The Elements of Valuation
Not every dollar of revenue has an assignable market value as a buyer assesses a security or fire alarm company. Learn what counts in a company valuation, in this first of a six-part article series.
While all revenue sources help drive EBITDA (earnings before interest, taxes, depreciation and amortization) and the related operating margins of the segments of the business, not every dollar of revenue has an assignable market value as a buyer assesses a company in the security and fire alarm industry. A well-run, responsive service department is a critical component to maintaining a low attrition level of a customer base, but the time-and-material (T&M) revenue that is derived from those efforts may not even result in positive margins. The T&M revenue doesn’t drive value in an entity valuation.
On the other hand, contracted recurring service revenue does drive consideration, especially if it represents revenue for maintenance, fire test and inspections and other periodic service functions.
Installation revenue and the associated margins realized from installing new customer RMR is considered a “one-time revenue” and reflects the investment decision that each company makes within their established capital parameters of growing (or replacing) the customer base. This revenue source does not drive value either, but it is important to maintain the engine.
Article Published By John Brady on SDM, January 14, 2014
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