August 9, 2011
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Question
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Ken
I am looking for a contract from you that would not stipulate 1 year or 3 year monitoring. I realize the value of having a contract which you could sell to a company, but I am not looking to sell when I retire. My partner died in January and there is no company that I wish to sell my company.
By the time I retire, I will not require any revenue generated by rmr to sustain me and do not wish my customers, most of whom I know personally, to fall into a giant corporate company. Most likely a local company will take over service with a myself retaining a small interest as a buffer for my customers. Most local companies I know personnaly and would turn over these accounts through a deal of some sort, but not on a multiple rmr basis.
I know this is unusual and you will strongly disagree about the length of terms, but, I have built my business on no long term contracts and if you're not happy with my company, then we should part ways. Better for the customer and better for me. We do maintain an A+ rating with BBB. My office is my home and I do answer the phone at 2am.
The contract I need should address limit of liability, ip phone issues, telco issues etc. which seems to be what your contract does. CCTV without audio could be in there also.
Any suggestions or direct me to an existing contract or yours will be appreciated.
I know this is unusual, but, I am more interested in helping my customers than the money generated. I don't get paid but every quarter and very little at that so my interest is protection from liability but not long term contracts.
Thanks in Advance
JE
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Answer
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The purpose of a "long term contract" is to ensure return on your investment in the sale or other transaction, as well as your anticipated profit. The fact that subscriber contracts trade like negotiable instruments is another value, and the more important issue when you are positioning to sell or selling your business or subscriber accounts. As a business owner you are entitled to make your business decisions, based on what you think sound judgment, or merely your whim, but there are objective standards that can be measured.
When it comes to contracts the business decisions of alarm owners run from 1) no contracts, 2) at will or short term contracts. 3) expired contracts on renewal, 4) poor written contracts and questionable execution of those contracts, to 5) well written, up to date current form contracts.
The level of protection and the measure of equity follows closely from 1 to 5. You can guess where the higher value is.
Properly drafted contracts do more than lock a subscriber into a term relationship. It also defines the relationship, and the protective provisions are designed and intended to insulate or limit exposure to liability. All properly drafted security contracts should have these protective provisions.
I suspect that whatever phase you are presently going through you will eventually regret not properly positioning your company for sale one day. By doing so you not only perserve and increase company equity but provide for the contractual protection you need when engaging in the security business.
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Comments on valuation of accounts
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Ken
Great forum, as usual. I'd like to weigh in on a recent topic of fairly universal interest here: valuation of accounts. I spent a lot of time on this topic when buying accounts, and also when advising others who were doing so. One recent poster expressed concern about the fact that a broker did not automatically attribute a higher account valuation to longer term contracts.
The broker is right, because the real issue regarding valuation is attrition. This point was not raised in his comments, or in your response (which is understandable, since your focus is liability, and not valuation). Now that mass-marketing dominates the residential portion of our industry, it's easy to forget that the primary purpose of an alarm contract is not to hold subscribers captive, but to protect the alarm company.
The best contracts contain the best protections, a point you make well and often. It's also easy to forget that the best alarm companies often have the lowest attrition (and therefore use the monitoring contract only for protection). Alarm companies who create accounts aggressively have to worry about high attrition, and for those companies, holding customers to the contract is a related (but very separate) goal. Frankly, any alarm company that relies on the contract instead of good service and a strong value proposition to retain its customers is borrowing trouble. Plus, this approach is not good for the industry, since it causes many complaints when people feel trapped in a relationship where they are poorly served, having committed to a service they really did not want or understand. When this happens (and it clearly happens a lot), the rest of the industry suffers by extension.
Any broker worth his or her salt will focus on attrition metrics (historical levels, causes, trends, relation to accounts receivable, etc.) as a primary source of account valuation. Contract term length and vintage will be analyzed but ironically those latter factors increase in importance proportionally with the anticipated level of attrition. Even brand new accounts on a five year contract are not worth as much if they are going to disappear at high rates during the initial term or at renewal, not to mention the cost in time and effort to retain them until renewal. And if your company borrows from a smart industry lender, that lender should require you to consider any accounts as canceled (and therefore exempt from your RMR borrowing base) simply for giving notice of intent to cancel at a later date. Those of us who have practiced in this industry long enough remember a day when there was no attrition spike meaning you did not have to anticipate your account attrition leaping up (in some cases to over 20% per year) at contract renewal. And yet that 20%+ rate is not uncommon for many of the more aggressive business models in use today.
So, back to your comment that a buyer would value a contract in original term over a contract in renewal. I strongly disagree on that as a blanket statement: the analysis should be based on the company's business model, the marketing and sales methodology, the value proposition to the subscriber and ultimately, the attrition metrics. I'll take a low attrition account base in renewal over a high attrition base in original term any day of the week. Why? I like accounts that are proven, and happy. The value of the low attrition account base is higher over time (steady state cash flow analysis proves this out), the accounts cost less to maintain, there are more referrals/less complaints, and you have a much more predictable asset. And after all, that predictability is a big component in what creates value in recurring revenue models. As for expired contracts, they are rarely seen, but I agree with you on that one.
Peter Rogers
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Re: Contracts
Having used Ken's contracts over the years and having sold my accounts back in 1998 (wow, doesn't seem like that long) I can verify what Ken is saying about the value of properly worded contract and having them in place for all your subscribers. When I sold, the prospective purchasers (there were several) didn't care about equipment, centrals, marketing strategies, or anything except "did I have quality contracts" for all my subs. They looked at the median time to expiration for all the contracts, although that was not a great factor in the multiple determination. In addition to the protection a well written (Kirschenbaum) contract provides, it is the predominant factor in selling your accounts or if need be (for an acquisition, for example) borrowing against them. I usually describe a well run (from a business standpoint) alarm company as a three legged stool.... one leg is a proper business structure (a corporation, LLC or other entity which provides a shield for your personal assets-see a good attorney for this-we all know one) second leg in the stool is good and valid contracts (we all know where to get them), third leg is a good insurance policy (cause when you are sued, someone has to pay the attorney to defend you..you don't want that burden yourself)... so you need all three legs... as we know, a three legged stool will stand on its own, but take away one leg and over it goes.
Joseph Hayes, CPP, PSP, SET