When Selling Alarm Accounts, What Factors Affect Price the Most

I have been buying and selling alarm accounts in Canada now for 25 years. I thought it would be useful to summarize what affects the price on alarm accounts the most.

Firstly, it may seem crazy but the size of the account base may well be the most important factor overall in determining. The cut-off point seems to be 1,000 accounts. Any account base with 1000 accounts or more gets lots of attention particularly from the bigger national buyers who generally pay the best prices. Owners with 500 accounts will not likely attract monthly multiples in excess of 36 X recurring monthly revenue (RMR) regardless of what other good features the account base has. Whereas 1000 accounts with some other good features can sell for 38 to 40 X RMR. The really high multiples such as 42-44 X are mostly reserved for account bases of 5,000 accounts and above.

Secondly, I think the average rate on the accounts is next in line in importance. Today the big buyers want the average rate to be $35/acc/mth and above -preferably between $40-$45/acc/mth. Low rates are a killer on price. Not only does the multiple go down, but the overall price shrinks too due to the low rates. A dealer once showed me how much quicker the payback is on high priced accounts is versus low-priced accounts all because the high-priced accounts higher gross margin.

When we go beyond these 2 factors it is a bit of crap shoot as to what is next in line for importance. In the United States it would be that the dealer has signed monitoring contracts on all his accounts with the proper waiver of liability. Americans are fanatical about having signed contracts. In Canada it is important but not always a deal breaker.

10 years ago, having all your panels programmed to your lines and call forwarded to the monitoring station was very critical. Today with a much higher % of cell and interactive accounts which can be transferred more easily, the call forward line issue is important but not as critical.

Next in importance, based on what I experience, are the panels installed on your accounts. Today the ideal account base has a high % of panels like Qualys or Neo panels. These are state of the art panels and can handle extra services like Alarm.com. In some cases, buyers of smaller blocks of accounts will pay lower multiples for accounts with older panels in hopes they can get an upgrade.

Accounts with a high % of cell and interactive services built into them tend today to attract higher multiples, Today, it is not uncommon to find 50% of an account base on cell or interactive (alarm.com) Not only does this give you higher monitoring rates but also the stats show the extra services make the accounts” stickier”.

Strangely enough, the next factor that can affect the multiple paid for a block of accounts is whether the accounts are sold into an “asset” or “share” deal. Share deals tend to get done at lower multiples than asset deals because the purchaser can’t write the purchase price off in a share deal. The bigger buyers of accounts don’t like to do share deals. They say they are more complicated and come with more risk. This may be true but the discount that buyers of shares sometimes are done at are too large. I believe the justifiable discount should be more like 3X RMR, not 5 X RMR.

The last 3 items that can affect price in a sale of accounts are in no particular order- the location of the accounts, the way the accounts are billed and the attrition rate on the accounts.

Regarding location, my sense is that 1000 accounts located in the GTA will tend to attract slightly higher multiples (1 or 2X at most) than one in a smaller city unless there are enough accounts being sold in the smaller city for the buyer to have an office. i.e. 2500 accounts or more. Paying more in the GTA makes some sense because it will likely be easier to find techs to service in the GTA and there is a good chance that extra accounts in the city create more density. Density is important in the servicing of an account base.

How accounts are billed is important. An account base totally on Pre-Authorized Payment is more attractive these days than one that has to be invoiced. Invoicing costs money. Secondly getting accounts on PAP is reputed to help decrease the attrition on the account base.

Finally, there is the attrition factor. The textbooks all say that attrition should be a big factor determining price and yet most buyers that I deal with don’t do enough due diligence on the account base before buying to know what the real attrition rate really is.

So, taking all this into account if I had an account base with 500 accounts, and I wanted to attract a higher price I would:

• Upgrade all my panels
• Try to sell interactive service on as many accounts as possible as I could.
• Get my average monitoring rate to $35/mth and above
• Put all my accounts on signed contracts and on PAP

But let’s keep in mind that there are other factors besides the upfront multiple to take into consideration. I am referring to the length of attrition guarantee period and the pay- out period for the accounts. You can have a multiple of 38 X but have that reduced with either a payout of the purchase price over 24 months or a 2-year attrition guarantee. The upfront multiple is never the whole story.

Victor Harding

Harding Security Services Inc