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Agreements you'll see when selling or buying alarm accounts – Exclusivity Agreement July 12, 2018

KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE

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Agreements you'll see when selling or buying alarm accounts – Exclusivity Agreement
July 12, 2018
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Agreements you'll see when selling or buying alarm accounts – Exclusivity Agreement
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          This is the fourth article in the series on agreements you’ll see when selling or buying alarm accounts. We’ve covered the:
agreement with the lawyer
agreement with the broker
Non-Disclosure Agreement
          Today we address the Exclusivity Agreement.  Sometimes the Exclusivity Agreement is included in the Letter of Intent or Letter of Interest. But the Exclusivity Agreement is really not part of the LOI because the LOI expresses the potential buyer’s outline of the offer to make the deal and some rough terms of that deal.  Some buyers tack on the Exclusivity Agreement at the end of the LOI, asking the seller to commit to the exclusivity of the buyer.
          The Exclusivity Agreement will lock the seller up, prohibiting the seller from communicating or negotiating with any other potential buyers while the buyer engages in its due diligence.  Be careful and read it thoroughly.  If you’re a seller you are essentially taking your company off the market while the potential buyer completes due diligence.  That could be a long time if the seller doesn’t insist on a cap in time for that due diligence.
          And about “due diligence”, I am seeing a new and disturbing trend. Buyers are increasing shifting the burden of due diligence on the seller.  If the buyer gets away with that then it’s going to be the seller who spends the time and money putting together the information, documentation and data so the buyer can analyze the deal and decide if it wants to continue with an offer or purchase.  
          Certainly if the buyer is performing or paying for the due diligence it’s understandable that the buyer would not want the deal to be pulled out from under it by another buyer who is more attracted to the deal because the first buyer showed interest.  A seller sits around waiting for a buyer and as soon as one shows up others begin to express interest.  When it rains is pours.  
          The Exclusivity Agreement should be simple but make sure the time period that seller is locked-up is short as can be.
          Do not let the potential buyer or broker lead you to believe that the Exclusivity Agreement sufficiently covers the NDA.  The NDA covers your confidential information and you need to draft and present that agreement.  The Exclusivity Agreement protects the interest of the buyer, is drafted by and presented by, the buyer. 
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comments on how much can you expect to get for your alarm company from July 7 2018 article
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Ken,
      Responding to “name withheld” and his comments on the value of a security business.  Any business should have a “fixation on worth.”  The worth of a business is one of the grades on its report card.  While it is most important to operate an honest and ethical business, it is, after all, a business, and businesses should be value driven.
      As one of the “vultures” who “act” as brokers I can tell you that the value of a business is based upon a variety of factors.  In a security business, the monitoring agreements with its customers are typically the most valuable asset.  Yes, a six year old truck and a warehouse full of inventory have value, but the Company’s major asset is the high margin, recurring cash flow from its RMR.  It is fairly easy to value a truck or a piece of equipment, the valuation of RMR is much more complicated.  I speak to financial professionals (bankers, CPA’s lawyers, even valuation professionals) all of the time and they are in disbelief as to how a security company can be valued as high as they typically are.  As Ken has stated time after time, the lack of executed, well written, and unmodified, monitoring agreements is a huge factor in the valuation of a security business.  I’m not sure where Mr. “Witheld” got his information, but I’m not aware of a central station refusing to provide a line to a small customer, and, even if the central wouldn’t do it, it is easy to obtain a WATS line and “point” it to the central station CO line.  While it is harder for a company to build it’s own AES network it can be done, and is well worth the effort.  As far as “…any firm that buys accounts” being willing to reprogram, I would like to have a list of some of these firms as this is a constant issue, and I have been doing this for over twenty years.  Yes, Buyers will re program the accounts, but this comes at a cost, typically $200 or more per account.  That is a 6+ multiple on a $30 account. 
      I am a member of the AICPA Business Valuation Section, and this is a profession for me.  I conform to certain rules and standards and I approach valuations as seriously as other professionals approach their work.  Yes, when I do a valuation for a divorce, partner dispute, estate planning, or other purpose, I do take the other assets into consideration.  A good broker does add value to the transaction, both in getting the best price for the seller, but also in managing the process.  I deal with all kinds of attorneys in transactions and my advice is to develop a relationship with Ken and his group long before you are ready to sell.  There are two ways to exit an alarm business, walk out, or be wheeled out.  Best to walk out with the most value possible, and the least in Uncle Sam’s pocket. 
Mitch Reitman
Reitman Consulting Group
Fort Worth, TX
817-698-9999
www.reitman.us
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Note: I just want to remind you that you are getting two duplicate emails from me daily because I am trying out two bulk email service companies. I may end up with only one of them but that's not decided yet so please do not unsubscribe from one. That may be the one I end up staying with. So far the two companies seem to reach different addresses. Feel free to delete one email. If you want to unsubscribe you should do it from both emails. You can always read our emails on our website at https://www.kirschenbaumesq.com/page/alarm-articles
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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301
ken@kirschenbaumesq.com
516 747 6700
www.KirschenbaumEsq.com