Re: Monitronics monitoring assigned to Apex

[Nomen Nescio <nobody@xxxxxxxxx>]

R.H.Campbell said:

>If lack
>of a long term contract is so bad, then my attrition rate should follow, yet
>it is one of the lowest rates on our station with over 300 dealers. In a few
>short years, my company has risen to become the 10th largest company here in
>town. I can sell my accounts for excellent value at the snap of a finger,
>because they are all well installed and most have been with me for many
>years. And our reputation in this business is sound !! Due diligence is MUCH
>more than the presence of a long term contract.

First of all, I am surprised that you have the slightest idea of the
attrition rate of the other 300 dealers monitored by your central.  I view
that as confidential information, and I would be highly upset if my central
was blabbing that information to my competitors.  Even though my attrition
rate is quite low, it's the principle of the thing:  confidentiality.

Getting back to your no-contract business model, let's assume for the sake
of argument that everything you say is absolutely correct:  your customers
all love you dearly and would stay with or without a contract, you don't
have scumbags who want the freedom to throw you out at a moment's notice,
and so on.  Even so, I think there are a few points you may not have
considered.

I'll assume that your business model works just fine for you now:  you're
selling jobs, making money, and not losing accounts.  But what happens when
it comes time to sell (and yes, sooner or later even the largest companies
sell out)?

As I recall, you have something over 500 accounts and are growing.  The
bigger you get, the fewer the number of potential buyers, since fewer and
fewer companies will have the cash, or be able to secure the financing, to
pay your price.  In that respect, you are a victim of your own success.
You will probably be limited to companies at least twice your size.

The odds are great that your buyer will not take as good care of your
accounts as you do.  After all, this is why you are currently taking
accounts from them and not the other way around!  The buyer does not have
any emotional stake in your accounts, since he knows none of them
personally.  Since your buyer will be a bigger company, it's likely your
accounts will be serviced by service techs you've never met, techs who may
not be as knowledgeable or dedicated as your own.  The buyer may also move
all your accounts to his own central station, rather than using yours,
especially since a buyer big enough to buy your 1000+ accounts (by that
time) may well operate his own central station.

All of this translates into a higher attrition rate after the sale.  The
buyer expects this, particularly if he's bought accounts before.  And it's
something he will factor into the price he is willing to pay.

Now, put yourself in the buyer's position, and think of what you're doing
by buying RHC Security's accounts.  You're buying accounts that can cancel
any time, for no reason.  You're buying accounts that are paying
below-market monitoring rates (correct me if I'm wrong).  And, I seem to
recall that you offer your accounts free maintenance and repairs with your
monitoring.  The buyer is taking one hell of a big risk!  Specifically,
he's betting that he can provide at least the same level of monitoring and
maintenance and customer service that your accounts are receiving now, and
still make enough money to pay you, cover his costs, and eventually turn a
profit.  He probably won't dare raise the rates, since he would risk losing
accounts in droves.

And let's consider financing.  Even large buyers often do not like to use
their own cash to buy accounts.   They'll use a bank or one of the alarm
industry financiers and borrow some money against the accounts they're
buying from you.  It might not be enough to cover all the cash, but it
definitely helps.  Only in your case, I doubt a bank or finance company
will loan much money against your accounts.  It would be like trying to
borrow money against a signed contract that reads, "I promise to pay you
$10,000 next month, if I feel like it."

If you were a buyer, would you pay the same price for a bunch of "cancel
anytime" accounts as you would pay for accounts that are contractually
obligated to pay you for the next N years?

Putting yourself in the position of a buyer, how do you protect yourself
against this kind of exposure?  A lower multiple, a minimal attrition
allowance, and a much bigger holdback -- that's what I would do.  You won't
like the terms, but you can always look for another buyer...except there's
that problem of not having very many buyers with enough cash in hand.  The
buyers have the money, and if you want it, then for the most part, you will
be dancing to their tune.

- badenov