AFS Divests Monitoring Account Portfolio Built Over 30 Years
Alarm Financial Services sold its accounts portfolio to an undisclosed buyer, with strategic financial advisement provided by the Edmonds Group.
CORTE MADERA, Calif. — Alarm Financial Services (AFS), based here, has sold its portfolio of more than 10,000 alarm monitoring accounts to an undisclosed buyer.
The portfolio consists of mostly residential subscribers. AFS President Jim Wooster Jr. tells SSI a nondisclosure agreement (NDA) precludes him from discussing terms of the transaction or identifying the purchasing company.
“I can tell you that they are a large, well established, existing strategic buyer. It is not a new entrant to the industry,” Wooster said.
Jim Wooster Sr. launched the company as an alarm funding business in the late 1980s by starting out purchasing small blocks of residential monitoring accounts. The legacy security dealer program continued to expand gradually throughout the nation for the next 30 years.
In 2005, AFS started a loan division as a way to diversify its funding offerings and to meet rising demand from small- to medium-sized dealers who found it difficult to find a lender in their community.
“We weren’t just a place to sell accounts but a place where they could get a loan and pledge their accounts as collateral for that loan,” Wooster said. “We were filling a void that was there because of the traditional banks’ inability to really understand the value of recurring revenue monitoring accounts on one side, and the established industry lenders that would only do larger sized transactions, say $2 million to $3 million and higher.”
That left a fruitful niche for AFS to initiate or refinance smaller loans ranging from about $150,000 to $2 million.
“In the past couple of years that area of our business has experienced the most growth. [Selling the alarm account portfolio] was largely a matter of us wanting to focus on our growth area,” he said. “It was a matter of timing. We had very strong interest in the sale of our accounts.”
The Edmonds Group, led by its president, Henry Edmonds, served as exclusive financial adviser to AFS. Wooster said the St. Louis-based firm identified the best acquirer for their accounts, with an emphasis on providing outstanding service to their customers and dealers.
Identifying potential suitors began in earnest toward the end of 2016. Wooster explained, “We had an idea within the industry who might be some interested parties. We were curious if there would be interested parties outside of the industry. We found really the best fit was with an established industry company who we knew would provide an easy transition for our customers.”
Edmonds explained to SSI the best buyers for the bulk sale of accounts, such as the AFS deal, are typically industry incumbents. Private equity firms are looking for platform companies with management and infrastructure to grow, Edmonds said, while non-industry strategics usually have a similar focus. Scale is also a consideration. With a few exceptions, he said, an alarm company would need at least $500,000 to $1 million in RMR to be of interest to PE firms or non-industry strategics.
“While AFS’ portfolio consisted of good performing traditional accounts, AFS had many central station partners and the base was geographically diverse. This meant that qualified buyers needed operational depth and a nationwide footprint,” Edmonds continued. “There was good interest from that group. While price was an important consideration, AFS chose the partner who they felt was the best fit for taking on their customers.”
Market Trends Favorable for Sellers
AFS witnessed firsthand much upheaval in the alarm industry once the Great Recession began to take hold in 2008. Throughout the financial crisis, the company serviced loans for alarm companies that were being turned away by traditional banks that previously had provided lines of credit. Those former community-based lenders that once supported small alarm businesses still have not returned to the security market, Wooster said.
“There is a whole tier of industry banks who have been very steady, solid lenders in the alarm industry. But they have dedicated groups who specialize in and have expert knowledge about the industry,” he explained. “I am talking about local banks that are not going to be able to dedicate the resources to understand our business. They have not come back in.”
A typical loan serviced by AFS these days is for a company that is seeking to grow through acquisition. Demographic trends are driving a lot of the deals, Wooster said. “What we are really seeing in the industry is we are making loans to dealers to buy the local company who they have competed with for years where the owners are getting to retirement age. That has fueled most of our loan activity over the last few years.”
A few market realities are especially helping drive the current trend toward selling. Not only do multiples continue to hold at a fairly strong level, but many long-time security dealers are unprepared to compete against non-traditional mass marketers, DIY systems, among other disruptors.
“All of those things have come together to make the timing right for dealers with solid operating companies to jump in and make some acquisitions,” Wooster said.
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