The Big Idea with Ron Davis
Protect Your Jewels
Sargenti has been in the business almost as long as I have, and I've known him for most of that time. A great deal of what happens in accounts financing in the alarm industry today is as a direct result of some of the innovative thinking that Sargenti has had through the years.
He is one of the most knowledgeable financial experts I know working in the alarm industry, and when he says something, dealers should listen.
Sargenti's underlying message is about the true value, or worth, of your business. It is not in the sales or even in the profitability, but rather in the value of your recurring monthly revenue (RMR). This is a lesson that integrators in our industry are learning when they try to raise capital, or even sell their businesses.
Building Cash Flow From RMR
While the value of an integrator's business is always a multiple of cash flow, the real value of an alarm dealer's business is a multiple of the RMR. Which method is best? It depends on who you ask.
If you ask a buyer who is also a consolidator, he will tell you RMR from alarm accounts is the most stable, predictable and arguably the best way to value a business in this industry. If you're talking to an integrator who buys other integrators, he will speak only of EBITDA (earnings before interest, taxes, depreciation and amortization).
Therein lays the value to an alarm dealer that is unique to the industry. The value of an alarm dealer's business is its RMR.
Sargenti's great idea caused me to explore how well alarm dealers take care of the "equity" in their business. If you were a diamond merchant, you would secure the assets of your business by keeping the diamonds in a safe when not on display. In working with alarm dealers that are selling their companies, we run across a great array of views by dealers on how to take care of their company's single largest asset: contracts.
Some dealers just throw their files in a drawer. Others don't keep them up to date. Some don't even have contracts. Those that do may not have a term, an indemnification clause or a right to assign clause.
There are all sorts of sources out there to help you learn how to take care of your assets. One of those resources is Ken Kirschenbaum's Web site (www.kirschenbaumesq.com). He sends out a daily newsletter focusing on legal issues in the alarm industry. Many of those issues deal with the proper way to treat contracts and all of the related issues connected with that chore.
How well you take care of your "diamonds" will determine their value.
Ron Davis is Security Sales & Integration's "What's the Big Idea?" columnist and contributing market analyst. He is president of Davis Group, a full-service consulting firm serving the security industry, which also includes GraybeardsRus. He has 35 years of industry experience, including founding Security Associates International in the 1980s.