5. Traffic in accounts on commingled or uncontrolled communication paths. A short parable: Shortly after closing one of my first deals, my buyer-client re-pointed purchased telephone lines to its central station. The acquisition agreement included detailed representations and warranties that all of seller’s accounts were on the purchased lines and that no other accounts were commingled on those lines. The central station soon began to receive errant signals from unknown accounts. Buyer immediately pointed the lines to back seller’s former monitoring facility and seller was obligated to pay the rather sizeable bill for re-programming accounts to a new clean telephone line. (Fortunately, no fire signals went unanswered.) Don’t suffer a similar fate. Review the records carefully and consult the monitoring facility. Make sure your agreement provides ample protection on this and other important technical industry issues. And if you’re a buyer, get title to the phone lines.
6. Misrepresent attrition. Attrition is a key metric for every knowledgeable buyer. Every seller (and every buyer) has attrition—normal attrition (e.g., customer moves, bankruptcies, deaths, etc.) and extraordinary attrition (e.g., related to a specific sales program). A seller should not orally represent its annual rate of attrition unless seller KNOWS its representation is factually accurate, has the records to prove it and can calculate attrition using an industry-acceptable formula. The generally accepted industry norm is about 12 percent, which means that for a seller who over promises and under delivers on a key deal metric such as attrition by representing a six percent rate, for example, the buyer’s purchase price will be subject to a six percent reduction, since buyer’s purchase price was premised on the lower attrition metric. Industry diligence experts can help sellers identify the true rate of attrition (calculated on an annual static pool basis) to ensure accuracy before entering into the sales process. Contact me and I can provide the formula.
7. Ignore aging. Pricing of an industry acquisition is premised on “performing” RMR and one of the requirements is that payment due for a particular account be within an agreed-upon time (usually 60 to 90 days). Plenty of sellers scramble before closing to get subscribers to pay open invoices in order to qualify accounts as performing. Why not start that process years ahead of time with disciplined collection efforts? Late payers always exist, but with a disciplined collection effort, sellers can limit their downside risk on exit.
Eric Pritchard co-chairs the electronic security group at Kleinbard Bell & Brecker LLP. Pritchard focuses his practice on the electronic security industry with an emphasis on acquisitions. This column does not constitute legal advice; contact an attorney with specific questions.