Finding Financing

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 alarm companies.

“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.”

Measuring Value

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.”

Potential Pitfalls

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.”

This article originally appeared in the October 2011 issue of Security Today.