QUESTION:

Ken,

I use all of your contracts, and was wondering is there a reason why 5 years is the maximum length you recommend in a contract? I understand that it is harder to sell a 10 year contract, but is it more difficult to enforce with the courts?

Ron

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ANSWER:

    Absent statute, which most states don't have [I am not aware of any that do] you are not limited by length of contract other than common sense, because if you offend that then the contract won't be enforced.  If the contract term is beyond reasonable you may have an unconscionable contract - one that no one of right mind would agree to and one that would shock the conscious of a judge.

    My standard contract typically provide for a 5 year term for residential and 10 year term for the Commercial Lease. 

   There are good business reasons not to make the term too long.

    Over time technology changes; perhaps systems need to also.  You should have a reason to go back to your subscriber to inspect, review and update systems.  Certainly contract terms change as well over time.  A 5 or 10 year contract is outdated.  It needs to be updated.

    Potential buyers of your business or subscriber contracts will prefer contracts that are not in renewal, and they will prefer contracts that are more or less within the middle of their term, but that doesn't mean that a 10 or more year contract that is in its 5th or 6th year is ideal.  The buyer will have to assume that the contract needs updating, as well as the system.

    A 5 year residential term and 10 year commercial term strikes a good balance.  Many alarm companies think they are better off with shorter terms.  They think it's a selling point. Most likely it's not.  You are better off leaving the printed form with the 5 or 10 year term.  For those subscribers who make an issue of the term you can make the change by hand and reduce, or increase the basic term.  The contracts do have automatic increase in charges provisions, so the price you charge should keep pace or exceed consumer rate increases, as well as your mounting costs.

    The premise for the longer term is to recoup your investment in the installation.  Since alarm systems are often installed at cost or below cost, the longer term is necessary to insure your profit on the transaction.  As you are able to charge installation prices that provide a profit the need to have a longer term contract becomes less important, at least as far as recoupment of cost of installation.

    The value of your business is directly related to your recurring revenue under contract, but you need to be certain that your contract is acceptable to the buyer.  Contracts that are out of the main stream of industry standard may receive far more scrutiny and be less far less than standardized forms that are customary in the industry.