Is it time for the alarm industry to change the way it conducts its
business? Long term planning is essential for all businesses. The alarm
industry has long employed term contracts with automatic renewal clauses to
perpetuate recurring revenue. While this business plan has worked well it
is increasingly coming under legislative attack. Let's deal with the issue
now.
The alarm industry is different in several ways from other "home
improvement" contractors, or other building trade contractors in the
commercial setting. One laudable distinguishing factor is that you deal
with security, an issue that has unfortunately become paramount in
everyone's mind. But the less attractive aspect of the business is that it
is terribly competitive. Unlike the typical home improvement contractor
you can't figure a job with 100% profit. More likely you are concerned
with how much you will lose on the installation. Your benefit comes from
the long term relationship and the recurring revenue that you will
receive. When you factor this in, you can actually make a good living and
more importantly, develop a nest egg when you are ready to sell your
business and retire.
Recurring revenue generating contracts require the subscriber to make
periodic payments, typically monthly or quarter annually. The contracts
that call for recurring revenue are usually the commercial lease,
monitoring contract and service contract. If you are just installing and
not monitoring you are walking away from the recurring revenue; Same with
service. If you have a "per call pay as you go" relationship you do not
have the benefit of recurring revenue.
We have seen the term of the contract increase. Long ago the typical
term was 3 years. It is now common to see 5 years in consumer contracts
and 10 or more in commercial leases, monitoring or service contracts. With
automatic escalation or a provision allowing you to increase the charges,
long term contracts become less risk for you.
The automatic renewal provision has always been a staple in the
recurring revenue alarm contracts. But the provision is coming under
attack in legislation around the country. The time to deal with this
legislative assault is now, not when you find your contracts invalidated,
or worse consequences.
If you go to my web site www.KirschenbaumEsq.com under Alarm Law
Issues, you will see that we have posted legislation from several states.
Our research has not found legislation in most states, but our search may
not be complete, and it appears that this issue is receiving sufficient
interest to put alarm companies in all states on alert.
There appear to be two variations with laws affecting the automatic
renewal clause. At least one state outlaws renewal completely. Others
have strict requirements on what notice you need to give the subscriber.
While at least one statute provides that violation of the notice will
constitute deceptive trade practice, you run the risk that law enforcement
or the courts will consider persistent violations a deceptive trade
practice, opening you to all kinds of damages, financial and perhaps more.
Your solution is easy to suggest, but perhaps difficult to digest. If
your state permits the renewal clause but imposes notice requirements, you
must comply with those requirements; not some of the time but all of the
time. Compliance starts today, not next year.
If you know you won't, don't want to, or can't comply, then you must
change the contract to a month to month renewal. Even in those states
where no renewal is permitted the damages for month to month will be less
severe.
The standard security contracts I offer to the trade will be updated
immediately to provide for month to month renewal. I suggest that you take
this time to upgrade your contracts with this change and others that have
been made over the past year.
Of course the best solution is to constantly re-sign your subscribers
on new contracts before the original term expires. That practice will
avoid renewal issues and it will ensure that your subscribers have the
latest contract forms, provided you are keeping current on your contract
upgrades [for contracts see http://www.alarmcontracts.com/]. The practice
of upgrading your subscribers to new contracts makes more sense then you
might think. Periodic visits to your subscribers will have tremendous
benefit to you. Not only will you be renewing and strengthening your
relationship with your subscriber, but you will have the opportunity to
inspect the security system, suggest upgrades and increase your recurring
revenue. Remember, your existing subscriber base is often your best
opportunity for new business, through upgrades, new or different
protection and referrals. If you have the burglar alarm system, why don't
you also have the fire alarm? What about CCTV, and I don't mean the stand
alone system that you install and walk away, but the one where you provide
data storage and central station monitoring so that you can generate
recurring revenue. If you don't suggest new and other systems to your
subscribers they may not be aware of the availability of the systems, or
they might not think you provide and service those systems.
If you are aware of legislation involving the automatic renewal clause
please let me know.
follow up comments -----------------
Ken,
In Louisiana's last two legislative sessions there has been an attempt to
eliminate auto renewal contracts. As well, the law would require written
notification prior to the expiration of the original term, otherwise the
contract would become invalid.
Not desiring to be required to notify, or execute a new contract with each
client at renewal to avoid invalidation, we were successful in reaching a
compromise such that, upon the expiration of the initial term, the contract
will automatically renew for successive terms, each not to exceed one year.
However, the client many cancel the contract, with 30 day notice, at any
time within any renewal period. There is no prohibition of executing a new
3 or 5 yr contract prior to the original contract's expiration.
It is in effect a month-to-month renewal.
So far, other strong interest groups such as cellular providers have been
able to defeat the bill's passage. Knowing the persistance of the bill's
author, it is just a matter of time before the legislation passes,
hopefully
with our favorable language.
Regards,
Bill
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Come on Robert.
The obvious benefit of term length of contracts are the value in the length
vs the value in the alternative (no length).
Eddie Harden
Prestige Alarm and Specialty Product, Inc.
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