Big Idea of the Month: Sort Contracts Before the Acquisition Process

While speaking about the acquisition process, Bob Lubic tells Ron Davis that the main reason a deal falls apart is there is something wrong with a significant percentage of contracts.

I just talked with a real knowledgeable player who does acquisitions for Alarm Detection Systems (ADS), located in Aurora, Ill. Yes, it is THAT company, owned by the Bonifas family, a well-known name in the industry.

I was talking to Bob Lubic, the man responsible for most of the acquisitions in the past 40 years that he’s been with the company. That’s a lot of acquisitions!

The reason I reached out to him is that I have been hearing that quality acquisitions are now harder to come by than in past years, which I know to be a fact, and I was wondering about how Bob’s company is dealing with that problem. As always, it seemed as they were on top of this information in moving forward toward their goals for this year.

As we delved further into their business plans, I stumbled onto the fact that one of the hardest parts in getting acquisitions is, believe it or not, contracts that are incomplete, or copying from competitors’ contracts, or contracts that are nonexistent in the majority of their transactions.

And when I asked Bob what I can do to help them, he simply said, “Tell all of your dealers who read your column that the main reason we don’t get deals done centers around the fact that there is something wrong with a significant percentage of their contracts. If we could eliminate discussions about contracts into our negotiations, we could get a lot of deals done faster.”

Here is an easy test you can take to determine whether or not your contract meets the test of suitability for a potential buyer. Go to the file cabinet where you keep your customers and just pull out 10 random files. Look at the contract. If anything seems wrong about any one of them, that may indicate a relatively small problem.

If three or four or more are problematic, it probably means you have a serious problem and if more than half of the contracts you look at have a problem, that probably holds true for the bulk of your contracts. And what that means is you probably have to go back to all customers and recontract those that are either incomplete or in some way incorrect.

Is there an expeditious solution to this problem? You bet! Just call Ken Kirschenbaum, an industry attorney who has already developed righteous and approved monitoring contracts for almost any situation. They are preprinted, you can buy them in bulk and after a talk with Ken, he can tell you whether or not they can be further modified.

This column is certainly not designed to promote other products or services; however, I know that what Ken has developed is certainly used by a majority of dealers we come across who are looking to sell their company. Ken is also a columnist (check out his Legal Briefing column here) for SSI magazine and fellow Industry Hall of Famer, as well as a pretty good litigator. Give him a call, you won’t regret it. On the other hand, if this is a DIY project, have at it.

Here are some of the problems that Bob sees when he is looking at potential acquisitions.

  1. Either improper or no language having to do with the three-day right of refusal.
  2. Does it spell out the geographic areas that you have indicated as noncompete zones?
  3. Do you spell out all of the charges that are covered under the contract?
  4. And on and on… Have an industry attorney review the contract (or of course, just ask Ken).

A few other points that Bob pointed out, and we think are pretty important:

  1. Do you offer service contracts? If not, you are losing a very important point, financially. When you go to sell your business, the buyer will pay something for the revenue that comes in for the contracted servicing. It may be anywhere from a few percentage points up to using the same formula that applies to monitoring to determine the value of those additional contracts. It is a frequently overlooked segment of an alarm business, if it is not offered, and most selling dealers do not realize how much money they are leaving on the table.
  2. Make sure you have complete files for all employees. One of the main reasons a buyer will pay a good price for your company is because you have seasoned, well-trained employees. If you don’t, now is the time to fix it, years before you put your company up for sale.
  3. Does your office facility look like it is well-cared for, or does it need a do over?
  4. Do you take customer complaints seriously, or do you gloss over not just the complaint, but the reason it is coming to you?

One last thing … have you looked at your accounts receivable, and are they in good shape? If not, fix it before you put your company up for sale. And if you’ve got an abundance of accounts past 90 days due, consider making an intensive effort to get those collected before you show the list of accounts receivable.

About the Author

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Ron Davis is Security Sales & Integration's "What's the Big Idea?" columnist and contributing market analyst. He is president of Davis Marketing Group (DMG), a full-service consulting firm serving the security industry, which also includes GraybeardsRus. He has 35 years of industry experience, including founding Security Associates Int’l in the 1980s.

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