[no subject]

<          How to evaluate service contracts - Nov 24 2009
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QUESTION:
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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
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ANSWER:
    Alarm companies are valued, for the most part, based upon their
recurring revenue under contract.  If 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:
       The multiple that the buyer is willing to pay, say 38 times,
multiplied by the recurring revenue under contract, in this case,
zero.  Do the math.