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Subcontractor clause in All in One / Comment on Ron Davis’ webinar
April 7, 2020
Subcontractor clause in All in One
          I have a potential client who is questioning the paragraph in the Commercial All in One regarding subcontracting special services.  Here is what he said:
          “There's a part in there that I don't recall from the other contracts about you having sole right to assign work to third parties but you not having any responsibility for the errors, negligence, etc. of said third parties. I don't like that, as I have no control over whom you bring in and no recourse if they do a poor job, as I have no agreement with them, only you, and you refuse to be responsible for their work. So, as I see it, either you have to give us control to approve/deny and negotiate with any third parties you bring in or you need to take responsibility for their work as the main contract holder.”
          We don’t use any subcontractors onsite; it would be only and our central station.  How would you advise I respond to this?  Would it be OK to remove/modify this?
          You should not remove or change this provision.  You are subcontracting the monitoring services, and perhaps other services.  Your central station relies on this provision, and will any other subcontractors you engage.
While I have no problem with you disclosing to your subscriber who subcontractors are, I am certain that you don’t want your subscriber dealing with them directly to negotiate contract terms.  How to respond to this challenge:
          The paragraph actually recites what the law is anyway, at least in most jurisdictions, if not all.  As the contractor you are contractually responsible for performance of the contract, whether by you or others you engage – the subcontractors.  You are also responsible for your own negligence.  However, you are not responsible for the negligence of your subcontractors, and your subcontractors are not responsible to your subscriber for breach of contract because the subcontractor doesn’t have a direct contract with the subcontractor.  The subscriber does have recourse against the subcontractor for the subcontractor’s negligence.
          So your subscriber is wrong when he writes that he would have no recourse for a poor job or damage caused by a subcontractor.  The subscriber can hold you liable for your breach of contract, which will include the subcontractor’s work, and can hold your subscriber liable for its negligence in performance.
          You can supplement the contract terms with this explanation because it’s the law anyway.
Comment on Ron Davis’ webinar on March 24, 2020 on selling accounts
          For what it is worth here are my thoughts regarding several of the issues that rose in today’s webinar:
  1.      Multiples of net RMR- In Canada almost all knowledgeable buyers buy accounts net of the cell and charges paid to the provider on the accounts. This deduction from gross RMR is usually much greater today than it was 5 years ago simply because but a much higher % of accounts use cell or today. But the details are important. When working for a Seller I try to negotiate that these monthly costs be deducted at the Buyers rate not the Sellers and there can be a difference of several dollars per account per month.  The Seller is often smaller than the buyer and accordingly often has higher rates. Secondly watch out for rates. Today they can be higher than $10/acc/mth for some accounts. Because of these extra charges the overall margin on monitored accounts is often lower than it used to be.
  2.      Valuing fire inspection accounts- Again I thought your approach to valuing these accounts was more common than Ron’s. The facts are that the margins on items like fire inspection, service and guard revenues are all lower (25- 40%) than for most monitored accounts (50-80%). Lower gross margins usually means lower values. In Canada the way we value a fire inspection account is a lower multiple (15-25) is applied to the gross revenue on inspection account. We would not deduct the cost of inspection and use the original multiple times the net revenue.
  3.      For everyone’s information multiples of EBITDA as a method of valuation can and should be used to value both fire service and integration businesses- not just fire companies. And oddly enough these integration businesses can have monitored accounts in them but they are not valued separately.
  4.      Valuing monthly pre-authorized payment (PAP) alarm accounts- In Canada account bases with a large % of PAP accounts would attract higher values. Why because it is so much easier and less expensive to bill and PAP accounts usually have lower attrition. The other wrinkle is up here PAP out of a bank account is even better than PAP on a credit card because credit cards have to have their expiry dates updated every 2-3 years- a pain. The other benefit to using PAP for the Seller is that it eliminates any deferred or unearned revenue deduction.
  5.      Lifetime warranty- Ken I think you are wrong on your views re lifetime warranty. Lots of dealers over the years have used use lifetime warranty and for very good reasons. ADT in Canada used to use it all the time. Firstly lifetime warranty helps to sell the system. Secondly it is usually sold at an extra $5-10/mth/acc so it increases the RMR on the account. Thirdly it avoids having to argue with the customer on service bills which is a big deal particularly in the residential market. There is a place for life time warranty but it can reduce the value of the accounts being sold for obvious reasons.
     Hope this all helps.
Victor Harding
Harding Security Services Inc.
Toronto , ON    M4T 1A3

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When: April 7, 2020 at 12 PM  ET
Topic:  discussion on the current state of the Financial/Capital Market Stability in the Security Industry and necessary agreements needed for security companies
Presented by:  Troy Iverson, VP of Sales, Brian Davis, CFO of AvantGuard Monitoring Centers
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Kirschenbaum & Kirschenbaum PC
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