Valuing Companies with RMR
By Victor Harding
Most owners of security alarm companies these days particularly those with monitored accounts know full well that their monitored accounts are valuable and can be sold in the open market place at a multiple (# of months) of their total RMR.
However , as an owner of a security company, if you are looking for a formal valuation to get done on your company (because you are thinking of selling or you want an estate freeze done or you are going through a divorce) strangely enough you need to be careful as to who values your company because many professional valuators simply don’t know how to value RMR and can often grossly undervalue your company.
A good example of the possible repercussions of arriving at wrong values happened to me more than 13 years ago when I was asked to value the 49% of a company for a minority shareholder who was in a dispute with his majority partner. This company had a large block of monitored accounts. Naively, I valued his 49% using a valuation method that I knew best which was valuing the RMR while his majority partner had his accountant value the company using the more standard valuation method, a multiple of average adjusted earnings. My method came up with a value of more twice what the other method came up with. Unfortunately, we were against a recognized a Chartered Business Valuator who frankly had the time won the day and my client suffered.
In reality my client and I we had valuation theory on our side in that by definition all valuations are to come up with the maximum value that can be arrived at between an arm’s length buyer and seller. Mine was the maximum value!
The question arises from this real- life example is how can values for the same company be so different. The answer lies partly in who is buying the target company. If the buyer is another industry player (what the valuation industry calls a strategic buyer) that facts are they can buy client’s company and, in the process, achieve cost savings after. They would fold my clients 1500 accounts into their own with not much extra cost. This enables to pay a higher price.
If my client’s company had been bought by an individual or even a financial institution like private equity, they would probably not value the company as highly as a strategic buyer. These buyers would need most of the structure of the original company to stay in place.
Over the last 13 years, since this above valuation incident happened, I have seen this same dichotomy of values happen over and over again particularly with alarm companies. Buyers who don’t know about the special value of monitoring RMR offer bids significantly under what the company is truly worth. Why? They are using the wrong valuation method. They are valuing the company using a multiple of average, adjusted earnings which almost never gets close to what the company is really worth. Here’s the shocking thing. Chartered Business Valuators often make the same mistake!
I and many others have explained many times why RMR is so valuable and why any of you in the security industry should be trying to generate RMR. The higher value stems mainly from the fact RMR, unlike installation and service revenue, recurs years after year for many years on end. (I have been the same monitoring company protecting my home for 12 years now.) That is not unusual in the alarm industry. It also helps that the monitoring RMR is generally quite high (70-80%), much higher than the other revenue.
And this comment about making sure you get the right valuation method for your company does not simply apply to alarm companies and monitoring revenue. I am currently selling a security & fire services company that has, amongst its several different types of RMR, significant in fire inspection revenue. Although inspection revenue comes in at lower margins generally (50 %) than monitoring revenue and therefore trades at lower multiples of RMR (18-24 months) it still gives this company a much higher value than using a multiple of adjusted earnings. The facts are fire inspection revenue these days is being treated as RMR. In this company’s case all the various types of this company’s RMR gives rise to a sale value of 4 times what you would using a multiple of adjusted earnings.
So anywhere there is RMR -and this applies to alarm and fire companies most likely- you should expect to get higher valuations valuing the RMR than valuing the earnings. Interestingly enough the market does not apply this rule of thumb to guard and integration companies. Guard company revenue is generally not considered recurring in nature and with larger integration company there is usually a far greater amount on installation revenue and in valuations it outweighs the value of any RMR.
The message here is be careful who you get to do a formal valuation of your security company. Even with professional valuations firms you can end up getting the wrong value.
Victor Harding
Harding Security Services Inc