No matter how you slice it, know your dealer agreement

Saturday, June 1, 2002

The alarm industry depends for its well being on a steady supply of new technology. Fancy key fobs. Nanny cams and digital imaging. Internet monitoring. Wireless connections to the central station.

But if the separate parts of the industry are going to grow they must rely on the basics that have always been the source of growth: new business. And if you want new business that depends on dealers, you have to understand the basic legal relationship between a monitoring company and a dealer.

Old business eventually dies, moves away or simply discontinues its monitoring service. If you are a dealer, only with new business is there a reliable source of payment of new commissions or payment of advance multiples. If you are the monitoring company, the best acquisition also contains accounts with an unpredictable shelf life even after the payment of a high multiple. Litigation in hindsight over lost accounts or chargebacks, or calculating offsets against future payments, may lead to appropriate accounting entries, and maybe to the collection of a money judgment. However, a little more foresight between the players will lead to far better results in the long run.

Read any dealer agreement, long or short, and what does the monitoring company want? Good accounts - lots of good accounts in a certain geographic area. It may offer higher multiples for better credit scores or pay extra compensation in the future for accounts that stay on the books a long time. It may also seek to penalize the dealer if certain ratios or attrition rates do not measure up to a sometimes impossible to understand accounting. All of these new business methods start with good intentions but unless everyone understands the input, no one understands the output. That makes for bad feelings and a decline in everyone's business reputation.

New dealers sign up for dealer programs based in part on other dealers' experiences. Dealers do not usually write the dealer agreement but depending on a dealer's business reputation or past success he or she may have more or less bargaining power. Dealers with a high sales volume with another monitoring company may be willing to jump to a new dealer program but it is not a good sign if a dealer moves too often.

So what does it take to attract and keep good dealers? What does the dealer want from the monitoring company? A good multiple is only the beginning.

A good dealer who is in the business for the long run wants a competitive up-front payment but also the chance to make more money, later, after giving good service. A good dealer also wants dependable service for the customer from the central station so that he or she can make new sales to the customers' friends, relatives and neighbors. Finally, a good dealer wants prompt payment for his or her accounts and a regular accounting of customer attrition. Dealer agreements do not often spell out in detail what the dealer wants except as it relates to compensation.Without an understanding of these other points, however, even the most lengthy dealer agreement is deficient.

So what do most dealer agreements provide? Appointment of the dealer in a certain area. The dealer's promise to sell accounts meeting a certain criteria to the monitoring company in exchange for an agreed upon price. Bonuses or incentives designed to keep the dealer interested in the economics of the relationship. The dealer's guarantee of the account's performance or a provision allowing a charge back. And certain housekeeping provisions intended to take care of the day-to-day problems that arise. These are all necessary to the financial part of the relationship.

What should a dealer agreement also provide? It should have a straightforward way for the parties to communicate small problems to each other before they get out of control. A regular accounting to the dealer is therefore necessary. But the same goes for information the other way.

The dealer has to communicate to the monitoring company his or her own complaints or the customers' complaints about service. Coming full circle, you have to work at keeping the old business too, or no amount of new business will help.

John C. King practices law in Wichita, Kansas and he is also a member of the bar in New York, Illinois, Virginia, several federal district courts and federal circuit courts of appeal. He holds a law degree from both The John Marshall Law School and New York University School of Law. He has litigated cases and advised clients from both sides of alarm monitoring dealer agreements.