1. VALUATION OF A SYSTEMS INTEGRATION COMPANY
5408Woodway Drive
Fort Worth, Texas 76133

2. General Accounting, Tax Preparation and Representation
Valuation Services
Brokerage
Due Diligence

3. Valuation is a Profession
Valuators are not required to be licensed.
Valuation Professionals should adopt and follow a set of Standards.

4. Examples of Professional Standards
American Society of Appraisers
The National Association of Certified Valuators and Analysts
American Institute of Certified Public Accountants (AICPA)

5. AICPA Statement on Valuation Standards
This statement establishes standards for AICPA members who are engaged to estimate the value of a business, business ownership interest, security, or intangible asset.

6. There is little statutory law governing valuations:
- IRS Code
- IRS Revenue Ruling 59-60
There is case law:
- Federal Income Tax Cases
- Divorce Cases 

7. defines Fair Market Value
IRS Revenue Ruling 59-60
defines Fair Market Value
Fair market value is defined as the price at which property would change hands between a hypothetical willing buyer and a hypothetical willing seller, both being adequately informed of the relevant facts and neither being under any compulsion to buy or to sell.

8. Valuation vs. Calculation
Valuation engagement: Estimate of the value of a subject interest using the valuation approaches and methods the Valuator deems appropriate in the circumstances.
The Valuator expresses the results of the valuation as a conclusion of value.
The conclusion may be either a single amount or a range.

9. Valuation vs. Calculation
Calculation engagement: Valuator and the client agree on the valuation approaches and methods the Valuator will use and the extent of procedures the valuator will perform in the process of calculating the value of a subject interest.
The valuator expresses the results of these procedures as a calculated value.

10. Valuation vs. Calculation
The calculated value is expressed as a range or as a single amount.
A calculation engagement does not include all of the procedures required for a valuation engagement.

11. Valuation vs. Calculation
Valuation Analyst:
Applies the valuation approaches and methods he or she deems appropriate in the circumstances.
The valuation analyst expresses the results of the valuation as a conclusion of value; the conclusion may be either a single amount or a range.

12. Valuation Approaches Income Approach Asset Approach or Cost Approach
Market Approach

13. Income Approach Two frequently used valuation methods:
Capitalization of earnings method (e.g., earnings or cash flows)
Discounted future benefits method (e.g., earnings or cash flows)

14. Capitalization of Earnings Method
Best suited for a stable company with consistent earnings.
Focused on historical earnings

15. Discounted Future Benefits Method
Best suited for a dynamic or fast growing company or a company without a stable earnings history.
Predicts future cash flows

16.  Asset Approach
Measurement of the net assets

17. Market Approach Guideline public company method
Guideline company transactions method
Guideline sales of interests in the subject entity, such as business ownership interests or securities

18. Valuations of Typical RMR Based Security Companies
Usually calculations using the Asset Approach
Occasionally a blended Income and Asset Approach can be used

19. Valuing an Integrator
Integrators typically have some RMR, which has stand-alone value
Most successful integrators also have Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

20. Valuation Components Value of RMR (Asset Approach)
Value of Adjusted EBITDA (Income Approach)

21. Valuation Methodology
Determine the Value of RMR
Determine the Adjusted EBITDA

22. Prepare an RMR Rollforward
RMR Rollforward Analysis - Alarm
2016
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
RMR Rollforward and the Attrition Trend
Previous Month Ending
$ ,819
$ ,587
$ ,981
$ ,173
$ ,396
$ ,393
$ ,488
$ ,686
$ ,025
$ ,588
$ ,728
$ ,546
Prince Increases
1,679
1,670
1,410
1,641
1,206
1,933
1,433
(5,501)
1,948
1,777
1,865
1,339
RMR Added
5,343
3,337
2,248
2,944
1,540
1,776
2,075
9,267
1,585
1,856
1,448
1,521
RMR Cancelled
(1,872)
(1,390)
(2,419)
(2,214)
(1,701)
(2,440)
(2,151)
(3,182)
(1,683)
(1,969)
(1,508)
(1,796)
Moves and Reconnects
(382)
(222)
(47)
(148)
(48)
(173)
(160)
(245)
(288)
(524) 13
(186)
Adjusted Attrtiion (change in RMR) -
Net Attrition
$ (1,872)
$ (1,390)
$ (2,419)
$ (2,214)
$ (1,701)
$ (2,440)
$ (2,151)
$ (3,182)
$ (1,683)
$ (1,969)
$ (1,508)
$ (1,796)
Ending RMR
$ ,173
$ ,588
$ ,546
$ ,423
BOM past due RMR $
EOM past due RMR
Variance in past due RMR $
Gross Attrition
$ ,872
$ ,390
$ ,419
$ ,214
$ ,701
$ ,440
$ ,151
$ ,182
$ ,683
$ ,969
$ ,508
$ ,796
1,872
Beginning RMR (see note below)
277,819
Annualized Gross Attrition
8.1%
5.9%
10.2%
9.3%
7.1%
10.1%
8.9%
13.0%
6.9%
8.0%
6.1%
7.2%
Annualized Net Attrition
3 Month Gross Attrition=====================================================
$ ,681
$ ,023
$ ,334
$ ,355
$ ,292
$ ,773
$ ,016
$ ,834
$ ,160
$ ,273
3 Month Net Attrition==============================================
5,681
6,023
6,334
6,355
6,292
7,773
7,016
6,834
5,160
5,273
Average beginning RMR - Last three months========================================
282,129
285,247
287,517
288,987
290,426
291,522
292,400
293,433
294,447
295,954
Annualized Attrition from last three months====================================================
8.4%
8.8%
8.7%
10.7%
9.6%
7.0%
Annualized Net Attrition from last three months===============================================
6 Month Gross Attrition======================================================================================================
$ ,036
$ ,315
$ ,107
$ ,371
$ ,126
$ ,933
$ ,289
6 Month Net Attrition=====================================================================================================
12,036
12,315
14,107
13,371
13,126
12,933
12,289
Average beginning RMR - Last 6 months==============================================================================================
285,558
287,836
289,520
290,693
291,929
292,985
294,177
Annualized Attrition from last 6 months===============================================================================================
8.6%
9.7%
9.2%
9.0%
Annualized Net Attrition from last 6 months=========================================================================================
12 Month Gross Attrition================================================================================================================================
$ ,325
12 Month Net Attrition==================================================================================================================================
24,325
Average beginning RMR - Last 12 months========================================================================================================================
289,867.42
Annualized Attrition from last 12 months============================================================================================================================
Annualized Net Attrition from last 12 months=========================================================================================================================

23. Valuation of RMR (Asset Approach)
Determine Net Present Value of Cash Flow from RMR
Apply Market Limitations
Judgmentally determine value of RMR

24. Determine Net Present Value of RMR
(NPV = {C for Period 1 / (1 + R) ^ 1} + {C for Period 2 / (1 + R) ^ 2} ... – Initial Investment

25. Apply Market Limitations
Adjust the NPV to reflect adjustments due to
Quality of account base
Contract impairments
Other impairments (geographic, account type, etc…)
The result is the Value of the RMR (accounts)

26. Determine Non RMR Cash Flow
Non RMR Cash Flow includes:
Adjusted EBITDA less:
Cash Flow From RMR plus:
Creation Cost adjustment (if any)

27. Determine RMR Added and Net RMR Added
Some integrators have Creation Cost. If an integrator installs systems below cost, a creation cost factor should be added back to EBITDA to compensate for Creation Cost expensed.

28. “Gross Up” EBITDA for ‘Add Backs’
Add Backs include:
Excessive owner compensation
Owner benefits
Over market rent or charges
Any expenditures that are not necessary to operate the Company
Determine if there is net cash flow from sources other than RMR.

29. Determine Net Assets Discount assets with impairments
Accounts receivable
Other Receivables
Inventory
Fixed Assets (may be marked up over NBV)
Other Impaired Assets

30. Consider Undisclosed Liabilities
Deferred Revenue
Unaccrued Expenses
Deposits and Retainers
“Off Balance Sheet” debt
Convertible Equity
Contingent Payments
Other Undisclosed Liabilities

31. Determine Earnings Multiplier
Judgmentally determined based upon expectation of future earnings
Applied to non-RMR EBITDA

32. Enterprise Value Value of Non RMR Cash Flow XXX NPV of RMR XXX
Market Value of RMR XXX
(Judgmentally select the
most reasonable amount) XXX
RMR Creation Adjustment (if any) XXX
Net Assets XXX
 Any other judgmental adjustments XXX
(reasonableness, enterprise,
brand awareness, etc.) __
Total Enterprise Value XXX

33. Other Considerations In Place Workforce Secondary Meaning
Repetitive Revenue
Exclusive Relationships

34. Adjustments for Lack of Control and Marketability
The Standards (AICPA Statement on Standards for Valuation Services, Section 40) require that the valuation analyst consider whether valuation adjustments should be made to a pre-adjustment value.

35. Lack of Control Discount
A Lack of Control Discount is a reduction in the value of an interest in an entity in order to recognize the absence of certain powers of control of the entity. These powers generally include the ability to:
Set policy
Enter into transactions or agreements
Pay dividends or distributions
Offer services of the entity
Guarantee the financial obligations of others or of other entities
Invest or reinvest the property or income of the entity
Manage the day to day affairs of the entity

36. Discount Amount for Lack of Control
In Holman v. Commissioner (130 T.C. 170 (2008) 105AFTR 2d ), the IRS contended and the Court affirmed that a minority interest discount of 14.4% was reasonable.
Apply a 14.4% Lack of Control Discount to the previously determined valuation to determine the value net of Lack of Control Discount but before Lack of Marketability Discount.

37. Lack of Marketability
Lack of Marketability Discount: Recognizes that an owner of a business interest cannot convert his/her interest into cash as easily and as quickly as a shareholder in a publicly traded company.

38. Determining the Discount
Interests in a closely held entity closely resemble shares of restricted stock.
In 1990 the Securities and Exchange Commission adopted Rule 144a which provided limited access to a resale market for restricted stock.
Prior to the adoption of Rule 144a restricted stock discounts were an average of 34%, after the adoption of Rule 144a discounts on many of those same stocks were an average of 22%.
When Rule 144a was amended average discounts dropped to 13%.

39. The IRS has contended (in Holman) that there are two components that influence investors in restricted stock: (1) limited liquidity and (2) the holding period.
For private holding companies which are not subject to any legally imposed holding periods or the risks attendant to restricted stock, the discount for lack of marketability should be close to 12%.
A reasonable buyer would request (and likely receive) a discount ranging from 10% to 15% for a restricted interest.

40. A Lack of Marketability Discount of 12.5% is reasonable.
This, when applied to the net value of after the Lack of Control Discount, yields a value net of Lack of Control Discount and Lack of Marketability Discount.