We talk a lot about the value of recurring monthly revenue (RMR) in building your business valuation and developing an exit strategy. But right now, how much are your accounts really worth?
According to legal expert Ken Kirschenbaum of Kirschenbaum & Kirschenbaum, who is also a columnist for CI‘s sister publication Security Sales & Integration, monitored commercial fire security accounts right now will earn 40 times multiple.
In other words, if you receive $100 per month from a commercial fire account, you will be paid $4,000 for that account.
Kirschenbaum says the going rate for monitored residential security/home automation accounts is 35X. Meanwhile, the value of service contracts appears to have grown tremendously. In past years, industry experts rated service agreements as low as 12X, but Kirschenbaum says the current valuation is 30X.
That’s great news for integrators, many of whom do not do security systems but instead are focused on getting signed service agreements.
3 Big Mistakes to Avoid
Meanwhile, Kirschenbaum points out three big mistakes that dealers make that hurt their valuations.
- Old Contracts. Having contracts that are 10 years old with your clients and do not include the newest legal jargon can hurt valuation by as much as 5X, he says.
- High Attrition. Having a “higher than average” attrition rate for your contracts will also affect the multiple paid. Kirschenbaum says that if a company has attrition higher than between 3 percent and 8 percent annually, it could also reduce the multiple paid by as much as 5X.
- Less-than-Ideal Central Station Relationship. If an integrator is using multiple central stations, or does not have direct lines into its contract central station, that can deduct as much as 5X. On the flip side, if you are selling accounts to a company that uses the same contract central station as you do, it can add valuation of 5X.
“There are numerous variables to be considered, and financial experts, some business brokers and attorneys have the acumen to do the calculations with some degree of precision. For the rest of us, much reliance is placed on gut feeling and general issues that are common enough to establish a method of valuation,” says Kirschenbaum.