valuing company / attrition / collections
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Question - attrition and valuation
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Ken:
When valuing an alarm company, we often hear that the account attrition rate is important. How do buyers determine attrition rates? If one of our customers moves from their home but the new owner signs up for our service, is that considered attrition or not?
Thanks,
Tad Linder, President
Linder Security Systems, Inc.
Atlanta, Georgia
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Answer
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Likely the single most important component used to value an alarm company is the Recurring Monthly Revenue under contract. I suppose there are more than one way to do an evaluation. You can get a quick evaluation of your alarm company at WhatsMyAlarmCompanyWorth.com.
High attrition outside the norm would of course have a negative impact on valuation. It signifies an unstable subscriber base and that could have multiple reasons, from poor service to subscriber economics. Attrition should be around 5%. If you permit a margin of error of 2% you get a spread of 3 to 7%. Under 3%, you're doing great. Over 7% you should find out why.
Lost accounts can be defined by a contract of sale of alarm subscriber accounts. I new contract at an existing location my be cause for not considering the former subscriber at that location a lost account. I agree that a new sub at an existing account means no lost account. However, if the new subscriber demanded an upgrade to the system, at no charge, then I would consider the former sub a lost account and the new sub a new account.
A buyer of alarm accounts knows it's going to take at least the number of months that went into the multiple, plus cost of operation. Figuring in attrition factors in to insure that the acquisition cost can be recouped before the loss of accounts reduces the RMR to an operating loss scenario.
A buyer doing due diligence will look into your attrition rate by checking your monthly deposits, invoiced RMR, subscriber count and lost accounts. Even without due diligence a buyer may require you as seller to warrant that your attrition rate is not greater than a particular percentage. If it turns out to be more later then you've breached your warranty.
By the way, certain accounts are known to have greater attrition rates. PERS for example. That's why PERS account sell for a lower multiple [compared to intrusion or fire monitoring].
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collection question
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Ken
I think this will be a quick, simple question.
What do I do about delinquent chargeback’s? I occasionally have an account get too behind or pass away etc. What do I then need to do? Go get the equipment? Sue them? Stick collectors on them?
MB
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Answer
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You entered into the contract with expectations of being paid. If you're not then your only options are continue to provide the service and not get paid, stop providing the service and sue or forget about it. Depends on the amount in question, how many you have, and whether you're willing to devote time, any time, to pursue the collection. There are practices you should follow when the subscriber stops paying, and it of course depends on why payment stopped.
If death, contact the personal representative; sue the estate representative; file a claim with the probate court.
Simple breach, sue or forget about it. If in New York or New Jersey, turn it over to my office.