Placing a value on a firm that installs and services life safety systems isn’t an exact science. Having worked with both buyers and sellers of fire alarm, sprinkler, and security firms the valuation gap between the two is often wide. Owners of firms promote their revenue growth, manufacturer distribution agreements, longevity, key accounts, relationships with AHJ’s, and their skilled workforce. Buyers are interested in the same items, but in the end they’re looking for an acceptable ROI. The seller tries to convince the buyer their investment is a good one as projections for future growth and profitability are solid. In many cases the owner will agree to run the firm for a period of time to ensure continuity. Buyers know there’s a significant risk as ownership transitions. What about all those key relationships with manufacturer’s and AHJ’s, will they continue? Will key employees move on and take key accounts with them? Will projects be available when construction slows? None of these questions are certainties; they all have a level of risk.
The most important item buyers look for on a firm’s P&L is revenue stream. They need to be ensured that there’s a cash flow to pay for their investment. That translates to RMR. Service Agreements are the key metric in valuing a firm. That means signed agreements. It doesn’t mean T&M revenue or inspections done annually with an informal agreement. There isn’t an exact number that buyers apply to calculating the value of RMR revenue. Everyone likes to talk multiples, but there are many factors to consider. Let me sum it up – in a meeting I was having between a buyer and seller the seller spoke of their impressive installation revenue growth and good margins. The buyer, “We equate $1M in installations to $100K in service agreements. Sooner or later construction will slow down. Service agreements are the only real financial asset you have” Knowing the seller’s situation I knew this deal was dead. They built a great installation business, and a decent service business, but did a poor job getting signed agreements. Don’t let your firm find itself in this situation. Every Service Agreement matters more than you think.