June 22, 2011
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Question
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Ken,
Thank you for your email blog, I read them regularly and find them to be very insightful. I am currently aware of an opportunity to purchase a large book of RMR from an alarm company but am hesitant to do so because the customers are currently not under any contracts. If I was to purchase these accounts with no contracts and no limitation of liability provisions would I be exposing my entire operation to unlimited liability to these subscribers? My gut tells me to stay away and that it would not be a sound business decision to expose my company like this and take this gamble.
Please advise
Thank you,
NY
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Comment
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Ken,
I am reading the email and it appears that this Buyer is purchasing accounts and hasn’t engaged a lawyer to assist with the transaction. My advice is stop!! Get a lawyer to help you.
We participate in 15 to 20 transactions a year, and, while the legal fees in these transactions are significant, they don’t come close to the cost of a transaction gone bad. How often do transactions go bad? About as often as Buyers and Sellers do them without attorneys. We don’t participate in “casual transactions”, in which either the Buyer or Seller do not have an attorney. I don’t care if the Buyer and Seller are Deacons in the same church and the church members are the only customers, too many things can, and do, go wrong, in these transactions.
When we perform due diligence, we get a copy of all of the contracts in use by the Seller before we start the review and send them to the Buyer’s attorney for review. We take a scanner into the field and send the attorney a scan of any new contracts that we run across, or any contracts that look as if they may have been modified to the extent that the attorney should take a look at them. We have participated in enough litigation support to tell you that every missing, modified, unsigned, and poorly written, contract, is a lawsuit waiting to happen.
Mitch Reitman
S.I.C. Consulting
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Question
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Ken
What about if you find that the company you want to buy (accounts) from has expired personal license and no business license? How big of a risk is there to buy from such an individual (small co.) 40 - 200 accounts?? Will these contracts have any weigh to them since the company is not licensed? Or will they be totally worthless anyway? Can the customers say “this co. was not even licensed when I signed up therefore now I can break the contract even if you ( the new co.) bought the contract??
Thanks
Hss
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Answer
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Alarm companies have different business models, almost as varied as the number of alarm dealers. One model, growth by acquisition, entails purchasing subscriber accounts from other alarm dealers. Alarm contracts trade like gold. Well, not quite, but they are very marketable and alarm companies that are in the market to purchase these accounts circle the industry like wild predators looking for the next selling dealer to pounce on. When the selling dealer is strong and in good shape with valuable subscriber accounts to sell the purchasing alarm dealer is forced to up the ante, agreeing to higher multiples for the RMR and terms of sale that favor the seller. When the seller is in a weaker position, perhaps ill, or accounts that are without contracts or expired contracts, or the seller is unlicensed, from the start or more recently, then the purchasing alarm dealer emerges as vulture picking at the bones of the selling alarm dealer, forcing the multiple down and compelling terms favorable to the buyer.
So how did I get on this tangent? Alarm dealers who want to buy the subscriber contracts often have open invitations to purchase, lulling the selling dealer into thinking that a sale is certain and a great price equally certain. But that's because the conversation generally starts with, "I have alarm subscriber accounts or contracts to sell, are you interested and will you be offering at least 35 times, cash?" "Definitely, we are in the market to buy the accounts and offer top dollar, and 35 times is well within our range".
Sounds good. Bring in the lawyers. [ I will leave to another article what happens when there aren't lawyers - too sad a tale to get into it now]. First the expense of a non disclosure agreement. Then conversation about the accounts. The all smiling seller starts to lose his enthusiasm as the buyer's smile turns into a smirk when the golden opportunity to acquire the accounts gets into details. What facts turn the milk sour?
No contracts. Expired contracts. Poorly written contracts. Failure to use the 3 day notice of cancellation. Most contracts in automatic renewal. Equipment old. Monitoring lines owned by central station, not seller, and most systems not remotely programmable. Seller not licensed when systems installed, or not licensed when selling. Seller doesn't have E&O insurance.
If a seller is unlicensed, especially when the system was sold and installed, the subscriber may be able to get out of the contract without penalty. Not all jurisdiction impose this penalty on the unlicensed contractor, but it's something to look into. Also, an unlicensed alarm dealer is likely to be doing other things that may cause a buyer to have concerns.
Each of the above reduces the value of the multiple applied to the RMR. Sophisticated buyers may lose all interest if any one of the above are found. Why is that?
Once a buyer acquires an alarm contract or subscriber and begins servicing that account and system, that buyer is responsible for the system and the consequences that generally follow a loss attributed in at least some small way to alarm failure. If you keep in mind that your alarm contract is designed to avail yourself of your right to "contract away liability even for your own negligence" then you will be mindful what conducting business without that contract can expose you and your company to. There are a myriad of factual scenarios describing how alarm failure caused injury and damage, and potential damages can be just as imaginative.
So what do I counsel my clients? If you're a seller, get your ducks in order so that you can get the highest multiple and the best selling terms. If you're a buyer, be careful. Know what you're buying, be sure you can service the systems and get the subscribers under proper contracts quickly if they aren't already; make sure your insurance E&O is in place. Be ready to assume responsibility for the alarm systems and meeting the needs, especially the security needs, of the subscribers. There won't be anyone to point a finger to once the sale is done, at least not as far as the subscriber is concerned.
One final bit of advice. Buyer or seller. Keep my phone number handy. (actually Jennifer has been handling these deals so don't hesitate to call her 516 747 6700 ext 302)