Leasecomm drops dealer program

Leaves 340 alarm dealers without a funding source
Friday, November 1, 2002

WALTHAM, Mass. - Another round of dealers lost a steady stream of funding for their businesses as a second major dealer program announced major changes to its funding program, this time calling it quits.

Leasecomm Corp., through its parent company MicroFinancial, announced in mid-October that it would cease to fund any new loan originations but would continue to collect on its existing portfolio of outstanding leases. The announcement marks a new corporate strategy for the company, which entails a reduction in its loan business and a new focus on customers with better credit, along with the company's technology and loan-servicing platform. The company also said it would cut about 31 percent of its workforce; published reports said it had already let go about 90 workers at its headquarters here. Company officials did not return repeated calls for comment.

"The current lending environment has been very unfavorable and this economic trend has caused our core Microticket financing business to become unattractive and economically unfeasible," said Richard Latour, president of Leasecomm, in a letter sent to Leasecomm's dealers dated Oct. 10. "Leasecomm tirelessly pursued and evaluated all avenues of opportunity to continue our Microticket financing as recently as today…I am hopeful that new financing can be in place in the near future."

The news comes on the heels of announcements from ADT Security Services, which said in late August that it was scaling back funding of account acquisitions and dropping more than two hundred dealers from its Authorized Dealer program, which had more than 700 dealers. That move has called into question the viability of such a huge dealer program, often a great cash drain on a company's coffers, in today's volatile economic climate. Leasecomm had about 340 dealers in its dealer program.

"On the one hand there seems to be ample capital coming into the security industry…and at the same time capital is generally drying up, it may not spill over to the traditional financing of alarm accounts," said Jack Mallon, principal at Mallon & Associates. "It doesn't mean that there isn't capital for the security industry; it's just that (capital providers) are looking for more tangible and technological and newer opportunities."

Unlike ADT and other dealers programs, which claimed the right of first refusal to buy a dealer's accounts, Leasecomm claimed no exclusivity in its dealer agreement.

"That's where they got us," said Chad Le Moine, president of Albuquerque Low Voltage in Albuquerque, N.M. "We were all so careful about signing on with ADT and other (dealer programs) with three year contracts."

Le Moine, who relies on commercial smoke and fire alarm installations as his businesses' bread and butter, said his high-end residential installations are a small but lucrative part of his business, but "we do need somewhere to sell our monitoring contracts."

A letter sent to dealers in late September notified them that, effective immediately, the multiples would be reduced depending on the Beacon score of the account. Le Moine said he was forced to sell about 10 accounts to Leasecomm at a 21 multiple after he made the decision to leave the program when learning of the lower multiples. Le Moine has since signed on with Monitronics, which he said is offering an industry standard 33 multiple with automatic check handling.

"They could have stopped taking dealers maybe six months ago, and that could have been their first step in downsizing the company," Le Moine said. "They gave no indication that what happened was going to happen."

While Leasecomm's program was on a much smaller scale than ADT's, those changes threaten to overwhelm other funding sources in the industry with interest. Some, like Monitronics International and Security Alarm Financing Enterprises, said phones are ringing off the hook with dealers looking for alternatives.

"Now may be a fortuitous time for some new dealer programs to come on - capital is difficult to get but the financing costs are low," said Tony Smith, president of Security Finance Associates, an investment banking firm specializing in the security industry. "The dealer program has become a necessary element in the overall alarm marketplace."

Dave Hill, sales manager at SAFE, said that the fallout from the two dealer programs will only seek to help the market because dealers will be forced to abandon the low-down model and seek more money up-front during a sale.

"This will drive down the multiples and help to increase the customer investment in an alarm system," he said.