PERS VALUATIONS

AND M&A ACTIVITY

March 2017
The Edmonds Group Overview
Investment banking services
Capital raising and mergers/acquisitions advisory
Focus on recurring revenue service businesses with a special emphasis
on security alarm industry and PERS industry
Over 50 transactions closed
4 closed PERS transactions; worked on many more that did not/have
not yet traded
$3.5 billion transaction value
Broad experience representing sellers, buyers, borrowers and capital
providers
What Determines Valuation
Across all industries, valuation are driven by the buyer/investors
expected return on investment (ROI)
The key determinant of ROI is cash flow and the expected growth rate
of that cash flow
In recurring revenue industries, the best measure of cash flow is steady
state free cash flow (SSFCF, sometimes called SSNOCF)
Key metrics to determine SSFCF and its growth rate are:
Creation cost
Attrition rate
Margin
RMR growth rate
Other Valuation Drivers
Size of transaction
Company reputation/quality of management
Quality of account and financial data
Ease of reprogramming/line swing
Rate of unit recovery/redeployment
Will be reflected in creation cost

Sales model for generating customers

Direct to retail customers or through health care organizations
Telemarketing, affiliate relationships, internet/digital, media, print
Valuation
Buyers have a target return on investment (ROI)
For PE firms, typically 20% to 30% yielding 3x+ their investment in 5 years
For strategic investors, typically longer investment horizon and other
considerations, return objectives similar
Key metrics determine cash flow and cash flow growth rate
Comparable transactions provide important valuation data points
Only a few large transactions in the PERS industry
Same valuation dynamics apply to PERS industry as to alarm and other RMR
industries with plenty of data points
Alarm Industry Valuations
Alarm industry lots of transactions
Alarm companies at scale ($1M in RMR+) typically trade in the 10x-13x SSFCF
Somewhere between 35x and 55x RMR
High multiple outliers (e.g. Electric Guard Dog) have exceptional metrics
Low multiple outliers (e.g. Devcon) have poor metrics
Smaller companies trade at multiple of incremental cash flow buyer expects
to receive from the acquisition
That translates into multiples of RMR for sellers vs. their own SSFCF
Bulk purchases of alarm accounts trade at 70% to 80% of company valuations
Relatively low attrition
Ability to upsell new services
Potential referrals
Reality Check: Why 10x-13x
SSFCF for Alarm Transactions?
Pay 10x SSFCF
Run the model for 20-30 years assuming modest growth
So dont have to assume an exit multiple
Standard industry leverage (24x to 30x+ RMR)
Can achieve a 20% to 30% ROI
With high growth, can pay 13x and achieve targeted return
PERS Industry Valuations
Few transactions of scale
PERS unit economics as attractive as security alarm
But much shorter average life: of ~33 months vs. ~70 months for alarms
Shorter lived assets, so significant reliance on cost effective new creation
Lending multiples 40% to 60% of alarm lending multiples
Lower as a result of less liquid market, less attractive run-off scenarios
As a result, we see and expect PERS companies of scale to trade at slightly lower
multiples of SSFCF: 8x 11x SSFCF
Like alarm businesses, smaller PERS companies will trade at multiples of buyers
expected cash flow
Bulk sale of PERS accounts worth only 25% to 45% of company value
Essentially a rapidly diminishing financial asset
Few upsell or referral opportunities
PERS marketing channels
Direct-to-Consumer
Higher RMR and margin
Higher new account creation cost
Advertising Internet, TV, radio, billboards, etc.
Higher attrition
Healthcare
Lower RMR and margin
Lower creation cost
Much longer lead time as relationships are built
Churn intermediary typically takes care of redeploying units
PERS company only experiences attrition when an agency relationship is lost
Looks more like wholesale monitoring model
Valuations by Channel
Metric Healthcare Direct to Consumer
Creation Cost Low High
Attrition Low High
Margin Low High
Growth Rate Low High
Valuation Based on ROI driven by Based on ROI driven by
interplay of key metrics interplay of key metrics
Valuation Range 8x 11x SSFCF 8x 11x SSFCF
Why Fewer Trades In PERS?
Much smaller industry
$2B+ per year in revenue vs. $55B security alarm industry
Bid/ask spread for larger transactions
In recent years, plenty of interest in larger transactions
Few trades as sellers had meaningfully higher valuations than buyers
However, buyer interest well above industry lending multiples
We see that changing in 2016
MobileHelp transaction closed in February
2-4 significant transactions likely in the next 3-9 months
Large PERS Acquisitions
Date Buyer Target Transaction Value/RMR
Value
Feb 2017 ABRY Partners MobileHelp DND DND
Nov 2014 Tunstall Healthcare Group Mountain Home Medical DND DND
Feb 2014 Pamlico Capital Valued Relationships, Inc. $117M 47x
(VRI)
Dec 2011 Tunstall Healthcare Group AMAC $82.3M Mid 40s - $1.8M in RMR
- included call center
Jan 2011 RockBridge Equity Partners Connect America $81.7M 43x
Sept 2009 Critical Signal Technologies, Link to Life $25.4M 39x
Inc. (CST)
Nov 2007 Blue Canyon Capital Valued Relationships, Inc. $20M Mid 20s
(VRI)
May 2007 Royal Philips Electronics NV Health Watch Holdings $130M Low 40s
Contact Information
Henry Edmonds
The Edmonds Group, LLC
16 Lenox Place
St. Louis, MO 63108
Ph: 314.422.4649

email: hedmonds@theedmondsgroup.com
website: www.theedmondsgroup.com
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