Acquiring Alarm Accounts Can Be Risky Business (Part 2)
Buying contracts from another alarm company that doesn’t have trained techs or use proper, up-to-date alarm contracts? Demand every acquired account sign a new contract and terminate every customer who won’t sign it.
Continued from last month, the next issue is whether you should buy contracts from another alarm company when it doesn’t have trained techs or use proper, up-to-date alarm contracts.
The scenario could be described as an accident waiting to happen. But the answer isn’t cut and dry because it depends on your tolerance for risk.
You buy contracts from another alarm company and own them upon closing. A loss occurs after the closing; it’s your loss, not the seller’s. Turns out the system defect was caused by the seller, maybe during installation or a preclosing service call.
Yes, it’s possible to have provisions in the acquisition agreement that imposes the liability on the seller, probably by way of indemnity. However, it’s not a provision I’d recommend my selling client agree to and it’s not something I would ask for when representing the buying client.
You will see something like this only when the attorney is not alarm industry knowledgeable or one who is unreasonable (and also not alarm industry knowledgeable) and hopes the other attorney is an idiot, which unfortunately isn’t that hard to find.
So, when you buy the alarm contracts and alarm accounts you will be responsible for the systems after the closing. It’s your insurance carrier that will be defending the loss that occurs after the closing. It’s the contract you purchased that both you and your insurance company will be relying on to defend the case.
If it’s not a proper contract you face risks. What risks? Well, a claim that exceeds your insurance coverage for one. That should be enough to keep you up at night. Another risk, just to add icing on the cake, a disclaimer by your carrier because you don’t have a proper contract, or more likely, a notice of cancellation of the policy or non-renewal of the policy (though the carrier will finish out the case).
And while you’re down, may as well add another risk factor to your misery — a notice from your central station that if you don’t produce a proper contract for every one of your monitored accounts you must take your monitoring elsewhere and you’ve got 10 days to take a hike.
Maybe you can find an insurance carrier and a central station with very high tolerance levels, most likely represented by one of the attorneys I described earlier.
But there is a positive side to buying the alarm accounts and contracts (if there are contracts) and that would be the price. Everything’s got a price. If your tolerance level for risk is high enough and the price for the contracts is low enough, you may have a deal.
What are these poorly contracted accounts worth? Well, nothing if you have no tolerance for risk. But if you do, then anywhere from 10x to 25x depending on a bunch of other factors that make up the calculation of the multiple. Why so low on the multiple scale?
Because my advice would be to buy the accounts and promptly demand every acquired account sign a new contract and terminate every customer who won’t sign it. What? Yes, you could lose half or more of your monitoring accounts (you could also lose your service and inspection RMR customers).
But if you lose half then your calculation for the purchase changes from 20x to 50x multiple. Look at it that way.
All potential sellers better take notice of what’s above. I am talking about the equity in your company, your likely selling price. If you’re OK with 10x to 25x so that the buyer can then go out and make those accounts worth double, then so be it. I can’t stop you from banging your head against the wall and I sure can’t make you drink the water.
However, there is no reason for you to be in this predicament because you still have time to update your contracts so that when it’s time to sell you will be prepared to get top dollar, top multiple for those contracts. Use proper contracts and don’t be the company mentioned above who lost a potential buyer because proper contracts aren’t used.
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