How to Build a Business Around Security

For most custom installation companies, if your new installations were off 30 percent and your total gross revenue was down $2 million, you might be ready to close up shop. That, however, is not the case at American Alarm & Communications Inc. in Arlington, Mass.

For more than 30 years, the security company has built a solid income based on recurring monthly revenue from the monitoring of residential and commercial security systems that allows it to maintain cash flow, educate its staff and improve customer service during a time when traditional custom companies are cutting to the bone.

Like almost all businesses in any industry, the recession has affected American Alarm. According to president Wells Sampson, the company has tightened its belt a little, but still will do between $22 million and $23 million in revenue in 2009 from its more than 17,000 accounts. If you need help doing the math, American Alarm generates about $800,000 in recurring monthly revenue from its four branch locations.

Between its commercial and residential installation, service and central station monitoring divisions, the company has about 140 employees. That equates to $165,000 in revenue per employee, which is 21 percent higher than the top performing custom-only companies in the CE Pro 100.

But in terms of recurring revenue, the security industry is not just simply monitoring burglar alarm systems. The market also includes:

• Fire alarms (smoke detectors in homes as well as pull stations and fire sprinkler systems in commercial facilities)
• Moisture sensors
• Temperature sensors
• Gas detectors (carbon monoxide [CO])
• Medical alert pendants
• Remote camera surveillance
• Remote access control/entry card management
• Line-cut protection/cellular or long-range radio backup

Another reason recurring revenue is important is the potential value it creates for your company as an exit strategy. American Alarm is not planning to sell. Wells Sampson recently took over the reins from his dad, Dick Sampson, who founded the company. But if past indicators of purchase multiples are still true, buyers of alarm contracts will pay between 20x and 50x the monthly recurring revenue. That means a company like American Alarm could sell for $16 million to $40 million.