View Full Version : Guest Post: Design a Future, Part Two-Business Models

08-15-2014, 11:03 AM
A guest post from Rob Gerhardt.

Business Models

The residential integrators and manufactures are often smarter than a classic security dealer. I should

know, I have been a security dealer since 1974 and an integrator since 1987.

But that is not the point, the point is that there is NO residential integrator who could sell his company

for any amount that approaches seven figures, while there are thousands of alarm dealers who are

worth that much.

The simple fact is that it is not a matter of how smart you are or how hard you work, it is that you are

mired in a business model that is not designed to build value. You are not alone, contracting does not

build much value for electricians or plumbers either.

With the skills and experience that most dealers have, the business model choices are:


Sell in a bidding environment, buy wholesale, install for a price, keep what’s left and then repeat. When

you are done with your career, you are done. Contracting companies in mainstream industries might

get sold to a competitor for the net income for one year. Another important consideration is that, if you

could find a buyer, you would have to sell the whole company.

A contracting business that achieves $500K in annual volume with a net profit of 8% would be worth

$40K, if you could find a buyer.

Repeat Business:

Restaurants, stores, dry cleaners, etc. provide products and services we need on a repeated schedule;

Often weekly or monthly.

Car dealerships, furniture stores provide products we need every few years.

Research shows that we need service from electricians every seven years, and garage door service or

replacement every nine years.

Businesses that provide such services are more valuable when sold because there is a certain assurance

that there will be continuing source of business. A business that achieves the same $500K in annual

volume and the same 8% net might be worth $200K to $240K, if you can find a buyer.

The catch is, you have to provide the products and services at the normal margins. Increased volume

requires more employees and capacity and what you did in previous years does not accumulate. That

means you really don’t make more money each year with the same volume, but you are building

something you might sell for more value.

Service contracts are Repeat Business, NOT Recurring Revenue. If your survey various industries, you

realize that service providers can be successful, but only when the need for service is widespread. There

are many service only electricians and plumbers because we all have electricity and water.

While there may be a service staff within the company, there are no service only systems integrators or

security companies. That is because there are not that many systems within your service range.

Recurring Revenue

Most entrepreneurs tend to overlook: not all revenue is created equal.

Sure, a dollar in sales is a dollar in sales. But the more predictable that dollar is, as in the more likely that

you will receive that dollar from your customer every month, the more valuable it becomes. When you

begin to multiply that dollar by adding new customers and creating an annuity of cash flow, you begin

reaping the benefits of what is known as a “recurring revenue stream”.

What makes recurring revenue so valuable is that you can spend more of your energy growing your

business rather than on trying to acquire enough new or repeat business just to hit the same revenue

level you did the year before.

If we take the same $500K in sales we used in the other examples, but in this case, 90 percent is

recurring. So, you can already count on receiving $450K as you begin your next fiscal year, you need

to find just an additional $50K to match your prior year’s result. Anything you add beyond that is all


Compare this to a contracting business built with no recurring revenue. You might earn $500K in a single

year. But, every subsequent year you begin again at $0 – something that makes it difficult to sustain


The beauty of recurring revenue is that because you can predict what you’re going to earn, you face less

risk – something that investors love.

The more recurring revenue a company has, the higher the valuation it will receive from prospective

investors and buyers. That’s why recurring revenue has become the gold standard of business models

and something that every owner should be working towards building into their own business.

For the first time, dealers with installation skills can build significant and marketable Recurring Revenue

within a few years without abandoning their traditional contracting business.


When you finally choose to sell, the value of your “accounts” is generally 35 time the Gross Recurring

Monthly Revenue (RMR). That means that $500K in RMR is worth $1,500,000 to $1,750,000 as

compared to the $40K a contracting company that grosses $500K might be worth.

That is the essence of our

purpose and all future blogs.