The Right MOVE
February 1, 2007
Acquiring another alarm company can be a way for security dealers to quickly expand their customer base â€” assuming that customers stay with the new company after the deal is completed. In this article, dealers that have grown through acquisition offer their advice for making a sound deal â€” before, during and after the sale.
Before the saleBefore pursuing an acquisition, a good way to judge whether customers will remain loyal is to look at the potential acquisition’s current track record in that area. But that’s just one of many factors that the acquiring dealer should consider before making a deal.
On the surface, some factors may not seem to have a direct relationship to attrition; yet ultimately, they do play an important role. “Number one is good chemistry between the owners and us,” notes John H. Colehower, executive vice president for Matrix Security Group, Pennington, N.J., of a good potential acquisition. Matrix Security Group has acquired 15 companies with total recurring monthly revenue (RMR) of around $400,000 over the past two years. “We look to see if they share the same values as we do and whether their company will be a good fit with our organization,” Colehower explains. Because if there’s not a good fit culturally, there may not be a good fit on the customer side either.
Dennis Stern, executive vice president and general counsel for Lisle, Ill.-headquartered HSM Electronic Protection Services Inc., has a similar point of view. “We look for compatibility,” he says. “Is the business within our footprint? Is the business similar to ours? You also look for what kind of equipment they use and how they do their monitoring. The more compatible they are, the more likely the acquisition will be a success.” HSM has made about seven acquisitions over the past two years, Stern says â€” and because the company has a high percentage of commercial accounts, it seeks to acquire companies that have a similar emphasis.
Unless a company wants to open up into a new market, the geographic compatibility Stern mentions can be particularly critical. “We want 80 percent to 90 percent of the clients to be within an existing footprint of ours,” comments Dave Hood, vice president and general manager for First Alarm, Aptos, Calif., which has made at least one small acquisition during each of the last five years. “We have a rule: the farther away they are, the less happy they are with our service,” Hood says, adding that the company defines its footprint as the area within a 30-mile radius of a branch office.
Hood considers the geographic footprint to be the most important factor in determining the success of an acquisition, followed by the quality of the installations and the type of equipment used, in that order. One of the first things he does before seriously considering a company for acquisition is to walk into some of the company’s accounts to see what kind of work the company has done. “We literally stick our head in the door to see the quality of work,” he says, adding that he also looks for companies that have installed equipment with which his own people are already familiar. First Alarm learned this lesson the hard way when it bought a company that used an unfamiliar brand for some home automation jobs. “To this day, it always takes two to three service calls to fix that equipment,” Hood says.
Due diligenceOnce the acquiring company has determined that a potential acquisition seems like a good fit, the next step is due diligence â€” the process of verifying key performance metrics for the seller’s company. Some of the most important metrics are customer account payment history, attrition, and the rate creation multiple (or what it costs to create a dollar of RMR), notes Ralph Murcino, chief financial officer for ASG Security, Beltsville, Md. ASG has acquired 18 companies in the last 24 months and is perpetually in acquisition mode.
Like several of the companies interviewed for this article, ASG uses a third-party firm to handle the due diligence. Because such firms specialize in such work, they may be able to uncover issues that less experienced people might overlook â€” although some alarm companies that do enough acquisitions may support their own in-house specialists.
Another important factor to look at during the due diligence process is the customer contract that the alarm company for sale uses, which should contain critical wording to limit the alarm company’s liability, along with an automatic renewal clause. It’s easy to see how the lack of an automatic renewal clause could magnify customer attrition. Yet Colehower estimates that as many as 20 to 25 percent of alarm companies do not use industry standard contracts â€” an oversight that can break or at least delay a sale.
In addition to scrutinizing a seller’s contract, buyers also should look for unwritten promises that the seller may have made to customers, Hood advises. For example, he says, the seller may have had a policy of replacing customers’ batteries every year. “It may not be a contractual obligation, but if you don’t do that, customers will believe service has gone downhill,” Hood comments. To help avoid such “time bombs,” First Alarm talks to a sample of the seller’s installed base before preparing an offer.
Other potential operational roadblocks are easier to avoid. If the seller uses industry-standard billing and customer support software, for example, it will be easier later to integrate the customer information from that system with the buyer’s system. That can help prevent a perilous situation from occurring after the closing, Murcino says. “If a customer calls and wants service and their information is not in the system, that’s when things start to go haywire,” he says.
Stern has some other advice about how to ensure that an acquisition will go smoothly from an operational standpoint. “Make sure if they’re monitored by a third-party that they own the phone line that connects to the central station,” he says. If so, customers can be easily moved to the buyer’s central station using a number reassignment, commonly known as a “line swing.” Otherwise, each customer’s panel must be reprogrammed to a new number â€” a process that at best requires downloading every panel and at worst involves a service call to each customer.
Before committing to an acquisition, buyers should make sure they’re ready internally as well. “Your operational group has to be in sound order so you can grow at a significant pace very quickly,” advises ASG Security president and chief executive officer Joseph J. Nuccio. “If you’re not in shape, simple things can start to get out of control.”
Getting one’s own company in order also may have a financial component, Colehower notes. “Arrange for proper financing that will allow your company to expand, while not interfering with your current operations,” he advises. “Smaller companies sometimes have acquisitions overwhelm them financially.”
After the saleWhen one security company acquires another, some employees are almost always lost in the transition. Often some or all of the seller’s accounting and other back office personnel are asked to leave because the buyer’s staff can accommodate the additional workload. Other employees may simply decide that the new environment is not a good fit and move on.
“We were fortunate in several acquisitions to get key people who are leaders in our company,” Hood says, adding that First Alarm would consider paying a premium to acquire a company with particularly talented people.
To retain key people, Hood advises buyers to reassure those people that they will be valuable members of the new team and that the success of the conversion depends on carrying on existing customer relationships. Often new employees are understandably distrustful, Hood says.
In some cases, a seller and other key employees may plan from the start to stay on with the new company for only a short time. In that case, the buyer should consider setting up a payment arrangement that involves holding back some of the money until a certain number of months after the closing, based on meeting certain performance criteria. Whatever the arrangement, sources agree, communication is critical.
“The day after the closing, we have an all-hands meeting,” Murcino says. “Joe and the selling owner meet with all the employees of the new company to handle any questions.”
“It’s very important that both the buyer and seller do what they say they will do,” adds Nuccio. “You don’t want employees confused. You have to be sensitive and you have to be sure that nobody is confused. At the all-employee meeting we encourage questions â€” and when they don’t ask, we ask the questions for them.”
Communication with customers is also crucial. Sources say they send a letter to all customers within a week or two of the sale. “We send a letter under my name and the owner’s identifying what just occurred,” Nuccio says, adding that the letter goes out on the seller’s letterhead so that customers will recognize it. The letter assures customers that service will not be interrupted and invites people to call with any questions.
Some companies also make a point of visiting key accounts soon after the sale to assure them that the service they receive will be as good or better than what they received previously. If the customer had a positive relationship with the seller’s salesperson and that person is staying on with the new company, it can be particularly reassuring to receive a visit from that trusted person.
Even something as simple as how the alarm company answers the phone can play a role in helping to ensure that customers stay with the new company. If possible, the buyer should retain the seller’s phone number to minimize disruption. Some companies answer the seller’s line using both company names for as long as 12 months after an acquisition.
No matter how hard buyers try to prevent it, some attrition may be inevitable. But buyers may be able to keep it to a minimum by heeding warning signals. “Make sure customers know who to pay and if they’re not paying, find out why,” Nuccio cautions.
Management of the buying company also should keep an open mind toward the ideas of the selling company, Nuccio advises. “You need to really absorb and understand how they do things,” he says. “The worst thing you can do is to think you know more than someone that built their company for 20 years.” Each year, ASG reviews performance metrics for all of its branches and, if one is outperforming the others in a certain area, management tries to identify the reason and, if appropriate, makes that a “best practice” for the entire organization.
If the acquired company has some policies or procedures that help it minimize attrition, perhaps the buying company could even use a best practices approach to improve its own performance in that area. Researching and following through on an acquisition can help alarm companies achieve successful acquisitions and minimized attrition.