Alarm dealer expert shares keys to successfully obtaining capital
- By Cindy Horbrook
- Oct 01, 2011
Whether you’re a brand-new alarm dealer starting a company
or an established dealer looking to expand through acquisitions,
opportunities for financing abound. The reasons alarm
dealers need to raise capital are no different from those in
other industries—for growth, to make an acquisition, to buy out a partner, to
open a new office or to consolidate existing debt. When navigating the world
of financing, though, there are a host of financial issues to consider, which can
sometimes be tricky for those without a business background.
Types of Financing
One of the most important aspects of finding financing is identifying the
proper source to approach for capital.
“There are different funding companies that fit the different needs of the
industry,” said Jim Wooster, president of Alarm Financial Services, which has
offices in California and Ohio.
One source of financing is banks, which typically provide large loans to big
“Traditionally, banks have not understood the alarm industry very well.
There are a few large banks that do and have dedicated divisions and personnel
who are experts in the security alarm industry,” Wooster said. “Those
banks are traditionally looking to do large financing transactions...$5 million,
$10 million or more. That doesn’t really help the small- to medium-sized
alarm company that is looking to grow.”
Those smaller dealers often turn to dealer programs that buy accounts on
an ongoing basis.
“They are set up to buy customer accounts and customer contracts as the
dealer creates them on a week-in, week-out basis,” Wooster said. “In those
situations, it’s fine if the dealer’s goal is not to accumulate security alarm monitoring
accounts and customers. If the goal is just to sell them and raise cash,
then that is going to fit their needs.”
Funding companies, such as Alarm Financial Services, also provide a
source of cash to small alarm dealers.
“Dealers who are looking for an alternative to dealer programs ... [are] not
big enough to approach one of the larger industry-specializing banks; that’s
the need that we fill,” Wooster said. “We offer funding anywhere from $20,000
to $1.5 million through a variety of different funding programs, including
loans, purchases of accounts and a program that’s a hybrid of a loan and a
purchase, where the dealer retains 50 percent of the accounts.”
For many alarm dealers, it’s all about the recurring monthly revenue, or RMR.
If the goal is to accumulate RMR, Wooster said selling to a dealer program
may not be the best option.
“The real value of an alarm company is measured in their recurring
monthly revenue and their ability to grow that recurring monthly revenue
over the years,” Wooster said. “If you sell all your accounts, you really aren’t
growing your recurring monthly revenue. That might be fine for some companies,
so a dealer program would fit that need.”
New RMR-generating opportunities for dealers include interactive services
available through smartphones, alternative communications such as cellular
or radio, medical emergency response monitoring, identity-theft protection
services and remote video monitoring.
For example, an iPhone- or Web-based application might cost the dealer
a few dollars a month, and that expense, plus a small fee charged to the consumer,
equates to additional RMR.
In the Electronic Security Association’s 2010 Electronic Security Megatrends
Survey, more than 66 percent of respondents expected the use of alternative
alarm signal transmission to grow by more than 10 percent over the next two
years. That expectation was followed by mobile device control at 49 percent and
integration on IT/networks and IP-based security each at 46 percent.
“Instead of being limited to traditional security- and fire-monitoring
RMR, dealers have a whole host of other services that they can generate RMR
from, and that RMR becomes eligible for financing,” Wooster said.
Determine Your Objectives
“The first thing to do is understand not all funding companies are the same, and
that the dealer has to really figure out what are their objectives,” Wooster said.
Basically, if you’re looking to build RMR, that will take you in one direction.
If you’re looking to sell RMR and maximize cash, that will take you in a
different direction. Dealers should fully understand how the program works
and the requirements.
“Too often a dealer just wants to hear ‘What is the highest multiple I can
get, and how quick is the turnaround?’” Wooster said. “Those seem to be the
two questions they ask, and they really need to ask a lot of other questions in
order to make sure it’s the right thing to help them accomplish their goals.”
Dealers often may be so focused on getting the money that they ignore what’s
involved in the process either after the fact or on an ongoing basis.
“I think too often they have some immediate need to raise the capital,”
Wooster said. “That immediate need is so strong it prevents them from understanding
all the ongoing requirements that may be placed upon them by
the funding company.”
When it comes to dealer programs, one of the biggest pitfalls Wooster has
seen is that dealers often have the impression that the dealer program has
control of only the accounts that it is purchasing from the dealer.
“The way that a lot of dealer programs protect their attrition guarantees
is by having a collateral or security interest in all the accounts of the dealer,
not just those that were sold to the dealer program,” he said. “Often, that’s a
surprise to the dealer. Nobody ever told them that,” he said.
Another difficulty some dealers face is the scarcity of business education.
While technical and sales education is plentiful for alarm dealers, there is a
need for more business education opportunities in the industry.
“Alarm dealers will often get into this industry because they are good technicians
or they are good salespeople, but don’t necessarily have a business
background,” Wooster said.
That has changed some over the last few years through ESX, the Electronic
Security Association’s annual trade show. During the 2011 ESX, a seminar
called “The Bank Factor” provided tips to dealers on how to communicate the
value of their company to banks in order to gain access to increased credit at
better terms. Other sessions included ideas to increase RMR, benchmarks of
business success and managing cash flow.
“They’ve made a point to offer a component of really strong business educational
classes,” Wooster said. “I think that’s going to help alarm dealers be more
business savvy and be smarter about how they raise capital to grow their business.”
Good News for Alarm Dealers
The security alarm industry continues to be active, despite the challenges of a
slow economy. Wooster said he has seen a lot of activity in terms of companies
being bought and sold.
“A great opportunity for small- to medium-sized dealers to grow their
business is through the acquisition of another company,” he said. “A lot of our
financing over the last couple of years has been to lend money to an alarm
dealer to make an acquisition.”
Owners of small- and medium-size alarm companies often think that if
they don’t have cash on hand and if they can’t go to their bank to borrow
money, then they cannot buy another company, he added.
“They sit back and watch while some large regional company comes in and
swoops up that seller. That’s unfortunate, because oftentimes the seller, if they
are a small company, would rather sell to another small company because they
know that their customers are going to be treated the way they’re used to being
treated,” Wooster said. “I hope small- to medium-sized alarm companies
realize there are resources out there for them to raise capital to grow their
company via acquisitions.”