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Question - What is a Qualified RMR account  March 10, 2014

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Ken,

    Is their any industry wide accepted definition of what "Qualified RMR" is as it relates to a buy/sell transaction ?

Regards,

Bob Williams

Brisco Protection

NY

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Answer

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    I am sure the industry brokers will want to weight in on this one.  A Qualified RMR account is of course whatever the acquisition contract defines it as.  I will refer to the acquisition contract as the APA, asset purchase agreement, since that's how most alarm deals are structured.  There can be a wide berth in definition depending on the tolerance level of the buyer, sophistication of the buyer, the strength of the seller and mix of accounts, and sometimes the dearth of of deals available, causing some buyers to relax their standards. 

    I have seen APAs with long rather complex definition of Qualified RMR account.  I tend to avoid definitions in my APAs because I prefer to rely on the common well established definition of words and terms,, rather than create my own language.  I also try to avoid defining what a Qualified RMR account is in my APAs be simply providing that the buyer is going to buy only those RMR subscriber contracts it approves at time of closing.  The criteria for selecting those subscriber contracts will be consistent with representations by the seller regarding the subscriber contracts for sale.  For example, if the seller has represented that all subscribers are party to a written contract in a form that has previously been provided to the buyer and approved by the buyer as a well drafted contract, then all of those subscriber contracts will be included in the sale; those without contracts or with modified contracts can be excluded or as the closing date approaches a deal reached for those accounts, but certainly not a full value as the other accounts.

    Some criteria I see is contracts have to have certain key provisions that buyers find important [all of course found in the Standard Alarm Contracts], that contracts be in original term or have a certain number of years left in original term, that 3 day notice of cancellation was given, that renewal notices comply with statutes, that subscribers not be more than 60 to 120 days in arrears or have not sent notice of cancellation, that installed systems meet certain criteria or be tied into a particular central station or on the seller's own lines.  I've also seen deals where the buyer doesn't have any criteria other than a subscriber, name, address, and proof that the subscriber is being billed and has paid within a few months of closing.  

    So if you are using an APA that has several pages of definitions you might want to consider attaching a dictionary to your next APA, just in case.

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On valuing long term contracts

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Ken

  I am responding Armando's email.  He is correct that longer term contracts do  not necessarily mean higher

value.  As you may know we specialize in the  alarm industry and do accounting, tax, valuation , due diligence and  brokerage.  He appears to have what I would call seasoned accounts, loyal  customers on year to year accounts who are happy with you as a company and  stay voluntarily.  I would rather see a customer that has voluntarily  renewed several times than one that has been forced (or tricked) into a long  term renewal.

    At the end of the day, the value of your account base is  determined by the value of the future cash flow it is expected to  produce.  The lower the cancellation rate, the lower the attrition, and  the higher the cash flow.If when evaluating a company I see  customers consistently renewing, that is

good.  If I see them jumping  ship as soon as their contract expires, that is not good.  I appears that he hasn't gone too far overboard and decided that things would be even  better if you had no contract at all, because this would be a fatal  mistake.  Buyers want to buy your future RMR, not your future law suits  and other liability.  Be sure to use Ken's contracts and update them  every year or two.  Since his customers all seem happy and renew every  year, there should be no problem in getting them to re sign updated contracts when they renew so that you always have a pristine customer base.

Mitch  Reitman

S.I.C.  Consulting, Inc.

Fort  Worth, TX 76133

817-698-9999

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TO SUBMIT QUESTIONS OR COMMENTS REPLY TO THIS EMAIL OR EMAIL Ken@Kirschenbaumesq.com.  Most comments and questions get circulated.

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