Infuse Capital While Protecting Equity Using the Right Dealer Programs
Many dealer programs are available to security dealers, including account purchasing programs that can help infuse capital into the business. Flexible new options allow dealers to gain capital without sacrificing long-term equity.
As 2013 begins, new options for account purchasing via dealer programs can help companies meet financial and operational challenges in the industry. An option that could see a lot of activity in 2013 is the ability to get funding for new accounts without actually selling the contracts — or to sell accounts based on need, rather than selling 100 percent of one’s customer accounts and leaving no equity or recurring monthly revenue (RMR) in the business. Capital extracted from the value of accounts can be used to grow or sustain business, while still leaving balance between holding, financing and selling accounts to ensure maximum stability in the business.
“I expect the 2013 terrain to be similar to 2012, but with more clarity following the election, greater activity, and clear knowledge of what the customer wants in terms of product,” says Amy Kothari, president and CEO of Alarm Capital Alliance, Media, Pa. “The consumer demand is there for the products that the dealers are offering, but the credit markets are still not an easy or viable option for the smaller, local dealers. So dealer programs continue to thrive.
“The benefit of these dealer programs is that they allow dealers to create immediate streams of cash flow to support their business (sales, marketing, and business development) as opposed to building up a base of accounts and selling an entire portfolio,” Kothari shares. “The dealer will in turn be able to meet the demands of changing technologies and increasing competition by having the necessary capital.”
In addition to dealer programs that purchase a flexible number of accounts, there are also newer dealer equity-focused programs that finance small-to-medium dealers on a single contract basis, loaning dealers the money when they need it, but return the contract to the dealers at the end of the contract term.
“Programs that finance small-to-medium dealers on a single contract basis are going to be a hit this coming year,” predicts Tony Smith, president and founder of Security Finance Associates Inc., Pasadena, Calif. “The programs enable dealers to access their company’s capital without selling their contracts in the process. That is the most important part — the dealer is not selling the account. He is retaining it.”
THE CHALLENGE: COMPETITION
The continuing increase in competitors — ranging from do-it-yourself offerings to some heavyweights like Comcast and Verizon — many of which are offering zero down on systems, can be hard for dealers to compete against.
“Given the challenges of competing against zero down, dealers can cover huge installation costs on multiple projects by only selling a portion of their accounts while they build and/or maintain their house accounts,” Kothari says.
Instead of selling accounts, dealers can also choose to finance the number of accounts necessary to cover installation costs without coming up with the money themselves, which is challenging in this economy with delayed payments, reduced cash flow, etc.
Smith explains, “Programs like Security Finance Associates’ Equity+Plus are the two- to four-year bridge financing that enables a dealer to recover the cost of installation while retaining the ownership of the customer contract. This enables him to keep five or six years of monthly income from the customer and/or sell it as part of a portfolio for full market multiple. The cash flow from the monthly RMR will help support the on-going company operations as his customer count grows. When the time comes to sell his accounts, he will get full price without the discount for the cost of installation. Since he is only borrowing on individual customer contracts he will not have the risk of a long-term loan with all of its covenants and restrictions.” Smith explains.
It is important to note that equity builder programs do not offer the high multiples you would receive from selling the contracts; that is not the purpose, says James Miller, founder of Security Equity Partners, Elgin, Ill.
“When you sign a new account you either have to come up with the money for the contract out of your own pocket or you can use a dealer program to lend the money. The purpose of the program is not to give a dealer the same type of multiple as they would get if they sold the account. Instead, the multiple [is] to give them enough money to buy the product, complete the installation, pay the commission and cover their costs. At the end of contract term they get the contract back and then enjoy the rest of the revenue coming of the contract,” Miller describes.
Miller recommends that dealers sit down with an accountant and figure out what their fixed costs are, and then from there determine how many contracts they would need to sell or place in an equity program to cover that amount.
The evolution of the technology demanded by end users is another continuing challenge for dealers.
Rory Russell, president and founder of Acquisition & Funding Services (AFS), Albany, N.Y., says, “Dealers need money to keep up with the changing times. New equipment, training — it all is more money. Dealers do need to keep up with the new technologies, and these new equity-focused programs can allow them to tap into their capital without cashing in the equity of their company.”
Russell cautions, “Remember that your security business is worth what you have in RMR, therefore, the monitoring contract is where your company’s value is. If you are staying in the business and you don’t have a monitoring contract four or five years from now, you have nothing. With this program the contracts come back to you,” Russell says.
While equity is lost with a sale, the multiple used to determine the value of the account is typically lower when you finance the account versus a sale of the account, so dealers should carefully consider their goals and needs.
“When financing versus selling an account, the seller needs to be prepared to take back the management of the accounts at the end of the designated period assuming the financing company takes over the billing and management. The transition of the accounts back and forth between owners does risk churn and the seller may risk not getting the accounts back after the designated period depending on the overall performance of the acquired accounts. Plus, if the seller decides to retire or move onto another business, he remains tied to the accounts or sacrifices value that he would have otherwise received if he had sold the accounts outright,” Kothari explains.
Every program is different, so checking the details will help you determine which program has terms that are right for you. There will be very specific requirements such as the minimum alarm contract RMR, necessary credit scores on the accounts, etc. For example, the AFS Equity Builder Program features include:
- Loans issued for new residential alarm contracts 24 months or greater
- Loan multiples are 15x RMR for a 24-month contract and 23x RMR for contracts 36 months or greater
- Alarm contracts are returned to you after the initial contract period (24 or 36 months)
Account requirements include:
- Loans provided on new residential homeowner accounts only with a credit score of 640+
- Accounts must not have filed for bankruptcy within three years and have no tax liens or judgments
Billing via ACH automated payments like AFS requires can be a huge plus when the finance company takes over the contract since it simplifies the billing process and ensures timely payments. ACH is also viewed as a plus and is often a requirement under dealer programs.“Dealer programs can be beneficial to the seller in that the multiple paid is higher, they often allow the dealer to avoid hiring an entire back office to support a portfolio of accounts and provide access to acceptable contracts and marketing materials,” Kothari says.
There’s clearly a lot to think about for an independent alarm company looking for capital; however, dealer programs continue to be a viable option along with financing programs that allow sellers to maintain equity. n
Editor’s Note: This article cites just a few of the dealer programs available. SDM’s Buyer’s Guide has a section for dealer and financial programs. Grab your Buyer’s Guide or search online at http://directories.sdmmag.com/BuyersGuide. Not listed and you should be? Contact SDM at firstname.lastname@example.org.
This article was previously published as "Eye on Equity" in the print magazine.
Prepping for the Sale
Whether selling a few accounts or an entire portfolio, a company has to be ready, taking the time to “get their house in order” and make sure the company is ready to present to a buyer. Greg Westhoff, president, Alarm Funding Associates, LLC, Westchester, Pa., advises:
✓ Make a decision about why you are selling accounts.
• Do you want to pay down debt?
• Do you want to semi-retire?
• Do you want to offset installation costs or compete with zero down companies?
• Do you want to take the money and go in a new direction with your company?
• Do you want to leave the billing and account management to someone else?
There are a lot of reasons why you may want to sell, but being clear about why will help you make the best decision and choose the best program for you. It will also allow you to explain your goals and how your cash flow will be used to repay any loan to potential lenders.
✓ Have the company ready to sell the accounts.
• Make sure you have contracts on each account. If you are thinking about selling in the future, analyze the length of contracts you are using. Some programs only accept contracts with specific lengths.
• Make sure there is no lien on the company. While companies should have a copy of any liens, it pays to eliminate surprises and do a simple lien search on your company.
• Make sure your accounts are serviced well and pay attention to your attrition rates, which lenders will look at.
• Make sure people are paying their bills. Payment issues with accounts can derail a deal.