Account worth

I'm not sure since mine were all under contract. We used a 1- to 3-year (customer's choice) contract with annual renewals. I got 36 multiple in the sale which I believe was common in the industry at the time. I suppose if you had a stronger contract you'd get more but with no contract at all an important factor is going to be the length of time you've had the accounts. Short average times may indicate poor client relationships to a prospective buyer. Another issue will be what you charge in comparison to what is common in your area. If you charge too much clients may be more inclined to bail when their warranty is up. If you charge too little fewer buyers may take an interest since they'll have a hard time ramping your clients up to their rates.

I've heard of a few small companies getting between 12 and 24 multiple without a contract or with relatively weak contract terms. I'd be surprised if you get more than that unless there's something special. For example, if you install proprietary systems a competing dealer selling the same hardware may find your accounts more attractive, especially if he's the only other one around.

Excellent reply, thanks Robert.

You're most welcome. Hope you get good money when you sell.

RHC: This is a very good question and one with a host of variables. Since I have no long term contracts on my account base, it is one I have had to deal with. With or without a long term commitment, competent buyers will always insist on doing what is called "due diligence" on your account base to determine a variety of things that have a large bearing on the eventual sale price. It helps if the buyer has knowledge of , or can find out, things like....

1-Your reputation in the industry for good installations, 2-Your actual attrition rate year over year, 3- How many different types of panels you install in your business (the fewer the better), and how modern they are 4- Whether or not they are "on line" 5- The state of paper documentation you have on each of your accounts that you can hand over to them, 6- How long the majority of your accounts have remained monitored, 7- The price of your monitoring vis a vis those of your competitors (since if you are too high, there is nothing to hold them if less expensive competitors come knocking) 8 - The terms of your warranty service agreement with your clients (what's covered and what isn't) 9- How much work there is to swing over your accounts to the buyers station (if you're already on their station, it's only paperwork) 10- Very important; whether or not you intend to remain part of the company upfront for a period of time (most small businesses depend heavily upon the goodwill generated by the original owner for their continued good health ), or whether you wish to totally bail out !!

Another big point is how you intend to "sell". With some large company buyers you can sell the "equity" and still stay in business with them as a partner, continuing to sell services which you then turn over to the buyer for an upfront price. If everything is set up correctly, you can get 30 months on a monthly contract BUT only if the buyer is convinced these accounts won't migrate away. This is a very attractive way to "sell" your account base and be able to continue to grow revenue as you continue to sell services (if even on an ongoing casual basis)

I have had the experience of knowing one local company that had 60 month terms on his contracts who only came away with 20 times monthly, but his account base was a mess. The buyer told me that he got hosed at that ! I know one other monthly term company who got 24 months but his paperwork was not in good shape. And a third who got 30 months, but his company was superbly run !!

Many buyers today are taking a much harder look at the long term contract idea and will only give the normally accepted multiples if everything else meets their business requirements. The long term contract in and of itself provides a buyer only with a short term guarantee (to the end of the contract). Wise buyers are looking for a much longer term viability for their purchases. If the seller's company has not been well run, most clients will leave after the term is up, and buyers know this. But if their service has been well handled in the past by the seller, and customers generally feel satisfied, the attrition rates will stay normal after all long term contracts have run their course. In either case, how the buyer handles these new clients and the process of how they are migrated over also has a bearing on long term attrition rates for the buyer (with or without long term commitments by the seller).

Look at it this way; even if you were to get a little less for each account, a sizeable percentage of those accounts you have, you got simply because the shopper didn't want to sign a long term agreement, and you have them as customers because they got turned off by some company who quoted only with the long term contract option, or they had a bad experience in the past. They like "being in the drivers seat" and will stay with you as long as you treat them well. These clients will also pay much more upfront for the system than normal in order to maintain that long term freedom to choose (same as the cell phone market). However, it IS a unique market niche and one you will have to service well to succeed !

Regardless of the term of your contracts, finding an appropriate buyer with the funds needed to pay you properly can sometimes be difficult. I understand there have been several books written on the subject which you might want to research.

Sorry to be so oblique in my answer, but the only true "black and white" answer is..."it depends". With so many poor quality security companies out there, most buyers will wisely handle each case on an "individual case basis"

technically, without a contract...you have nothing to sell.

I'm glad *you* said that. It's sorta what I was thinkin'.

Not necessarily. If the seller has his customers signed up to month-to-month contracts, the accounts may still have value, though probably less than a longer-term contract would be worth.

If the seller has no contracts at all, or contracts that don't contain the proper language to limit liability, the buyer may require the seller to sign his accounts up on the buyer's contract form as a condition of sale. Not the best arrangement for the seller, obviously.

Finally, nobody has mentioned the guarantee period. The seller will be expected to guarantee that the accounts he sells will continue making payments to the buyer for some period of time after the sale. Part of this is to keep sellers from getting paid for deadbeat , cancelled, or nonexistent accounts, part of it is to protect the buyer from paying for accounts that cancel or go out of business a short time after the sale. The buyer holds back a percentage of the purchase price until the end of the guarantee period. Even on month-to-month contracts, this amount gives the buyer some protection.

...and substantially lowers the selling price.

I thank you all for all the inputs and comments.

Yes, I meant month2month contract instead of no contract, good catch there Crash.

We are going to be making an offer to buy, so the least multiple we can pick up the accounts for, the better it is for our own pocket.

IMO that would drop the price way down as it's really not much of a commitment on the client's part. Also...make sure you do your due diligence!...go out there and visit the accounts, that they exist, quality of install, age of equipment...etc. I've seen all too many people buy accounts that have NO alarm system installed and don't find out till the supposed client never pays! Seriously!

RHC: Very good point !! Most deals involving purchase of alarm accounts (regardless of length of contractual agreement) usually involve some kind of staggered payment plan with a clawback clause for just this reason. Bad clients can bail out regardless of contract length, and there is no reason why the buyer should end up financing this "higher than normal attrition rate" loss. The shorter the contractual period, obviously the more important it is.

One other risk to both buyer and seller is the tendency for the buyer to want to raise prices up to his levels from the levels that the sellers accounts are at. This is a recipe for disaster.The buyer paid a price based on the original monthly rate and should honour this rate at least for the first while. One large buyer bumped the rates and lost 80% of the accounts he bought (and these accounts were under long term contract). So the seller has to find out in advance how the buyer is going to handle this transition period of a year or two since this will affect what he ends up getting paid. From the sellers perspective, he should know exactly what the buyer plans to do and what his old clients can expect at least for the next couple of years afterward.

RHC: Wow, never seen buying a non existant account, but I wouldn't put it past someone doing !!

We have a dealer up here that a few years ago sold his medium sized company, and then immediately started a new company and began chasing all his old customers to get them back (even though he had signed a non compete agreement with the buyer). I never heard what happened but I hope the buyer got some sort of court order to stop this blatant theft....

So, "technically" I don't think anyone can deny, it thus follows ..... that the shorter the term of the contract the lower the selling price is likely to be. I wonder to what point that gets carried.

Does a one year contract get less than a two year? A three year less than a four .... a five? I would think and hope so. What about contracts that are partially expired. Like a one year contract that's only 3 or 4 months from expiration? Or a three or four or five year?

Would a 5 year contract that's got 4 years to go be worth more than one that's only got 6 months left? and what about renewals? Some contracts are renewable for a set period of time. Say a 5 year contract ..... but it only renews for one year or on a monthly basis rather than another 5 years. ( and I realize that, such as my state, some clients must be notified prior to renewal, with the right to cancel)

I wonder how much this all affects pricing? Maybe it just depends on who's buying.(?)

Anyone got some direct experience with this?

It's not a cookie-cutter formula. Accounts have different values to different buyers, for different reasons. If you are selling to a company that likes to enforce their contracts aggressively and sue their ex-customers for the balance of their contracts, then that company will pay more for up-to-date contracts.

However, some buyers are more interested in a company's attrition rate. That gives the buyer an idea of how long the accounts are likely to stick around. They're also interested in the payment history of the accounts: long-term accounts that always pay on time are like gold, even if there aren't long-term contracts to enforce.

In some areas, five-year residential contracts may not be the norm. In other areas, small claims judges don't like to enforce automatic renewals, especially long-term renewals the customer claimed not to know about. So, in these areas long-term monitoring contracts for customer-owned systems may not be enforceable, or collectable, at least in practical terms. The value of such accounts may be based more on anticipated longevity, especially on residential accounts that pay a fairly low monthly fee. Who's going to sue a residential account that cancels with four months left on a one year contract? And who needs the bad publicity?

As far as contracts being worth more if they have a lot of time left, remember that accounts aren't usually priced out individually, with different multiples for different accounts. The buyer is willing to pay X months for all the seller's accounts, and he bases the multiple on his evaluation of the account package as a whole. The length of the contracts is really only important to a buyer who intends to enforce those contracts. Otherwise, the buyer is concerned with how long the accounts will be likely to stick around: people move, people die, etc. That's where service records, quality of equipment and installation, attrition rate, and payment history can up the value of your accounts.

The proper way to handle this is to write into the purchase contract that if a customer cancels during the guarantee period due to a rate increase by the buyer, the seller still gets paid the full price for the account. This is only fair, since the seller has no control over whether the buyer decides to raise the rates, and shouldn't be punished for his inability to foretell the future. Alternatively, the contract might contain the seller's promise to keep the rates unchanged until the guarantee period expires.

This should cover not only the monthly monitoring, but also the labor rates. It doesn't help if the monitoring stays the same and the labor rates triple.

It isn't usually that the seller is trying to cheat the buyer. It's usually just a matter of sloppy bookkeeping: accounts cancel or stop paying, but they stay on the books. The company keeps sending out bills, doesn't do any follow-up or collections, and then when it's time to sell, there's a bunch of dead wood on their account list. Obviously, the buyer would like to find out about this before he writes a check.

No contract equals no worth and no money.