Get the bread to stay fed

One of the challenges faced by both small and larger alarm companies is cash flow. You're in the recurring revenue business and competition often forces installations at your cost or below cost. You absorb the upfront loss anticipating the long-term revenue. You can also take some comfort knowing that properly drafted subscriber alarm contracts with recurring revenue can be sold like a negotiable instrument. Of course selling subscriber accounts is inconsistent with the plan of building up recurring revenue. Nevertheless, alarm companies who are either under-capitalized or who want to grow quickly through acquisition may want to consider financing options.

Financing options should meet goals

Traditional loans from financial institutions are one option. Not all lenders understand or appreciate the value of subscriber contracts and loans with open credit lines may be difficult to negotiate. There are lenders who do specialize in loans to the alarm industry. Some are traditional lenders and others really looking to acquire the subscriber contracts' recurring revenue.

Another option is dealer programs. These generally come in one of two plans. The first requires that its dealers sell, assign or transfer all subscriber contracts to the Program in exchange for prearranged selling rates, always a multiple of the monthly recurring revenue. The other plan gives the dealer the option of retaining the subscriber contracts or selling the subscriber contracts to the Program.

Selling the subscriber contracts to the Program has the obvious advantage of providing immediate cash flow, permitting the alarm company dealer to meet operating expenses or grow through acquisition. But at the end of the rainbow you won't find your pot of gold with this plan. The recurring revenue has been sold; your cash flow will be what you have to show for your endeavors and efforts. Retaining the subscriber contracts, along with the recurring revenue, will build up equity in your company and eventually provide positive cash flow once the recurring revenue exceeds expenses. The latter plan may require tightening your belt for a few years, and also may inhibit fast growth, but is, in my opinion, the preferred business model, at least for the smaller alarm company. If your company is well-heeled or using OPM [other people's money] then you may have the sophistication to utilize financing options, including dealer programs that buy your recurring revenue.

Go for the RMR

Whichever business model you have, the buildup of recurring revenue needs to be your goal. Stiff competition in the security integration industry is going to keep sales and installation charges tight. Even recurring revenue charges are becoming beyond competitive. Alarm companies, probably those with their own central station, are offering monitoring to subscribers at wholesale prices. There are online ads or mass-advertised services where monitoring is offered below $5 a month. Since dealers typically charge from $16 to $22 (upwards of $30 or more if the alarm system is installed for free or at a reduced cost) these cut-rate monitoring companies are going to have an impact, a negative one, on the alarm monitoring business.

There are a number of professionals who are available to advise alarm company owners and dealers should avail themselves of these services. Your first consideration should be joining and participating in local alarm associations. There are many dedicated experienced alarm dealers and systems integrators who participate in the associations and share their knowledge and experience and arrange regular informative programs, training and technical primers. Your lawyer, accountant and business advisors who are well known in the alarm industry are other sources of information you should be considering. Getting out there and selling alarm monitoring and other essential services, building your recurring revenue-there is no substitute for this model in the industry.

Ken Kirschenbaum, Esq. (www.kirschenbaumesq.com) is a practicing attorney and partner at Kirschenbaum and Kirschenbaum PC in Garden City, N.Y. He specializes in the security industry and is SD&I's longtime contributor.

 

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