Note: Thanks to Affiliated Monitoring for its informative presentation on central stations and PERS monitoring. Be sure to contact Mike Zydor at email@example.com if you have follow up questions or just want more information about Affiliated Monitoring's central station services. You will find Affiliated Monitoring listed on The Alarm Exchange. It's time to register for our next webinar in the PERS series, which will address PERS licensing and contracts. Register here: https://attendee.gotowebinar.com/register/5380922320883276803
QUESTION: LENGTH OF CONTRACT TERM AND AUTOMATIC RENEWAL
We use many of your contracts and I have a question about the term. Lately, with many of the telecoms getting into the residential security game, we are getting a lot of push back on the five year term. While we have historically been successful in getting the contracts signed, we seem to be getting more objections to the term length. Because we want to minimize objections and issues in getting our customers to sign we have toyed with the idea of moving to a 3 year term. My biggest perception (and maybe misconception) has always been that the longer term contract is more valuable than the shorter term because financial logic tells me that customers under a longer term contract are worth more from a valuation standpoint than a shorter term.
I called Barry Epstein about this and was surprised to learn that there is little if any difference in value between a 5 year vs. a 3 year contract and that most companies look at how long the customer has been with you and assume a reasonable expectation that they will remain a customer for some time to come based on historical attrition and other factors.
I told him that our contracts were 5 year with a 30 day auto-renewal provision and his response was that the only downside was the 30 day auto-renewal. He suggested a longer period on this which is why I wanted to get your opinion. We operate in KY and IN and I don't believe either state requires contracts to be on a 30 day auto-renewal after the initial term (I could also be wrong!). I don't know exactly what other companies do with their terms but does a 3 year contract with a 1 year auto-renewal provision seem unreasonable?
Your concerns are valid and Barry's sage advice, as usual, legitimate. Here's my take.
The alarm industry gets a bad rap for long term contracts, mostly because of negative advertising luring customers to "no contract" monitoring deals. I suppose that because of DIY and wireless systems, as well as cheaper technology and products, there is less investment in an alarm installation than when all systems were hard wired. I'm not technical, so I may be wrong. It's only natural that an alarm dealer is going to prefer a longer term agreement. Our Standard Form Agreements are 5 years for residential and 10 years for commercial. Of course you can always change the original term, either by modifying the printed form or changing the term by hand when negotiating the agreement.
Let's address your specific concerns and assumptions.
I agree with Barry that when valuing alarm accounts an original term of 3 or 5 years would not make a significant difference, if any difference at all. As I write this I have in mind a prospective purchaser who is in the alarm business, perhaps your competitor. If your prospective buyer is a hedge fund thinking about an RMR investment it may have an entirely different way of valuing your business, taking a business enterprise approach. But not having gone to Wharton I'll leave that valuation to others.
Most alarm companies have one of two plans for selling subscriber accounts. Some sell the subscriber contracts as they are signed up, or in bulk on a regular basis to the same buyer. Others sell all subscriber accounts as part of their exit strategy from the alarm industry. The length of the original term or the average life of the original contract remaining may be critical for the regular seller of subscriber contracts. The buyer is probably more a finance company or heavily relying on financing to acquire the accounts on a regular basis, and will have strict guidelines imposed by financial experts. They may believe that longer term contracts or contracts in the infancy of the original term warrant a higher multiple to apply to RMR for the purpose of company valuation. Another alarm company looking to acquire your accounts may accept accounts with a shorter original term and may not be concerned that contracts provide for, or are in, automatic renewal.
Original term does matter, though I am not so sure it makes a significant difference if the term is 3 or 5 years. There will be a significant difference however when comparing contracts with no term or a 30 day term against contracts with a longer original term of 3 to 5 years.
The percentage of a company's customer base still in original term will affect the company's valuation in the sense that a higher multiple will be applied to RMR, but probably not by much. Though a customer in original term is legally bound to the alarm company, a customer that has been in renewal for years may be considered more reliable, and one more likely to remain a customer years after that customer's contract is purchased by the buyer. Keep in mind what the buyer of alarm contracts has to consider. In order to recover its investment on the purchase of the contract there needs to be an expectation that the customer is retained. Since multiples can range from 40 to 50 on the high end, the retention period needs to be at least 4 years, depending on the multiple and the cost of providing the on going service. It could take 6 years or more to break even on the sale, and since the "guarantee" from the seller is not likely to be more than one year, the buyer is at risk.
The glue that binds the customer to you is the service. It better be good or your competitor will end up with the customer, contract or no contract. Good service is achieved by customer contact, upgrades, keeping up with and offering new technology, and of course, responsive service. Technology is the great game changer if you think about it. With something new and better [or at least something else to talk about as far as bells and whistles go] you better be offering it because your customers are hearing about it daily from your competitors. Even if you are one of the nationwide operations with thousands of accounts, especially if you have that operation, you need to be in touch with your subscribers. Regular emails offering new promotions and components will retain your subscribers. Sell and forget them and your competitors will be offering them a better and cheaper option in no time.
Automatic renewal period becomes less important when you consider the above. It's not the renewal term that retains the customer. You are correct that Kentucky and Indiana do not have statutes prohibiting or limiting automatic renewal. If however those states ever do enact legislation it's likely that the law exempts month to month term from the statute [as it does in all jurisdictions that have such automatic renewal laws. You can check your state law here]. I do not believe that your contracts are more or less valuable because you have an automatic renewal period of one year or more. I think month to month is sufficient, especially if you have the original term in the Standard Form Agreements of 5 years for residential and 10 years for commercial.
The real question is, do you really think it's the contract term that binds the subscriber to the alarm company? I don't, at least not in the long run. In fact, if you're running a nationwide operation, it may not even be possible to engage in collection litigation. Customer defaults, end of story; move on. This is not the case however for alarm companies using our Standard Form Agreements or some other contract with an enforceable arbitration provision. In fact one of the benefits derived from using our Standard Form Agreements is that our litigation department will handle your company's collections cases, if you so choose, regardless of state. If you use our Standard Form Agreements and are interested in our firm's litigation department handling your company's collections cases, contact Jesse Kirschenbaum, Esq. at (516) 747-6700 ext. 317 or Jesse@Kirshenbaumesq.com.
PERS: SERIES - WEBINARS
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WEBINARS: PERS: Personal Emergency Response Service / Medical Alert: how and why you need to consider getting into that business Everything you need to know and do to get started with PERS or grow your PERS business to a nationwide operation. Presented by a leading PERS manufacturer, a central station specializing in PERS monitoring, attorneys who will address licensing and contract issues and telemarketing issues. Sign up for each webinar separately. These webinars are FREE. You need to register in advance to reserve your spot [attendance is limited] and sign in a few minutes before each presentation.
Title: Licensing and Contracting for your nationwide PERS operation
Date and time: July 27, 2016 12 noon to 1 PM
Place: your computer
Register here: https://attendee.gotowebinar.com/register/5380922320883276803
Presented by: Jesse Kirschenbaum,Esq., contract counsel at Kirschenbaum & Kirschenbaum. Moderator: Ken Kirschenbaum
Topic: Licensing for nationwide PERS. Agreement needed for nationwide PERS
Q&A: Send your questions in advance to Jesse Kirschenbaum at Jesse@KirschenbaumEsq.com
Title: Telemarketing nationwide
Date and time: August 3, 2016 12 noon to 1 PM
Place: your computer
Register here: https://attendee.gotowebinar.com/register/3591740925073303811
Presented by: Matthew Pitts, Director of Legal Compliance, Alliance Security, Rhode Island.
Topic: state telemarketing licensing; Federal and State Do-Not-Call compliance and call scrubbing; current legislation including the Telephone Consumer Protection Act (TCPA) and the Telephone Sales Rule (TSR); vicarious liability and the use of sales affiliates; recent litigation trends.
Q&A: Send your questions in advance to firstname.lastname@example.org