KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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More on inflation and great advice to those acquiring accounts through acquisition
July 9, 2022
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More on inflation and great advice to those acquiring accounts through acquisition
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Ken,
          I appreciate the conversation from you and Mitch Reitman regarding the impact of inflation on alarm company valuations.   Since our company, Alarm Financial Services, provides financing and advisory services to companies making acquisitions, this is a regular topic of discussion for us.  Whenever we work with a buyer who is trying to come up with an offer price, we break the equation into two parts:
  1.  the value of the RMR alone, and
  2.  the “additional opportunities” from the business and customer base.  
          Future costs like attrition and inflation obviously impact the first part of that equation, along with interest on money borrowed to make the acquisition.  However, when we look back on acquisitions, we see that the biggest impact on Return on Investment comes from what the dealer did with the accounts after they acquired them.  Did they visit each account?  Did they have a plan for introducing new service to the customer base?  Did they obtain any new product offerings from the seller that could be introduced to their existing customers?  Did they ASK FOR REFERRALS?  
          Take Mitch’s example of acquiring 750 monitoring customers. Calls to those customers could result in 250 appointments; leading to 125 sales with a profit of $500 each for $62,500 total (please do your own math).
          So while costs impacted by inflation certainly need to be taken into account, a good buyer will more than make up for those costs with a well-executed plan to maximize the value of the acquisition.
  Regards,
Jim Wooster, Jr.
Alarm Financial Services, Inc.
866-204-9350 ext 1200
415-509-4750 cell
jfwooster@alarmfunding.com
www.alarmfunding.com
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Response
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          I usually reserve the accolade “great advice” to my own advice, but Jim you earned it here.  Very valuable advice.
          When you buy alarm accounts you are not simply buying the revenue stream.  If you think you are then you may as well buy promissory notes or credit card debt and hope you get paid.  When you buy alarm accounts you are buying the RMR revenue stream, but so much more, such as:
  *  the opportunity to sell more services and charge more money
  *  the opportunity for referrals
          Sure need a post-closing plan.  In just about every alarm deal the contract of sale includes a provision whereby the seller and buyer will join in a letter to the subscribers announcing the sale or merger or whatever they want to call it.  I am not usually involved beyond that and I don’t know what the buyer does once the deal closes, other than get involved in the attrition calculation when there is an account guarantee secured by a holdback of the purchaser price. 
          I suppose the goal for any buyer is increase the RMR, not suffer attrition until it’s all gone.  You buy an account base you need to work it, just like you need to work your own account base.  How many times have I suggested that you don’t rely on automatic renewal unless you’ve made every effort to re-sign, using a new updated contract, every subscriber in their last year of the original term?  I don’t think asking you to be in communication with your subscriber to try and get a new contract at least once every 5 years [for residential] or 10 years [for commercial] is too much to expect.  Fast changing technology in the alarm and home automation business gives you every opportunity to communicate with your subscriber and offer surveys and system updates.
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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301
ken@kirschenbaumesq.com
www.KirschenbaumEsq.com