KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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valuation if alarm co owns communication /  using the Fire All in One
March 21, 2018
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valuation if alarm co owns communication
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Ken,
    There are some semi-standard formulas to calculate the value of accounts based on RMR and contract lengths.   With the advent of dealer owned communication networks based on technologies like AES radios, do the old formulas even apply?  Assuming the dealer owns the entire communication network, subscriber and head end equipment, as well as the FCC license, does the contract term matter at that point?      Clearly all things are a negotiation but the assumption being that having subscribers tied into a proprietary network negates the need for a long term contract and that the account still holds the same value to a potential buyer. 
    All advice and opinions are welcome.  
Josh Lloyd
Vice President
VFS Fire & Security
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Response
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    The question is, are subscriber contracts worth more if the alarm company owns the communication lines, such as AES.  Conversely, are they worth less?  Would length of contract matter if the communication lines were owned by the alarm company?
    All good questions.  We know that alarm contracts have a range of value depending on many factors, including:

    Valuation can be 18 times RMR or less, and can be 40 times and more.  While you can't always control all of the factors, you do have considerable leeway with most.  You decide to use non-standard contracts, sloppy with contract executions, off brand equipment, shoddy work, don't own your lines to the cs, etc, then don't expect that you will be able to command the higher prices when you sell the accounts, if you can sell the accounts.  
    I won't address all of the factors today, but I will opine that length of contract term is not the highest priority in valuation.  Whether it's 3,5 or 10 year terms, the buyer knows the "life expectancy" of a subscriber.  While I don't know the statistics [someone might] I do know that a buyer who pays 40 times RMR has to retain that subscriber for less than a year, or more than 45 to 50 months.  Less than a year because then the seller's guarantee is going to reimburse the purchase of that account; more than 45 months because that will be the break even point on the 40 times purchase [my math may be off but that's the idea].
    Any advantage the alarm company has with the subscriber makes a difference in the longevity of the account.  Some factors:

    The DIY products are a good example of alarm company control.  Without access to the portal or communication pathway the equipment becomes worthless.  
    If you own the radio then a subscriber is going to have to invest in other communication.  I don't know if AES can be included in fire alarm specifications, but that would certainly cause a subscriber to pause before terminating the relationship with the alarm company.  No only would there be equipment expense, but new plans would have to be filed with the AHJ.  If AES isn't approved for fire don't jump all over me -- it's an example.
    I asked alarm broker Rory Russell to comment.  Here is his take.
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Ken,
    Our industry has well qualified buyers who would require a well written term contract in place to receive value.  Dealer Proprietary Communication Network does not Negate the need for an agreement,  period
One has nothing to do with the other.
Rory Russell, Owner
(518) 656-9268
www.AFSSmartFunding.com
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using the Fire All in One
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Ken,
    We have a customer that we installed a fire alarm system.  The business was purchased by another company.  They would like a service/inspection contract.  How do we use this 
Fire All in One contract if we are not doing the install, but just the inspection and service?
Thanks
Wend
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Response
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    The 
Fire All in One covers

    You don't have to use the contract for all of those services.  The contract form is easily separated so that you can select the services that you intend to perform.  You may use the Fire All in One for just installation.  Or you can use it for only Repair Service; or just Inspections; or just monitoring.  Or you can select all of these services and cover everything you do.  
    You need to familiarize yourself and be comfortable with the contract terms.  Like tools in your tool box, you need to know how the contract works to get the most out of it.
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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