financial officer, chief executive officer and president stay in tune with all areas of the business, including the best way to finance and keep it balanced, that lead to a healthy company.

Capitalize on Industry’s Appeal to Financial Community

Maintaining a healthy and profitable business is not easy and not necessarily the same as it was traditionally. Traditionally it was common for security dealers to stay laser focused on their recurring monthly revenue (RMR), creation multiples and earning a large multiple of their RMR for the greatest company valuation when they are ready to divest.

Unfortunately, this is really something of the past. Yes, maintaining best practices and paying attention to fundamentals is still important, and some portfolio acquisition companies may grab smaller portfolios of RMR contracts for a pure multiple of RMR.

Having said this, we may find that this model of evaluations could experience an adjustment that may translate into a reduction in that multiplier for some dealers.

Decades ago, many would complain that it was a daunting task to teach lenders our business and how they should look at the industry as it relates to lending. I remember when I would go from bank to bank seeing what it took to attain financing and how no two deals looked alike.

The good news is we are many years down the road and the lenders are friendly to our industry. In fact, lenders and the financial community at large really get it — they understand RMR, cash flow, EBITDA and, most important, that the creative adjustments that were acceptable over the years require a deeper dive than RMR alone.

This has made it better for some and challenging for others when arriving at valuations for lending and investment.

It’s critical that owners and management manage their businesses every day with valuation in mind and understand the value of the business at the start as well as the end of each day.

All Revenue Streams Affect Your ROI

Although security dealers’ or systems integrators’ RMR from monitoring is essential, it is not the only thing that matters. It is equally important that security business owners and managers pay very close attention to all revenue streams their company generates and how they collectively relate to the company’s bottom line.

Revenue and margins relating to installations, upgrades, service and other ancillary items could be the catalyst toward attracting an above-average valuation and sale price.

Although the ‘recurring’ aspect of your revenue is essential, it is just as important to understand that building a business that provides profitable service and installation revenue plays a big part in valuations.

Dealers often debate the logic of why certain acquisitions are valued at higher multiples of RMR than others. What sometimes causes confusion is when the news circulates that a business was sold for a substantial multiple without understanding all the details of the company and the transaction.

Likely, the multiple was simply the overall calculation for simplifying communication of the deal and only the byproduct of what was a much more complex calculation of the business’ overall financial health. So those reading the acquisition news don’t have a full picture of the number crunching.

Naturally I’ve seen a variety of business models during 40 years as an executive and a consultant in acquiring and selling companies and portfolios of accounts.

From my experience working with well-balanced businesses, security companies must stay focused on what really makes the difference toward the greatest returns. Many elements impact the differential in the multiples of RMR utilized.

In short, building profitability will translate into a maximum return on your investment. Building value provides borrowing and bargaining power.

This is important if you choose to borrow money for growth or other reasons as looking for extended credit from suppliers or a host of other reasons. In short, by increasing your installation revenue and RMR, while staying efficient in your expenditures, you will build a higher valuation.

The electronic security industry remains highly attractive to investors and lenders. Fortunately the industry has several very credible, competent and informative financial advisors, consultants and accountants.

It is essential that you chose a specialist who will guide and advise you toward the goal of garnering the highest valuation for all of your efforts, hard work and investment.

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About the Author

Contact:

Peter Giacalone is President of Giacalone Associates, an independent security consulting firm.

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