QUESTION:
Dear Ken,
We have purchased some of your contracts and understand the value of them. We recently received a competitor contract copy from a successful sale and found what looks like a good idea.
The contract read like a lease agreement, rather than a purchase payout. They had a blank spot for the term of the lease and the payments. Then it stated "the equipment remained property of the company".
How they turned this on-going lease into a purchase-over-time appears to be by marking thru the last statement and writing in "after successful payment of contract terms, notification to Alarm Company, and payment of $1, customer will own system."
There seems to be some problems (like taxing a lease) with this that I pointed out to the customer but the biggest one I didn't mention to her. Actually the big problem seems to be to the alarm company using this. Namely that they had to fix or repair and keep the system in working order during the contract for no additional charges.
Do you have any thoughts about this leasing approach?
Angi
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ANSWER:
Sell or lease? There are two issues that quickly come to mind, legal and business. Let's briefly cover these issues.
The life blood of the alarm industry is recurring revenue under contract. The higher your recurring revenue is, the more cash flow you have and the more your business is worth. It's a simple equation once you have the multiple. The sales contract is the only contract without a recurring revenue feature. You make the sale, get paid, done. The most you can hope for is a monitoring contract and a service contract, both of which provide for recurring revenue.
A lease provides for recurring revenue in consideration of the installation, service and monitoring. More importantly, you always own the equipment.
Typically commercial systems are leased and residential systems are sold. Businesses like the idea of leasing and conversely home owners want to own equipment being installed in their homes.
Selling with a dollar buy back confuses the transaction because courts have held these transactions to be disguised sales, not leases. You can run afoul of retail installment finance laws that require specific disclosure and specific provisions in contracts that are not ordinarily included in alarm contracts.
None of my contracts www.alarmcontracts.com are designed with buy out provisions in the leases; they are either a sale or a lease. I suggest you stick with those two distinct arrangements.