By: Jim Wooster, Jr., Alarm Financial Services, Inc.
This is the second article in our six-part series outlining the many aspects of making an acquisition and financing that acquisition using the recurring monthly revenue (“RMR”) accounts as collateral. The previous article was titled Finding a Company to Acquire.
This article deals with determining how much to pay for RMR accounts once you have identified a seller. In the alarm industry, we typically talk about the purchase price as a “multiple” of RMR. For example, the purchase of $10,000 RMR for $300,000 would be referred to as a 30-multiple or 30x or 30-times purchase price or valuation. The essential concept to take away from this discussion is that the purchase multiple is how we express value, not how we determine value.
So, how do buyers determine value? Many factors go into the process, but the two main factors are: 1) the profit margin on the RMR being purchased, and 2) the length of time the buyer can expect to keep the accounts, otherwise known as attrition. For example, if I purchase a $35 per month monitoring account, I know I have expenses associated with that account for the central station, cellular provider, and billing. If those expenses are, say, $11, then the profit is $24. And if I expect to keep that account for seven years (a guess, your mileage may vary), then the net profit over the life of that account will be $2,016. So, how much should a buyer pay in return for $2,016? $1,000? – that would be a 28.5-multiple. More? Less?
This is where other variables come into play: Will the accounts provide other revenue sources like test and inspection? Can you sell new services to existing customers? What about the referrals that will come from all the new customers? Estimating the future profits that will come from these and other factors will further help buyers determine the price they are willing to pay.
The excellent news is GMS dealers don’t have to go it alone when trying to figure out how much to pay for RMR accounts. With GMS, you have access to its network of industry professionals – brokers, consultants, lenders like AFS – who can assist.