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Alarm Industry Valuations, Value Drivers and Pros and Cons of Holding vs.

Selling Accounts
August 22, 2013
Confidential Presentation prepared for Recipients use only. Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC.

Introduction Valuation Drivers Valuations and Recent M&A Deals Holding vs. Selling Accounts and Capital

Markets Q&A


Henry Edmonds
Over 28 years of capital markets experience

Last 23 in the alarm industry

Started The Edmonds Group in 2004 Co-Founder (1990) and CEO of SLP Capital (thru 2004)

Largest lender to alarm industry when sold to CapitalSource in 2004 Over $400M of alarm loans $2B in transactions in the airline industry

Wall Street investment banker (1985-1990)

MBA, Harvard Business School BS, with distinction, civil engineering, University of


The Edmonds Group

Investment banking services Capital raising and mergers/acquisitions advisory 40+ transactions closed Average transaction size about $50 million Sweet spot $10 million to $300 million $3.0+ billion transaction value Focused on security alarm industry Specialize in recurring revenue service businesses Broad experience representing buyers, sellers,

borrowers and capital providers High level of client service


Key Valuation Metrics

At the highest level, everything can be reduced to four key metrics: Cash flow Attrition rate Growth rate/new account volume Creation cost

Only affects valuation when selling a company

Dealers must have the ability to provide good data on these metrics if they are going to maximize value!

Key Valuation Metrics

Cash flow margin from existing customers

Attrition rate

Adjusted EBITDA and SSCF

Creation cost of new customers

Total lost RMR on a TTM or trailing 6 mo basis divided by average RMR outstanding Canceled and change in over 90 days Total direct and indirect cost associated with new account creation, less upfront revenue, divided by newly created RMR Net Creation Cost before allocation of corp. overhead Gross Creation Cost after allocating corp. overhead Not relevant in bulk account sale

Growth rate

Other Valuation Drivers

Size of transaction Company reputation Quality of account and financial data Credit score profile RMR per account/margin Volume of account generation Critical mass per market/geography Ease of reprogramming/line swing

Bulk or company sales

Sales model for generating customers

Other Valuation Drivers (cont.)

Install quality/service call rates Contracts

Term Organization

Scanned and original contracts

Contract form

Automatic renewals, appropriate disclaimers

Billing profile

ACH vs. credit card vs. invoice

Age of accounts Type of RMR (residential vs. commercial)

Types of Sale Transactions

Types of transaction matters Company sale Bulk accounts sale Ongoing dealer program sales Valuation drivers vary depending transaction type Creation cost doesnt matter in bulk or dealer program sales Credit scores less important in company sale with aged account portfolio

Average Industry Metrics

Margins on existing customers Adjusted EBITDA of 50% to 65% for companies with scale Average 55% Attrition rate 8% to 14% Average 12% Growth rate 5% to 10% Average 8% Creation cost Gross Creation Cost 25x to 35x Average 28.5x Net Creation cost 20x to 30x Average 25x

Valuation Ranges
Not every company or account base is created equal How does your companys performance across key

metrics compare with others? If you have strong metrics, get a valuation at the high end of the range Poor metrics, low valuation Large alarm companies trade at 10x to 13x SSCF Smaller companies trade at 30x to 50x RMR


Liquidity/Secondary Market Activity

Active secondary market for buying/selling alarm companies

and/or alarm contracts Hundreds of transactions occur every year

Entire companies Dealer programs Bulk account sales

Larger (more efficient) buyers get predictable and significant

economies of scale by acquiring Large transactions ($500k+ in RMR) trade on multiples of seller cash flow Smaller transactions trade on buyers cash flow not sellers

Hence RMR multiples Still all about cash flow

Dealer Programs/Bulk Sales

Significant factor in the industry today Over 1 million accounts purchased each year Doesnt include company acquisitions Dealer program purchases Weekly or monthly closings Typically newly created accounts Bulk sales Accounts only Aged accounts Usually one-off transaction Seller stays in business

Dealer Program Gross Multiples

Monthly Volume <100/mo. Credit Score 625-650 650-700 700+ Avg. Gross: Avg. Net: Up to $50k/year 32x 34x 36x 34.0x 30.6x >100/mo. $50k to $100k/year 33x 35x 37x 35.0x 31.5x >200/mo. $100k to $150k/year 34x 36x 38x 36.0x 32.4x >300/mo. Over $150k/year 35x 37x 39x 37.0x 33.3x

Assumes: Auto-Debit Three Year Agreement Actual cash to dealer typically 10% less based on holdback

Company/Bulk Sale Multiples

55.0x 50.0x 45.0x 40.0x 35.0x 30.0x 25.0x 20.0x Under $50K RMR $50-100K RMR $101K-500K RMR Over $500K RMR 36.1x 31.1x 28.9x 39.9x 34.2x 40.2x 34.7x

Max & min yearly averages 2003-2012


Source: Barnes Associates

Company/Bulk Sale Multiples

Averages for 2003-2012
45.0x 40.0x 35.0x 30.0x 25.0x 20.0x 15.0x 10.0x 5.0x 0.0x Under $50K RMR $50-100K RMR $101K-500K RMR Over $500K RMR 34.1x 36.9x 37.2x 42.5x

Source: Barnes Associates

Dealer Program vs. Bulk/Company Sale

Monthly Volume Dealer <100/mo. Up to $50k/year Avg. Mult. Company/ Bulk Avg. Mult. 34x Up to $50k/year 34.1x >100/mo. $50k to $100k/year 35x $50k to $100k 36.9x >200/mo. $100k to $150k/year 36x $101k to $500k 37.2x >300/mo. Over $150k/year 37x Over $500k 42.5x

Notes: Dealer and bulk sales typically have holdbacks (10%+) for account guarantees Company sales typically do not

Major M&A Transactions 2013 YTD

Buyer/ Investor SAFE Security Central Security Group Goldman Sachs/The Beekman Group ADT Security Services Ascent Media Corporation Acquired Pinnacle (accounts) SecureNet NorthStar RMR (millions) $1.6 $.65 $1.0+ RMR multiple 30s 40s DND

Devcon International Security Networks

$3.6 $8.8

41x 58x

Major M&A Transactions 2012

Buyer/ Investor BV Investment Partners Interface Acquired DTT Westec RMR (millions) $1.5 $1.7 $3.6 $4.4 $31.6 ~$.40 RMR multiple 60x 32x 50x 30x 57x DND

Norwest Venture ACA Partners Monitronics Blackstone Group Protection 1 Pinnacle Vivint Vintage Security


Selling Accounts / Dealer Program

Limited outside capital

Buyer has a lot of control Typically no capital commitment Terms/availability can change Holdbacks/ account


Cash up-front from buyer

No long term account

performance risk Limited infrastructure beyond sales

Limited service, billing, account retention requirements

guarantees Not creating track record of servicing/retaining accounts Little control of data and/or account performance

Holding Accounts
Control of accounts


Who you sell to What products you sell What you charge How the customers are serviced and treated

Significant capital

Building a brand Opportunity for much

required Responsible for long term customer performance Need full infrastructure

higher multiple when eventually selling

billing, collections, servicing, retention

Debt Markets
Lots of experience alarm lenders However, most industry lenders require a minimum

deal size of $5 million to $10 million Local/regional banks will lend smaller amounts

Lack of industry understanding low advance rates

Advance rates for industry lenders not high enough

to cover all cost of origination some equity required

Senior Debt lending 18-24x RMR Stretch Senior multiples 26-28x RMR Subordinated debt up to 30x RMR

Private Equity
Over 2,000 private equity firms in the US Firms come in all sizes Over $500 billion in money to spend Many more PE firms interested in the alarm industry Industry performed well through 2008/2009 recession Viewed as safe harbor with good upside potential However, require positive EBITDA and a certain size Most want EBITDA $1M+ Need to invest at least $2M+ Dealer probably needs to own at least $500k in RMR

Venture Capital and Public Markets

Venture capital firms invest in pre-cash flow and

pre-revenue companies Typically looking for companies that have a unique product or service and potential for exponential growth

Not a fit for most alarm companies

Public markets well suited for alarm companies Few alarm companies big enough (very expensive to be public company/need minimum market capitalization $500M+) Markets dont really understand alarm industry accounting

Summary Hold vs. Sell

Outside capital is hard to come by/expensive until a

firm reaches a certain size/scale Dealer programs/selling accounts are a great way to develop a track record

Reinvest profits to build infrastructure

Transition through a hybrid approach Sell some accounts, hold the rest Holding accounts/becoming a full service alarm

company ultimately creates much more value


Contact Information

Henry Edmonds The Edmonds Group, LLC 16 Lenox Place St. Louis, MO 63108 Ph: 314.422.4649 Email: Website: Facebook: Twitter: TheEdmondsGroup