An Impending Major Transaction in the Electronic Security Industry Sheds Light on Potential New Lending Practices

Two sources have confirmed that one of our major industry alarm companies is in final negotiations with one of the largest consumer finance companies that serves security alarm dealers (and other verticals) around the country. The price tag for this transaction will purportedly be in the $1 Billion range. Should we be surprised? I do not think so.

The Buyer, in this case, has an account purchase program from contracted alarm dealers where the Buyer purchases accounts for 30x to 40x RMR, depending on various criteria. The Seller is a multifaceted consumer finance company that has a strong financing platform although a checkered history of losses in our industry. The Seller and the several other financial services companies, such as Synchrony, which service our industry have been doing some significant business, but they treat alarms just like any other vertical. If the Buyer in this reported transaction allows the dealer’s financing of the customer installation to provide a more profitable payment to the dealer, then the Buyer will likely pay a lesser amount than they are paying now to acquire the monitoring contract from the dealer. That’s a good deal for the dealer, especially if the Buyer removes the holdback clause. Its a good deal for the Buyer because they have reduced their acquisition cost. The Buyer now has a projected 15 yr. life (per their financial reports) for the monitoring contract less any portion paid to the dealer.

Let us look a little deeper at the elements that can make Consumer Finance good for all parties. History has already taught us (2006-2008 recession) that consumer finance in our industry will likely implode if there is not some involvement by alarm dealers in the long-term success of their designated consumer finance company. Consumer Finance companies do not, as a rule, allow the dealer to combine the monthly monitoring fees with the installation charges because they do not finance service contracts. Security Funding Assoc.(SFA) has thrown both rules out the window.

SFA works with its dealers to be sure that there are signals at the central station to confirm the installation. They ask their dealers to identify any customer issues that may cause a customer to be late with their payments. ACH and 680+ credit are required for funding. SFA will periodically check customer activity. Finally, by combining the monitoring and installation, the customer only has one check to write each month. Split billing was a major cause of attrition in 2008 because dealers did not understand that once the customer drops monitoring, their equipment is perceived as almost worthless. Also, because of their limited terms, SFA does not generally work with consumer finance companies. Its primary relationship is with a bank that has a strong Platform and a Federal Charter. The bank is encouraged with its proactive work on their behalf to reduce attrition.  All of the above is why there has been minimal attrition for the bank and there is no need for dealer chargebacks or holdbacks after the deal is funded.

Finance companies are now allowing their security customers to go beyond 5 years to 10 or 12 years, although the monitoring contract is normally 5 years or less. SFA decided early on that there would only be a 36mo. and a 60mo. program to avoid confusing the customer and creating a loan term that might exceed the useful life of the installation. Many states want alarm companies to renew monitoring on a monthly basis, so anything beyond 5 years becomes problematic. Again, remember, that in 2006-08, split billing caused a severe attrition problem. As a final thought we do not know if the above referenced transaction will actually close, but it is clear that there is a strong rationale and demand for responsible Consumer Finance to help replace the void caused by the withdrawal of traditional banking from our industry over the last few years.

Tony Smith is a licensed CA alarm dealer, Past President of the CAA and Co- Founder, Co-Managing Director of SFA. He has been actively involved in funding for alarm dealers and mergers and acquisitions for over 30 years. He may be reached at (626) 795-9199 or 

Tony Smith
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