Buyers in the security industry purchase accounts they think will generate recurring monthly revenue (RMR) for more months than the multiple they pay. It’s simple math. To earn a return on investment on an acquisition priced at 36 times seller’s RMR, a buyer must keep the purchased accounts for 48, 60 or 72 months, or perhaps even longer, especially when you consider attrition and transaction costs. These numbers change based on the multiple, buyer’s targeted ROI and costs of funds, attrition, amount of the holdback and length of performance guaranty, among other things. The well-executed acquisition of an account base can be extraordinarily profitable, especially when compared to organic growth.
Generally speaking, the better the operator, the better the quality of contract, the more comfortable the buyer can feel about the purchase and the higher the purchase multiple. While detailed representations and warranties are crucial to acquisitions, nothing beats thorough due diligence. What a buyer fails to discover before closing may create significant problems after closing, when buyer’s recourse may be significantly limited (or barred) for any number of legal or practical reasons. Buyers should assemble its due diligence team early in the process. Sellers should complete their due diligence before even taking the company to market.
Here are contract due diligence issues to focus on–whether buying or selling accounts:
Monitoring Contracts: Prospective sellers should purchase form contracts from qualified industry counsel when getting started in business, not when they begin selling their company. Good contracts will pay dividends on exit. A generic central station contract almost never contains terms to protect your company against claims and certainly does not establish your company’s title to an account.
Assignment: While this provision may not be so important to the sales team, it is essential to sellers and buyers. Prohibit subscribers from assigning contracts to third parties. Permit your company to assign the contract to another without the subscriber’s consent. Without this clause, the account may not be assignable to the buyer, which, at best, will lead to additional work and possibly concessions on the seller’s part, or no account to sell.
Monthly Recurring Charges: Clearly set forth the monthly charge. You’d be surprised how often this comes up in a deal.
Services: List all services offered to rebut potential claims that you failed to offer additional protection. Contracts should also include written acknowledgment that additional protection is available at additional cost.
Term: The length of term (12, 36 or 60 months) should be pre-printed on the standard agreement. Never leave a blank for a salesperson to fill in later—terms accidentally left blank create issues for both buyers and sellers. Although contracts should renew automatically upon expiration of the initial term and each renewal term, buyers should determine the seller has complied with any applicable legal and regulatory requirements governing renewal. For example, many states require written notice that the contract will renew within a specific time absent the subscriber’s written notice of intention not to renew the agreement. Failure to comply renders the contract voidable by the subscriber. Can the seller prove compliance with the law? Many companies simply re-contract their accounts at the end of each term as a means of avoiding the applicable law. But buyers won’t and shouldn’t pay for expired contracts.