Why Accurate Accounting of Attrition Matters for Security Companies
Alarm Capital Alliance President and CEO Amy Kothari discusses the role attrition plays in determining a security company’s fiscal well-being, among other topics.
If there is a common thread among the best-run installing security companies it is the laser focus executives place on attrition. Amy Kothari, president and CEO of Alarm Capital Alliance (ACA), which specializes in account acquisitions, joins the conversation to discuss the role attrition plays in determining a company’s fiscal well-being, among other topics.
What annual attrition rate do most dealers generally cite for their companies?
It really comes down to how well attrition is tracked and managed. We often hear “attrition is less than 10%” or “it’s about 8%,” but, more often than not, it’s in the range of 10% to 13%. Attrition gets understated because companies may not consistently cancel non-pay accounts, so reported attrition is less than 10%, but RMR-at-risk [RMR 90 days or more past due] needs to be factored into the equation.
Attrition may also not be accurate if the security company is holding customers to their balance of contract. These customers have requested to cancel, but are kept on the books until the end of their contract. That being said, attrition is much better understood by more and more companies today and we see more accurate reporting than a few years ago. The correlation to value is too hard to ignore for a well-run business.
When ACA purchases accounts, what are the main factors you look for in a company?
First and foremost is attrition. If the attrition rate is too high, we just don’t do the deal. We’ve made a few exceptions where we’ve believed that we could improve attrition, but the purchase price then reflects this. We look at the company’s contracts to ensure they’re valid and enforceable, as well as the relationship with their central station – clean/shared receiver lines, owning the toll-free receiver number, and the remaining contract length at the central station. Once attrition is verified, we look at payment history and spend time understanding the company’s sales and business practices.
Are dealers that falsify their attrition rates and other business metrics a prevalent occurrence in the industry?
We don’t find falsification of information to be prevalent within the industry. Any inconsistencies relating to the business metrics will be uncovered during due diligence and can usually be traced back to a seller’s unfamiliarity with how to properly measure certain KPIs [key performance indicators]. The focus on, importance of, and accuracy of data has increased substantially in the industry over the years; we really don’t see deliberate misrepresentation much anymore.
How important is it for a dealer to maintain a sufficient insurance plan?
Demonstrating to a buyer that you actively manage your company’s risk through insurance and proper licensing is very beneficial, especially during an acquisition. Our due diligence includes a general assessment of the company/owner/operator and proper risk protection is one of the indicators of how well a business is run. It never hurts being risk averse. We recommend consulting with an insurance professional who will properly assess your company’s insurance needs. These needs change over time, so this is not a “one and done” process.
Can you provide another key ‘best practice’ for dealers to keep their financials in order?
It’s not just about keeping financials in order and accurate; it’s having proper and well documented standard operating procedures in place for key business functions, such as billing and collections, and measuring and reporting on key metrics. A good quote to remember when running your business is, “When performance is measured, performance improves. When performance is measured and reported, the rate of improvement accelerates.” You cannot manage what you don’t measure and similarly you cannot value what isn’t measured.
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What tangible influences are you seeing in the residential market from the influx of cablecos and telecoms into the industry? (e.g. on attrition rates, monitored accounts rising or falling, etc.)
With the entrance of cable and telecom providers, we’re noticing a much more educated consumer when it comes to home automation products. Yet, one thing still seems to ring true: personal security is the main reason people purchase an alarm system.
Can the small independent security dealer hope to compete with the continued influx of telcos, cablecos and other innovative technology providers and their massive marketing budgets?
The new entrants to the industry have done a tremendous job spotlighting the full features and capabilities of the home security industry, but there is still a consumer preference to purchase home security from a local, home security provider that’s not bundled with other cable/telecom services.
People still want a security expert when it comes to life safety. So, yes, I believe many of them can continue to play a competitive role; however, it’s critical that they be able to offer and support the newer and more advanced products and services. We’re finding some of the smaller companies choosing this as a time to exit given the competition, so we expect to see more consolidation and concentration by some of the midsized and larger players.
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