Choosing a Financial Partner

Look beyond money to find the best financial services partner for your company. It is easy to get locked into the dollar signs, but over time, you will appreciate any time spent ensuring your financial partner is the right fit for your business. While financing decisions (obviously) do come down to money, there is so much more to the transaction than that. For example, what benefits should you expect from your financial partner? And how should you go about choosing one?

On the following pages, SDM has collected the “Top 3 Tips When Choosing a Financial Partner” from all kinds of financial companies in the security market, as well as from security integrators and dealers. It’s a collection of advice you can use whether you are exploring new relationships/opportunities or reevaluating existing ones. As you read through them, you will see one trend is very, very clear. It doesn’t matter if you are a small dealer selling a few accounts each month or a large integrator seeking funding for a major acquisition: you must work with a financial partner that understands your business and the industry.

Experience in the sector, good terms and conditions, and good references are recommendations from John Mack, executive vice president, co-head of Investment Banking, Imperial Capital, Los Angeles. Ask to talk to an existing client of the prospective lender that has had some sort of difficulty to determine how well the lender handled the problem, he says. “Lenders are generally all reasonably good to work with when things are going well, but it is particularly important to see how well they will work with you if you have an issue,” he advises.

Michael Bailey, chief financial officer, Mountain Alarm, Ogden, Utah, a company that entered the fire and security industry in 1950, says working with a financial partner who understands his business (and the industry) is worth more than the final monetary value.

“I am willing to pay a little more for financing if I have a partner who is understanding of our business and what we are trying to accomplish as a team,” Bailey shares. “This includes a partner who can be flexible when opportunities arise outside the forecasted scope of business.”

Before your partner can understand your business, you must know your business’ financial goals. The happiest outcomes start when you have a business plan with actual dollar projections of sales, revenue, expenses and attrition so that your business is designed to meet your goals, advises Jim Wooster, chief executive officer, Alarm Financial Services Inc., Corte Madera, Calif. “If you do this first, you can select a financing partner who meets your needs, rather than building your business around what a dealer program or financing company says you should do,” Wooster adds.

Will Schmidt, managing director, Security Lending Group, CapitalSource, Chevy Chase, Md., says, “Money is ultimately a commodity, but the way a transaction is structured and the advice that a financial partner can provide will prove to be invaluable in the long run.”

Most dealers prefer a long-term relationship with a financial partner, and while it takes some time and effort to establish a relationship, once it is in place there are inherent efficiencies that come from knowing each other, says David O’Brien, director of Specialized Banking, Citizens Financial Group Inc., Providence, R.I. In September O’Brien joined Jane Westrich in Citizens Commercial Banking’s security alarm industry banking business led by Greg Buscone. Read more here: http://bit.ly/1ptFPUc.

“It takes some time on the front end to get an agreement in place, but then it is readily available,” O’Brien adds. “The amount needed will vary by the size of the dealer/integrator, the pace of their growth and whether their operation generates sufficient cash flow to support their growth goals.”

The most valuable services a financial partner can provide will depend largely on where the particular dealer or integrator is in their life cycle, thinks Thomas Pagnani, managing director, Security Lending Team, Capital One, Chevy Chase, Md.

In some instances, obtaining institutional debt is a completely new experience. For these dealers, whose businesses are typically fairly small in scale, bringing on a debt partner can be a major undertaking. “These companies are looking for a partner who is well-versed in the industry, is willing to finance a smaller facility upfront with the prospect of growth over time and can provide a financing that is as user-friendly and turnkey as possible,” Pagnani predicts.

For more mature dealers who may be used to institutional debt, their “hot button” issue may be finding a debt partner who is willing to provide acquisition financing in order to expand their reach into the marketplace, Pagnani adds. “These borrowers want a debt partner who is comfortable with that strategy and able to provide certainty of execution once an acquisition candidate has been identified.

“So, while the specific financing need may be somewhat idiosyncratic, it’s fair to say that all dealers and integrators are looking for partners who are dependable, have a proven track record in the industry and can offer an array of ancillary services (e.g., treasury management) that will help them move along their long-term growth plan,” Pagnani shares.

Financing can be an intimidating process, but dealers don’t have to figure it all out themselves. “If dealers open up dialogue with finance professionals, they can get advice right away on options to consider and they’ll gain a better understanding of what they will need in the future to borrow money,” encourages Rory Russell, owner of Acquisition & Funding Services (AFS), Kattskill Bay, N.Y., a broker for acquisitions, sales and mergers for security alarm companies. In the last 18 years, AFS has handled approximately $500 million in mergers, acquisitions and financing of fire, burglar and integration companies.

When dealers open up a dialogue with financial professionals about borrowing money, they will be able to get prepared for the loan and know the things they need to do know to borrow money in the future, Russell adds. Brokers such as AFS help connect dealers with the appropriate financial partner. “Don’t spin your wheels with the wrong lender. Do more than one interview. Get references. There are many different banks and there is the perfect fit out there for everyone,” he believes. Read more in “Thinking of Selling Your Business? You’ll Want to Read This First” on page 49.

SDMalso asked professionals around the industry about what’s trending in finance to stay aware of. Here are a few notable trends to keep on your radar.

A few years ago during the recession, traditional banks pulled back on lending, but that is no longer the case. Dealers or integrators who had a negative experience should expect a whole new conversation today.

“During the aftermath of the mortgage melt-down alarm companies came to us saying that they had been cut off from additional borrowing, or even that their loans and lines of credit were being called,” Wooster recalls, adding that a significant amount of his company’s lending during that time was refinancing loans previously held by local traditional banks.

“Recently, however, the companies we lend to have been borrowing more from a position of strength, using our funds to make acquisitions. We’re extremely pleased to see this type of borrowing continue as security companies are using debt in a positive way to build the value of their business,” Wooster observes.

TECHNOLOGIES BEYOND THE ALARM

An area to watch is the growth beyond the alarm into new technologies, such as home automation, personal emergency response (PERS) systems, and video. The shift in the industry is pressuring the current valuations given to general alarm accounts and the way financing has always worked.

Dealers are increasingly seeking “RMR financing” on non-traditional forms of RMR such as home automation services, video, access control and guard/patrol, observes David Stang, senior vice president, senior client manager, Security Banking Group, Global Commercial Banking, Bank of America Merrill Lynch, Chicago. “But not all of these services have the same margin or performance characteristics as traditional alarm monitoring,” he says.

It will take some time to figure out — for dealers and for lenders.

Is the take rate for home automation solutions really at a level where small- to medium-sized companies should be investing in the additional products and the training necessary to meet homeowner expectations? There are a lot of factors that enter into the appropriate financial analysis necessary to make an informed decision in these and other areas. Looking at home automation or video verification, the costs of entering those service segments may not fit the financial terms and expectations of the entity supplying the loan capital,” observes Tony Smith, Security Funding Associates Inc., Tujunga, Calif.

Creative funding programs are available. For example, EMERgency24, Chicago, is offering a video alarm program designed to optimize a dealer’s cash flow while letting him tap into the technology. “Video is the future of the industry and many lenders understand that a system with a video component will retain more value over time than a blind system,” says Emergency24’s senior vice president, Patrick Devereaux. “We are much more comfortable investing when we know the hardware still will have value in 15 to 20 years. The video system we are offering today will serve end users well during that time frame. And for dealers, the value of each installed system compounds as agreements mature and are renewed.” Read more about the program in “Beyond the Alarm: Financing Video Verification” above.

On the debt capital front, O’Brien is seeing more firms access the institutional debt capital markets with Term Loan B offerings and bond offerings. “There are size and risk rating limitations to access those markets so it applies more to larger companies in the industry, but it is a real positive that institutional buyers of debt are gaining knowledge and experience with issuers from the security alarm industry.

“It has been, and should remain, very attractive for dealers to get financing. Even during the past recession, dealers had access to debt capital, which is a testament to the stability of the industry and the recurring nature of their revenue streams,” O’Brien adds.

Whether looking at new or long-standing financial partnerships, continued due diligence and planning by dealers and integrators will ensure the best, very attractive outcomes. Start with a partner who is willing to learn about your business and support your goals and the sky is the limit. Once the relationship is in place, financing becomes a lot less like a hair-pulling headache and a lot more like hitting the easy button. As close as financing can get to that anyway.

Thinking of Selling Your Business? You’ll Want to Read This

First

A new book, “To Sell or Not to Sell: Advice for Security Alarm Business Owners,” by Rory Russell from AFS Acquisition & Funding Services, offers an inside look at the industry and offers best practice advice on maximizing your company’s value. The 33-page book outlines the complexities faced by small business owners, who Russell says “constantly juggle critical decisions on where to best invest their money. Should you upgrade your equipment? Add on new services? Increase your marketing budget?”The book features easy-to-comprehend information on why owners should have an exit strategy for selling their businesses, even when those businesses are doing well. The author suggests ways to ensure that important must-haves are in place to position an alarm company for a future sale.

Russell outlines AFS Acquisition & Funding Services’ keys for ensuring a company is sold at a premium price, no matter when the sale occurs. He breaks down best practices for each of the following subjects:

• Strong customer contracts

• Your own telephone line

• A diversified account base

• Up-to-date paperwork

• Clear accounting records

• Low attrition

The book also offers advice about the right time to sell one’s business; offering readers 10 factors to consider before making a sale in order to get the best price. These 10 items include questions such as, “Is it a buyer’s or seller’s market?” and “What should you do first?” A well-written, straightforward guide, “To Sell or Not to Sell” provides alternative solutions for financial holdings, such as strategically selling off accounts and how to know when it is time to reinvest in a business or walk away. The book ends with an expert analysis of where the industry will be in the next five years.

Readers can reach out to AFS Acquisition & Funding Services for more assistance.Read the book at http://bit.ly/1vd6BF8. — By Maya Dollarhide, SDM Associate Editor

Evolving Options From Dealer Programs

For Scott Carpenter, president and CEO, Action Alarm Solutions, The Colony, Texas, the right dealer program was the one that allowed him to use his own company’s name.

Carpenter used to run Brink’s Home Security Authorized Dealer Program, but when it was sold to ADT, he opened up his own business, headquartered in The Colony, Texas. Since then he has been through two dealer programs before joining Alarm Capital Alliance (ACA).

“We’re not a huge company, but we were missing being able to be funded — or not funded — while still exclusively using our name to gain name recognition for our own company,” Carpenter says.

“Name recognition is key in my region,” he emphasizes. Action Alarm Solutions has established a strong reputation in its market, winning a Super Service Award from Angie’s List three years in a row.

Switching to ACA gave Carpenter the opportunity to build on his company’s reputation. “When customers call Action Alarm Solutions, everything is run through the company. When I assign a technician to an account, they can count on that technician coming to their house, not a stranger. We are dealing with high-end clientele where name recognition and 24-hour support is key. This financial relationship was a great decision on my part,” Carpenter shares.

Kelly Bond, senior vice president of business development, ACA, Newtown Square, Pa., adds that while many dealers such as Carpenter are looking for a long-term partner that allows them to continue running their business as they always have, with the opportunity to continue using their own brand name, others do want the customer support.In that case, “they want to understand what will happen with their customers following the sale and be assured they will be well taken care of,” Bond says.

When a dealer signs on with the authorized dealer program offered by Guardian Protection Services, Warrendale, Pa., the dealer gains the support of an experienced talent pool without incurring the overhead costs and effort to maintain the same, shares Brian Helt, vice president of the Guardian authorized dealer program. “Traditional lenders simply cannot assist the dealer with account retention functions, because they lack the requisite focus and support structure,” he says.

He adds that traditional banking industry lenders may require dealers to have an RMR base against which to borrow. Yet the dealer can’t build that RMR base without having access to the bank’s funding, creating a “chicken and egg” conundrum. Guardian Protection Services’ lending platform gives the dealer both the chicken and the egg by lending the dealer the capital to hold up to 20 percent of whatever volume the dealer generates starting on day one. “This is important in that it allows the dealer the ability to borrow money with no RMR base,” he says.

The dealer program operated by Safe Security, San Ramon, Calif., knows dealers are looking for fast, reliable funding so they can build their company, but a smart dealer always should keep a percentage of their accounts in-house as well, he cautions. “Those in-house accounts will eventually build up enough RMR that you no longer need a dealer program and you’re able to self-fund,” says Safe Security’s Chancy Pray.Read more about financing for the future in “Balancing Equity and Capital,” http://bit.ly/1xi3ahX.

Dealer programs are often competing for the same dealer, typically a dealer that is producing a high volume of accounts monthly, so multiples have continued to increase as these buyers compete for market share. “There is a lot of risk with that model for a dealer, however, as they are often required to hit significant growth milestones and can be left out to dry if their engine stops producing,” Bond cautions.

She shares there are also companies that are providing more of a factoring-type financing in which a dealer will be paid a lower multiple up front for a new contract and then will get the contract back after a period of time, typically three to five years.

“If the dealer can afford the lower advance and the contract stays valid (for three to five years), this can be a great option,” Bond advises.

Beyond the Alarm: Financing Video Verification

EMERgency24’s new video alarm program optimizes a dealer’s cash flow by providing Videofied wireless systems and paying the dealer for the installation and value of the subscriber agreement once it is signed and commissioned. A base system includes a control panel, keypad, Videofied MotionViewer and two contacts. The dealer receives about $675 for the installation and upfront funding of the 36-month agreement. The end user pays less than $40 a month for this, plus $199 for installation.

With minimal out-of-pocket expense, dealers can add staff to install and cover costs. In fact, selling just one system a week generates $35,000 in annual revenue. Over five years, that is 260 accounts and each is worth more than $1,000 when it matures. For information, visit www.emergency24.com.

New Security Investment Trends Committee

Looking for up-to-date information on the state of finance in the security industry? Follow the work of the SIA Security Investment Trends Committee. Its mission is to increase the availability of security industry related capital markets, mergers and acquisitions, and investment information for participants in the industry. Founding committee members include: Franklin McClelland (Allegion), John Orr – Ascent Capital (Monitronics), Stephan Segouin (The ADT Corporation), Will Schmidt (Capital Source), John Mack (Imperial Capital), Alper Cetingok (Raymond James), Andrew Dodson (Parthenon Capital Partners) and Jeff Kessler (Imperial Capital). View the PowerPoint for the first webinar here: http://bit.ly/1s3VDnI.