Re: More on alarm company valuation

[tourman <robercampbell@xxxxxxxxx>]

On Nov 24, 2:26=A0pm, Effenpig1 <dirtyspicev...@xxxxxxxxxxx> wrote:
> From a recent Ken K. Q&A
>
> < =A0 =A0 =A0 =A0 =A0How to evaluate service contracts - Nov 24 2009
> ****
> QUESTION:
> *****
> Dear Mr. Kirschenbaum,
> How do you evaluate an alarm company that has service agreements that
> do not lock the customer into a yearly contract? I am in the industry
> and there is a company we are looking at buy but they have these
> service agreements that do not lock any of their customers into
> staying with them. Now how would you go about evaluating that company
> or would that even be a wise idea to buy such company? Thank you.
> Sincerely,
> Melissa
> ********
> ANSWER:
> =A0 =A0 Alarm companies are valued, for the most part, based upon their
> recurring revenue under contract. =A0If you decide to provide service
> without a contract or with a contract that does not have a fixed term
> [in other words terminable at will or a per call relationship] then
> here is the calculation:
> =A0 =A0 =A0 =A0The multiple that the buyer is willing to pay, say 38 time=
s,
> multiplied by the recurring revenue under contract, in this case,
> zero. =A0Do the math.

RHC: Not so ! Not even close....

What you get as a multiple will vary all over the map based on the
nature of the company you are buying, including a large number of
different factors making up the ultimate "worth" of the company. Yes,
longer term contracts will definately get you more generally speaking,
but anyone doing their "due diligence" on the accounts in question
will use this as only one way of determining the real worth of the
company. Many other factors come into play, like...reputation of the
company and their known quality of installations, established "churn"
rate (with or without a long term contract), how many different types
of panels involved, their age and length of time in service, makeup of
the customer base, geographical spread, warranty and service terms
provided, quality of company records kept, percentage lease versus
owned panels, actualy purchase terms versus time payments,
etc,etc..and the list goes on.

I suggest anyone either buying or selling accounts do some reading on
the subject before making any kinds of commitment involving money.
Also get yourself a good lawyer who knows the industry; it will be
worth any money spent since his evaluation will more reflect
reality......

We have a large dealer here in town who is well known as a sleazebag.
All his clients are under five year contracts. No one....and I mean no
one...wants to buy this company; he's tried all potential buyers and
none are interested. Anyone who thinks they can keep a purchased
contract customer simply due to the fact that they are locked in to a
finite term is looking at life through rose coloured glasses....

I would also suggest you be cautious of advice like this given by
someone who clearly knows little about the subject.