Barnes on dealer programs

Monday, May 1, 2006

YARMOUTH, Maine--Dealer programs in the residential alarm industry are enjoying something of a resurgence in the security market. Why did they fall out of vogue and why are they now enjoying a comeback?
Michael Barnes, a partner in Barnes Associates, an investment banking and consulting firm that specializes in the security alarm industry, shared some thoughts on the topic with Security Systems News.
Most recent criticism is due to "a misunderstanding of what went wrong with several programs that ended up as financial failures," he said.
Those failures were not generally due to the "fundamental validity of using outsourced sales and installation arrangements like a dealer program," rather, the failures were generally because of "flaws in the structuring of the relationship, the underlying quality of the alarm account, or the price paid for the account ... or some combination of all three," Barnes explained.
Lessons from the past are being heeded by today's account buyers, who Barnes said know the dealer needs "iron clad incentives to pursue customers with a real need and desire to have the protection," who put down a minimum upfront payment for the installation, and have good credit. Further, processes and procedures have to be in place to verify the quality of the installation and the commitment of the customer to the long-term contract, and to verify that the dealer sold the system using professional, respectful methods.
Barnes gave three reasons for renewed interest in dealer programs.
First, he said, "standardized high-volume sales programs, particularly those aimed at the unpenetrated residential market are often times best executed by independent, highly focused sales and installation organizations."
Second, the relationship of the parties in a dealer program delineates and simplifies the economics. "The originating dealer has a clearly defined price it receives for new alarm accounts, and it is up to them to make the sale and installation economics work," Barnes explained. On the other hand, the buyer has "predictable costs for growth," and must "make sure the costs of monitoring and servicing the account, and the cost of the capital to fund the growth, is economically sound."
Third, dealer programs result in clearer financial statements for dealer and buyer, "allowing each to more specifically delineate their respective activities." Accounting rules make it difficult for fully integrated alarm companies to do the same.
When sales and installations are performed by employees of the typical account buyer, the costs in most cases "would have to be expensed, while if outsourced to an independent dealer, the total cost of originating the customer can be capitalized through the purchase of the account," Barnes said.What will new dealer programs look like? Barnes expects to see more variations on dealer program pricing structures "as buyers attempt to compete for accounts without bidding up the economics to a level that doesn't work."