More on alarm company valuation

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.

Or in the business of creating and selling contracts.

Yes,

Agreed.

I doubt I'll ever purchase accounts, but I may someday be on the selling end.

I do not have my customers under locked contracts but they are loyal to me and me to them and they would be loyal to a company buying me out as long as they were treated fairly. its all about service provide good service and pricing and the money will always be there but too many companys have forgoten this. i never advertise either word of mouth is how i built my company and im always busy.

Your above statement sounds like something I could have written, however I believe it is in my best future interests to start getting my customers used to the idea of locked-in contracts. I was thinking of giving them the option to "freeze" their current rates for the length of the contract as an incentive.

RHC: Bingo !! Too many companies buying other companies try to impose "rules" that, although they may be acceptable to large corporate interests, are anything but to a client who has been used to being treated like a real person ( and not just an impersonal contractual value).

It pays to make sure you know precisely how the buyer plans to handle your prices, contractual terms, and service / warranty terms once he controls your customer base. If you allow him to get greedy, the inevitable clawback clause will cost you dearly in lost customers (long term contract or not....)

Ideally, I'd like to pass the business to my son, but I have know way of knowing yet if its something he will have the skill and drive to do. Eventually I'm going to have to do something, and if it turns out to be sell, I want to be able to get what it's worth.

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RHC: Sounds familiar !! One of the toughest decisions you and I have to make is whether or not our offspring have the moxy to make the business work. We put blood, sweat and tears into building a business anyone would be proud to be associated with. The next generation don't always share the same old world values we do.

You will have to make your decision to hand it over to your son in the most cold blooded fashion possible, forgetting he is your son, and looking at him just as you would any other employee. Does he have the drive, the ambition, and the will to work hard, and at all hours, to run it like you do. It's a hard decision, but one that you MUST get right.

Build your business any way you see fit; just make sure it is run fairly and honestly to the best of your ability, and NEVER forget your customer and their service levels. If you do forget, and service falls down, long term contracts will not save you over the long run......

That's exactly what we do. We've been able to demonstrate that our rates haven't changed in over 12 years. We offer a 3 year agreement that's renewable at one year intervals on expiry of the original agreement. I have customers actually calling me asking to "extend" for another three years!! :-)

In the context of the subject of this thread and assuming that someday you will want to sell the company; it would seem to me that any potential buyer, seeing that you haven't raised your prices in 12 years, would not look at that favorably. They would have to think that upon buying the company, if they raised prices, they would lose customers. And I'm assuming that you are talking about monitoring prices only.

With either short OR long term contracts in place, certainly, if for no other reason, shouldn't your prices have been increased to at least reflect the natural increase in doing business? I'm sure you're paying your personel more now than you did 12 years ago and if you include the increase in every thing else over 12 years...... You've got to be getting income from somewhere to be in business that long but not increasing prices just because of the minor objection you might get from a few clients, doesn't seem to me to be a good policy. Increasing the monthly monitoring fee by a relatively small amount over the years, is not something that 99.9% of your clients would object to. I'm sure that YOU expect things to go up, why would you not think that your clients would not expect things to go up also?

I can understand that you might be increasing your installation prices to compensate for the increase in cost of doing business, and the relative decrease in monitoring income over the years, but that's contrary to the customary .................... monitoring income supplementing the installation income. When someone looks to buy a company, annual income in considered but it is usually offset somewhat by the buyer as attributable to "good will" which is more of a subjective value (that is, subject to devaluation) as compared to hard income from contracted clients.

I know a few alarm companys who have not raised their prices for a long time and when you dig right down to the basic reason why, it always turns out to be that they're afraid they're going to lose their accounts. I raise my prices after 5 years and then more often for other accounts for various reason. In my experience, you may lose one of two through the years but the overall increase in income far offsets the loss.

Just curious.

For monthly monitoring fees, I decided on an increase of 16% every 5 years based on the original starting monthly fee. I have been through

Another thing I decided from the beginning was I would keep my equipment prices fairly low. I found a certain website, which I won't name, and couldn't believe what the prices they were selling the equipment for. People can find out pricing with a few keystrokes, so I decided to make my money on the labor, with moderate equipment markups. A company I had worked for really jacked up prices, yet had a fairly low labor rate. I always felt it was better to keep equipment markup reasonable and make profit on the labor.

My monitoring costs have actually gone down. I see no reason to increase the cost of monitoring. Unfortunately, service costs have gone up and consequently so have our hourly rates. We don't do free installs, but we do deliver value for the dollar. There *is* a market for used Binkey panels, after all. ;-)

RHC: Frank, I find myself in the same position. I have always looked at monitoring income as a "profit centre" in itself, independant of sales and installation profit. My actual costs for monitoring have also gone down, adding another $500 a month to the income stream from the monitoring allocated to service and warranty. However, since service and warranty are bundled, that comes out of that same revenue stream. Costs for equipment are the same or slightly less, with service costs increasing with the increased volume of accounts. However, I keep detailed service records to establish costs and they more than balance out. Service levels have dropped over the last few years for everything except batteries and door changes (which have increased greatly due to the ravages of time). I suspect being ruthless in what panels and clients I will take over has helped service matters greatly.....

The only negatives I see are governmental taxes which are horrible at my income level. I spend as much time at legal tax avoidance as I do anything else in the business. However, I have had occasion to use the Canadian health care system extensively lately, and it is absolutely superb, so I guess that balances things out....:((

Glad your business is going well. Next time I'm in Vancouver, I'll try to look you up so we can meet....

That hardly answers the questions but ..... Ok.