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CE Pro Summit: What Is the Value of My Company?

Industry broker identifies the key elements integrators need to examine to determine how much their company is worth. What is the effect of home automation RMR, cash flow, revenues, service contracts and brand name on multiples?


Do you know the value of your company?
Jason Knott · September 2, 2015

“What is my custom installation company worth?” It is a common question among integrators, even those who are not actively seeking an exit strategy.

At the recent CE Pro Summit in Washington, D.C., 20-year financial industry veteran David Stang of Stang Capital Advisory spoke with attendees about the key factors that affect valuation. His overall messages:

  • Build recurring monthly revenue (RMR) to earn going rates of 30X to 40X multiples
  • For non-RMR-based integrators, build cash flow or EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) to earn going rates of 4X to 5X multiples
  • Achieve EBITDA of at least $5 million to get on the radar of investors
  • Service contracts are worth half of monitoring contracts

Stang Advisory Capital focuses on helping middle market and lower middle market companies, like custom integrators, to raise capital.

“If you are looking to grow, there quite a few different capital providers out there, from banks to equity providers, who are looking to put their money to work but they need to understand the industry and improve the communication,” he says.

Valuing Home Automation RMR

A number of years ago the market was purely security, but now home automation monitoring is all the rage. Stang admits that investors were at first hesitant when security companies like ADT and others started adding lighting control and HVAC control to the monitoring contract because they thought it would limit potential buyers. Those fears have been allayed.

“Honestly the lenders were a little bit concerned [with home automation]. First, because they did not know what that meant in terms of additional creation costs and what it meant for retention or attrition. And secondly, they did not know ultimately what the value of those types of accounts to account buyers would be,” says Stang.

“To buyers, the account contracts are collateral that can be resold if they want to another purchaser. So, as additional services are added onto the core security contract, what if the buyer can’t provide those services? You can’t provide services that are too proprietary or too unique so that a potential buyer could not be able to do it. That makes it tough to sell that account.  But once the companies that buy accounts also started adding home automation services, it facilitated any difficulties.”

Related: More from the 2015 CE Pro Summit

He now sees the expansion of RMR opportunities to audio and video in combination with home automation.

“The more services that are added, the more value, but it all depends on the margins, which is critical,” he says. “Traditional security alarm monitoring has very high margins… ADT’s monitoring margins are in the 70 percent to 80 percent range. It doesn’t help to add $10 in RMR if it costs you $9.50 cents per month to monitor and maintain it. But in general adding more services improves retention and reduces attrition, so it clearly makes home automation customers more valuable because that means the cash flow stream will be there for a longer period of time. That will lead to a higher multiple to be paid.”

There is a lot that goes into calculating the multiple paid for RMR. Multiples being paid for RMR right now are in the 30x to 40x range, according to Stang. If you area selling only a handful of accounts, it is on the low end, but higher volume equals a higher multiple. There is also value in the company brand name itself. Stang cited the recent sale of Protection One to ASG for a very high multiple because P-One has has such a strong brand equity.

Non-RMR Valuation Formulas

Besides RMR, the other formula for valuation is EBITDA, which should replicate cash flow, according to Stang. That means for most integrators, you need adjust EBITDA to match cash flow to make your company more attractive. That might mean taking out some of the owner’s expenses, for example. 

Also, EBITDA trend is important. You can’t have a spike in EBITDA and expect to sell the company based on a multiple of that spike. The buyer wants to know if that spike is sustainable. He needs to know if the business is cyclical. He will likely want to look at an average over a number of years and put a multiple on that, surmises Stang.

EBITDA multiples are not any different than would be paid for any cash flow-generating company. They start at 4x to 5x and adjust up or down based on growth rates, strength of the management team, strength of the margins, quality of the financial information, and other factors, notes Stang.

But how big do you have to be?

“The threshold to be reached to be sold varies,” says Stang. “Smaller, more bite-sized companies are easier to be acquired, especially if it is a competitor simply wishing to expand into a new geographic territory. If it is an investor or private equity firm, you need to have larger amounts of EBITDA because the buyer is going to need financing. Most lenders do not like to lend against small cash flow companies because that cash flow can go away. So for an outside buyer, you need to have $5 million to $10 million in EBITDA.”

Doing the math on those figures, it means a custom installation company working on a 20 percent net profit margin (and that is really really good) needs to have revenues over $25 million to attract an outside investor buyout.

Valuing Service Contracts

“There is certainly a value of service contracts,” says Stang. “Most service contracts do not earn the same margin as a home automation monitored account, so they are going to be worth half the multiple. It’s important to have service contracts to add value but those are harder to scale. For example, you can add a new security monitoring account without having add any more people, but with a service contract you have to have the manpower to service the system.”

Future of VSaaS

One of the new trends is Video Surveillance as a Service (VSaaS) in which cameras are “leased” or monitoring fees are charged per camera. Stang believes that is a great opportunity to grow value for custom integrators.

“Everyone wants cameras inside and outside the home. So VSaaS is going to be a much more common part of the home automation package in the future,” he says.



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  About the Author

Jason Knott is Chief Content Officer for Emerald Expositions Connected Brands. Jason has covered low-voltage electronics as an editor since 1990, serving as editor and publisher of Security Sales & Integration. He joined CE Pro in 2000 and serves as Editor-in-Chief of that brand. He served as chairman of the Security Industry Association’s Education Committee from 2000-2004 and sat on the board of that association from 1998-2002. He is also a former board member of the Alarm Industry Research and Educational Foundation. He has been a member of the CEDIA Business Working Group since 2010. Jason graduated from the University of Southern California. Have a suggestion or a topic you want to read more about? Email Jason at jason.knott@emeraldexpo.com

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