The Big Idea with Ron Davis
Why RMR is King in the Alarm Industry
Idea of the Month
If you had just one really great idea you could share with the alarm industry, what would it be?
This month's great idea comes from John Raiger, who is proprietor of New Lenox, Ill.-based Electronic Systems of Illinois Inc.
Raiger's great idea:
Be sure to develop your recurring monthly revenue, and don't get distracted by projects that don't have an RMR component.
John Raiger, owner of New Lenox, Ill.-based Electronic Systems of Illinois Inc., is easy to like. With his ponytail, soft demeanor and easygoing attitude, he would be perfectly cast in an updated version of “Middle Age Crazy,” a wonderful movie from 1980 that so perfectly captures the essence of that period in one’s life.
However, looks can be deceiving. Behind Raiger’s relaxed manner is a knowledgeable, successful alarm dealer who has been around this industry since before the time that movie was made. He’s seen it all. Back when he started he became a disciple of the concept of being in “the recurring monthly revenue” business.
As many of you know, my day job is as a business broker, helping alarm dealers to exit the business in the most profitable way possible. And that usually means helping those potential sellers to define as much RMR as their business is capable of. That means not just monitoring, but also service contracts, long-range radio, video monitoring, medical alert and, frankly, anything that has ongoing and steady monthly cash flow.
Unlike many other businesses and industries, the alarm industry estimates the value of its companies based on a multiple of RMR. And that means to you, dear reader, that every dollar you add to your recurring revenue is multiplied by the multiple you will receive when you sell the business. So when Raiger talks about his idea of being in the RMR business, he means it literally.
Hard Lesson to Learn
It breaks my heart when a dealer who works primarily on the integration side of the business — including home entertainment and other spinoff installation services — calls to request an evaluation of their company, only to learn that its worth is considerably less than what they expected.
I recall a client of ours who regularly billed upward of $10 million on big installation projects. He was of the mind that his company “must be worth lots of money,” but actually quite the opposite was true. In short, he wasn’t selling service contracts or any other type of RMR services. By the time he finally put together the financials, he discovered a cold reality: Without a RMR component to his business, he had nothing to fall back on. We finally helped him sell his company, but at a considerably lower number than he ever expected.
All of the little or no money down sales programs out there are really nothing more than an attempt to build up RMR at a cost that is lower than the multiple that the account might be sold for. For example, let’s assume an account was paying $25 a month and had a three-year contract. If you multiply $25 times 36 months, you come up with a gross value of $900. Depending upon the valuation of other accounts in the portfolio, you can see how it might pay to spend $200 to $500 in creation costs to get an account that might be worth $900. When looking at the valuation of alarm companies, gross sales are not nearly as important as RMR.
It can be all too easy to sidestep your primary mission — creating RMR! — and instead start monitoring other products and services that might generate revenue but really do not have any application for the future. Raiger’s concept of not getting distracted by non-RMR-related projects is a good one. For those of us nearing the age of retirement, and thinking about our exit strategy, it is mandatory!
Ron Davis is a SSI Hall of Fame inductee and President of Davis Mergers and Acquisitions Group Inc. Also known as The Graybeards, the company is active in acquisitions and mergers exclusively in the alarm business.