Typically, buyers of subscriber alarm contracts can be placed in one of two categories, those who are always on the prowl to buy (predator or scavenger) and those who are presented with an opportunity that comes their way.
The “professional” buyers have in-house teams looking for deals, engage capable and knowledgeable brokers to find deals, and even advertise and promote in the form of dealer programs or simply as buyers of accounts.
The second category is those who might be working for someone who is interested in retiring and wants to give a loyal employee the ability to continue the business. Or it’s a buddy who would like to sell and believes it’s easier to just offer the accounts to his/her friend who runs a local competing business. Or it’s someone who really isn’t in the market to buy but an opportunity presents itself that makes good business sense.
The professional buyer is geared up for due diligence, which means checking out the seller to determine the risk and if it justifies the purchase price. Issues include:
- Location of accounts
- Type of accounts (residential, commercial, institutional, government)
- Types of services (sales, monitoring, service, inspection)
- Types of systems (intrusion, fire, CCTV, access control)
- Contracts, if they are in proper legal form and have all subscribers signed
- Average age of contracts, if the seller complied with all laws regarding initial execution of contracts and renewal notices
- If seller has any debts, claims or lawsuits threatened or pending
- If seller is under any impediment to sell business assets or the subscriber accounts
- Seller’s customary attrition rate
- Where the seller’s accounts are monitored
- If seller has its own lines
- If seller utilizes equipment that requires special training, authorization or certification from a manufacturer
- The seller’s receivables and average subscriber payment history
- How many employees and what category of employees the seller has
- How much the seller is asking, how flexible the seller is and how the seller wants to be paid
- If the seller looking to stay in the alarm business or retire
- If there are key employees available to continue working
- If key employees have started competing and if they are under or will sign noncompete agreements
- Verification of finances, which may include checking bank statements, audits, tax returns, financial reports to lenders, internal ledgers and records
- Interviewing employees
- Checking insurance coverage, claims history and claims reports
The opportunity buyer should, but most likely won’t, check all of the above. But even this buyer should consider:
- If the seller’s subscribers will be a good fit for the buyer; if the accounts are in a similar territory and otherwise similar to the buyer’s current accounts
- If there are proper legal contracts; if not, if seller will get them signed on new, properly drafted contracts
- If all systems are operating; if there are outstanding service calls or unfinished installations and who is going to be responsible for completion; and what’s owed for that work and who’s going to get paid for it
- If seller will take back a note, permitting the buyer to pay off the purchase price over time
- If buyer has all necessary licenses to operate the continued business; if not, if will seller stay on as the license holder
- If seller will stay on to help transition the accounts if necessary
- Percentage of accounts that are family related or personal friends of seller and not used to paying for services
Ken Kirschenbaum has been a recognized counsel to the alarm industry for 35 years and is principal of Kirschenbaum & Kirschenbaum, P.C. (www.kirschenbaumesq.com). His team of attorneys, which includes daughter Jennifer, specialize in transactional, defense litigation, regulatory compliance and collection matters.
The opinions expressed in this column are not necessarily those of SSI, and not intended as legal advice.