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Should you write off the hold back when you sell your alarm accounts
November 14 2022
Should you write off the hold back when you sell your alarm accounts
          Of course not every deal is the same, but there are a few customary issues that are generally accepted practice in an alarm industry transaction.  While there are certainly deals where there is a final price at closing and no adjustments after closing for loss of accounts, that is not the most popular way to structure the deal.  It’s more common to have a purchase price based on a multiple of the recurring monthly revenue and a guarantee that the account RMR will be the same or more after a period of time, again, typically, 12 months. 
          The seller’s guarantee is then secured by collateral, cash, commonly referred to as the Hold Back.  Most alarm dealers understand this concept and accepted practice.  Sometimes the guarantee is limited to the collateral and sometimes it’s not; it’s a matter of negotiation when the deal’s made. 
          Unless the seller has a historically stable attrition rate and the guarantee is pegged to that rate there should be no reason the seller should believe the Hold Back will never be paid.  Typically the Hold Back will far exceed the anticipated attrition because the buyer wants to be secure with the collateral.
          A dispute over the Hold Back is a sure sign of either
  *  an unscrupulous buyer,
  *  unskilled lawyers negotiating the deal
  *  difficult clients interfering with skilled attorneys insisting on badly drafted provisions
  *  poor negotiating and drafting by the attorneys  
          Why do I say that?  Because I get to see some of the deals I don’t handle [as counsel for either seller or buyer] when disputes arise and one of the alarm companies wants to sue the other, usually over the Hold Back but sometimes other issues as well [but always the Hold Back].  Surprisingly some of the lawyers who tout themselves as “alarm industry” experts or specialists are the ones who end up leaving their [now former] clients in limbo – dispute land battling with the other alarm company.  So before hiring an “alarm” lawyer I suggest you ask them if any of their deals have ended up in disputes after the closing.  Next question might be what they did to resolve the issues.  If you get that far you can ask how it happened.
          This is a sure sign that the contract between seller and buyer [and there are really only two types, Asset Purchase Agreement, APA, or Stock Purchase Agreement, SPA] was poorly conceived and drafted. 
          I have represented one or both parties in hundreds of deals and contracts for buy-sell deals.  I do not believe a single one has gone to litigation or dispute resolution post-closing [or before closing].  It’s because all the issues that can and do arise in these deals is clearly and concisely covered by provisions in the contract.  When parties can clearly see their obligations and requirements in the contract a future dispute is less likely because the outcome would be certain and the consequences of pressing an untenable claim just as certain.  That means that if you take an untenable position get ready to lose and to have to pay your opponent’s legal fees and costs, not to mention leaving yourself open to any counterclaim that may be asserted. 
          So, yes, another deal by other “alarm” lawyers landed in my lap, prompting this article.  BTW, a reputable broker recommended at least one of the lawyers.  The broker should stick to brokering deals and not evaluating and recommending lawyers.

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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