Follow up on contract term and valuation
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Ken,
I’d like to give you another viewpoint on contract length. I have purchased more than 20 companies since 1969. If the seller is over 5 years old, then a significant percentage of his/her contracts are in the annual renewal phase, so the original term is irrelevant. As long as the contracts contain all the necessary legal terms, I do not hesitate to offer the same multiple as if the initial term were five years.
Further, if you assume an attrition rate of 10% or less, then the average life of an account is over ten years. If you provide superior service at a fair price, the customers are not going to think about the expiration date of their contracts. In a review of our accounts currently in progress, I have significant numbers of accounts that I purchased in the early to mid 80s. And, these were not necessarily new accounts when we bought them, so they can be 40 years old or older. I track the RMR of each acquisition indefinitely, so I can document what I’m saying here.
B
New Jersey
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Response
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There is no better way to value anything than the price someone is willing to pay for it. You're a buyer, so who am I to argue? I happen to agree with you that RMR is the first and perhaps most significant part of the valuation formula. There are many other factors of course, so picking on just whether it's a short original term [one year], or a longer term [five years] or how the automatic renewal clause reads, may not influence a buyer, or may not influence a buyer enough to walk from a deal. Buyers do have to make choices, and their decision to make a purchase often will turn on the price. Some deals are not worth pursuing at any price, and others make sense if priced within a range the buyer is comfortable paying. Thus, when a buyer looks over your company, it's going to be a combination of many factors. Some buyers may juggle those factors intuitively, and others may engage various consultants to perform due diligence. I agree with B that a good purchase will entail retaining most of the accounts well past the break even point [which is a combination of the multiple paid and the cost of servicing the account]. A well established company can expect it's subscriber accounts to remain stable and continue paying well beyond the break even point and into the profit zone. That's what a buyer counts on.
But, B is also counting on things being what they were since he started buying companies in 1969. Not too many consumer laws on the books then. Now is different. While you might be comfortable knowing that most subscribers will continue paying after your acquisition and you'll make a profit eventually, the change in laws, and by the way, technology, may be a game changer. How so? Well for starters, let's consider the contracts that have expired. True most will continue paying. But these contracts will at best be "at will", which means cancelable at will. Then there are the ever changing auto renewal statutes. B is in NJ. There is no statute covering auto renew presently. But below is proposed legislation that has already made its way through the NJ state Assembly. I think NJ can expect this or another version to get though eventually. You may not be able to ignore the auto renew statute. Note that the proposal below includes the following:
"5. A violation of any of the provisions of this act shall be an unlawful practice and a violation of P.L.1960, c.39 (C.56:8-1 et seq.)."
Think about the ramifications of being accused of unlawful practice and violating PL 1960 [which I am guessing is consumer protection statutes].
So, in a nut shell, if you go to WhatsMyAlarmCompanyWorth.com and decide to get an evaluation. it is going to matter whether your contracts are recently drafted. in original term, if you comply with auto renewal laws, if you comply with consumer laws when executing the contracts.
Finally, technology forces changes with subscribers as well. New bells and whistles are coming out every day. You think a subscriber with an alarm system installed in 1969, or 30 years after, don't need something new? Time to get over there and update that system and get a new contract signed. If you don't, one of your competitors will, and since your contract from 1969 is cancelable at will, you'll be out of luck.
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2012 NJ A.B. 1585
NEW JERSEY 215TH LEGISLATURE
ASSEMBLY BILL 1585
FIRST REPRINT
ASSEMBLY, NO. 1585
STATE OF NEW JERSEY
215TH LEGISLATURE
PRE-FILED FOR INTRODUCTION IN THE 2012 SESSION
SPONSORED BY:
ASSEMBLYMAN DANIEL R. BENSON
DISTRICT 14 (MERCER AND MIDDLESEX)
ASSEMBLYMAN PAUL D. MORIARTY
DISTRICT 4 (CAMDEN AND GLOUCESTER)
CO-SPONSORED BY:
ASSEMBLYMAN COUGHLIN
SYNOPSIS
PROHIBITS AUTOMATIC RENEWAL OF SERVICE CONTRACTS.
CURRENT VERSION OF TEXT
AS REPORTED BY THE ASSEMBLY CONSUMER AFFAIRS COMMITTEE ON MARCH 5, 2012,
WITH AMENDMENTS.
BILL TRACKING REPORT: 2012 Bill Tracking NJ A.B. 1585
2012 Bill Text NJ A.B. 1585
VERSION: Amended
VERSION-DATE: March 5, 2012
SYNOPSIS: An Act concerning service contracts and supplementing P.L.1960, c.39 (C.56:8-1 et seq.).
NOTICE:
[A] UPPERCASE TEXT WITHIN THESE SYMBOLS IS ADDED
TEXT: Be It Enacted by the Senate and General Assembly of the State of New Jersey:
1. As used in this act:
"Automatic renewal provision" means a provision under which a service contract is renewed for a specified period of more than one month if: (1) the renewal causes the service contract to be in effect more than six months after the day of the initiation of the service contract; and (2) the renewal is effective unless the consumer gives notice to the seller of the consumer's intention to terminate the service contract.
"Consumer" means a natural person who buys other than for purposes of trade any tangible personal property that is distributed in commerce and that is normally used for personal, family, or household purposes and not for business or research purposes.
"Seller" means any natural person, firm, partnership, company, corporation, association, or other similar legal entity engaged in commerce that sells, leases, or offers to sell or lease any service to a customer pursuant to a service contract.
"Service contract" means a written contract for the performance of service, maintenance, or repair over a fixed period of time or for a specified duration in connection with any real property or that provides a benefit to any real property.
"Warranty" means a warranty made solely by the manufacturer, importer, or seller of property or services without consideration, that is incidental to, and not negotiated or separated from, the sale of the property or services, that guarantees indemnity for defective materials, parts, mechanical or electrical breakdown, labor, or workmanship, or provides other remedial measures, including repair or replacement of the property or repetition of services.
2. a. Any seller that sells, leases or offers to sell or lease any service to a consumer pursuant to a service contract that has an automatic renewal provision shall disclose the automatic renewal provision clearly and conspicuously in the contract or contract offer.
b. Any seller that sells or offers to sell any service to a consumer pursuant to a service contract the term of which is a specified period of 12 months or more and that automatically renews for a specified period of more than one month, unless the consumer cancels the contract, shall provide the consumer with written or electronic notification of the automatic renewal provision. Notification shall be provided to the consumer not less than 30 days nor more than 60 days before the cancellation deadline pursuant to the automatic renewal provision. This notification shall disclose clearly and conspicuously:
(1) That unless the consumer cancels the contract the contract will automatically renew; and
(2) Methods by which the consumer may obtain details of the automatic renewal provision and cancellation procedure, whether by contacting the seller at a specified telephone number or address, by referring to the contract, or by any other method.
c. As part of the seller's routine business practice, where an error has caused the failure to comply with the provisions of this section, the unearned portion of the contract subject to the automatic renewal provision shall be refunded as of the date on which the seller is notified of the error.
d. The seller shall provide written [A] OR ELECTRONIC
3. The following shall be exempt from the provisions of this act:
a. warranties;
b. service contracts on tangible property if the tangible property for which the service contract is sold has a purchase price of $ 250 or less, excluding sales tax;
c. service contracts with a bank, trust company, savings bank, savings and loan association, credit union, insurance company, or health maintenance organization organized under the laws of any state or the United States; and
d. service contracts issued, offered, or sold:
(1) by a public utility to the extent that the public utility is regulated by the Board of Public Utilities, or by a person providing central heating and air conditioning services; or
(2) to any person other than a consumer.
4. a. This act shall not limit rights or remedies available to a consumer under any other law.
b. If a seller does not comply with the provisions of this act, the automatic renewal provision shall be void and unenforceable.
5. A violation of any of the provisions of this act shall be an unlawful practice and a violation of P.L.1960, c.39 (C.56:8-1 et seq.).
6. This act shall take effect on the first day of the third month following enactment, and shall apply to service contracts entered into on or after that date.