If you're looking at acquiring a security alarm company, a fire and life-safety business, or anything else with a real recurring-revenue book, the standard small-business valuation playbook — take Seller's Discretionary Earnings, apply a multiple — will lead you to undervalue exactly the part of the business that makes it worth buying.
The standard approach, and where it breaks down
Most small businesses get valued on SDE: normalize the earnings, apply a multiple appropriate to the industry and size (commonly somewhere in the 2-4x range for a true owner-operator business), and that's your number. This works fine when the business's value is entirely a function of its trailing profitability.
It breaks down for a business with a real, distinct recurring-revenue stream — monitoring contracts, service agreements, retainers — because a dollar of recurring revenue and a dollar of one-off project revenue are not worth the same amount, and blending them into a single earnings figure before applying one multiple erases that difference.
The convention that actually applies
In the alarm and security monitoring industry specifically, recurring monitoring revenue is commonly valued on a multiple of monthly recurring revenue (RMR) directly — not annualized first, just the monthly figure times a multiple, typically somewhere in the 25-45x range depending on the quality of the book. A $40,000/month RMR base might be worth $1.0-1.8M on that basis alone, independent of whatever the rest of the business's trailing earnings show.
Why RMR gets its own multiple: it's predictable, it renews without new sales effort, and it's the part of the business a buyer can actually count on the day after closing. Project and installation revenue is real, but it's lumpy, dependent on the current backlog, and doesn't automatically continue just because the business changed hands.
What actually drives the multiple within that range
Not every RMR book is worth the same per dollar. A few things that move the number, in our experience actually running this analysis:
- Customer mix. Commercial and institutional monitoring accounts are typically stickier — lower attrition — than residential, and should support a higher multiple.
- Contract assignability. This is the one that catches buyers off guard most often: government and large institutional contracts frequently require consent to assign on a change of ownership. A recurring-revenue book that's 40% government accounts isn't automatically worth less — but if those consents aren't confirmed before closing, a buyer is paying for revenue that could evaporate the moment the seller's name comes off the contract. This alone is worth a real multiple discount until it's resolved, and it's worth structuring the deal (an escrow holdback, a delayed earn-out) around specifically.
- Concentration. A handful of large accounts making up most of the RMR is a different risk profile than the same total spread across hundreds of small ones.
Putting it together
The businesses we've found this matters most for get valued as a blend: the RMR book valued on its own multiple, the remaining project/installation earnings valued separately on a more conventional SDE basis, and the two combined — carefully, without double-counting the portion of earnings that the RMR book itself already generates.
If you're evaluating a business like this using a single blended SDE multiple, you're very likely getting the wrong number, in either direction. It's worth doing the two calculations separately before you anchor on anything.