Fool’s Gold in Alarm Companies
— Dorsie Mosher, July 2009
Dating back to the sixteenth century, there are hundreds of stories about gold miners who mistook shiny rocks for the real thing but later learned that all their hard work had only produced iron pyrites (fool’s gold). In fact, this is so much the case that there is a story of an entire shipload of iron pyrite having been shipped over to England during the 1500’s — the yellow stuff having been mistaken for gold.
Dating back to the sixteenth century, there are hundreds of stories about gold miners who mistook shiny rocks for the real thing but later learned that all their hard work had only produced iron pyrites (fool’s gold). In fact, this is so much the case that there is a story of an entire shipload of iron pyrite having been shipped over to England during the 1500’s — the yellow stuff having been mistaken for gold.
All too often, alarm company owners see great value in certain aspects of their business that turns out to be “fool’s gold” in the eye of the buyer. Here are some of the more common examples of owner fool’s gold:
- “I do all of the selling myself – my customers like dealing with the boss and know that they can always call me if they have a problem”
While it’s admirable to have great sales skills and to have a broad network of personal contacts, this scenario creates a major problem for the Buyer (particularly if the Seller is “out the door” after the sale). The Buyer is faced with building a sales force (even if the Seller remains on staff, his customer service commitment preclude sales growth – not adequate selling time available). Further, the Seller will not be honoring the basic principal of “highest and best use of his time”. An employee costing the company $50 per hour should not be spending a large portion of their time dealing with business issues that should be handled by $12 per hour employees.
- “Thanks to our great marketing efforts, we do business all over the state”
The more compact the footprint of the subscriber base, the more valuable the business. If a significant percentage of the subscribers are more than an hour’s drive from the office, this can be a strong negative to the Buyer.
- “More than a third of our business comes from the largest employer in our market — we get all their new facilities”
Any time a single customer represents more than 15% of the revenue and/or profit of a business, this is a negative for the Buyer. Losing a single customer representing a third of the business, is extremely worrisome. (Ever hear the one about the alarm company had all 150 stores of a grocery chain – and then the chain was bought by another chain; that had its own central station!)
- “We don’t even bill for most service calls – it’s more important for us to maintain the goodwill of the customer than to collect a small amount for service – we believe this helps referrals”
Major problem for the Buyer. Most Buyers have a substantial overhead structure in place to ensure that they can provide professional service on a timely basis (when you have 10 or 50 service requests per day, having Johnnie Serviceman catch it on his way home doesn’t work). Most companies figure that their raw cost for putting a serviceperson on the street is about three (3) times the hourly wage (includes salary, benefits, training, vehicle, fuel, insurance, management, callbacks, facility, etc.). Accordingly, a tech paid $20 per hour costs $60 per hour to be in the field. In order to make a 50% gross margin on service revenue with this cost structure, a $120 per hour labor charge is necessary. A subscriber accustomed to “no charge” service is not likely to be pleased when billed at the service rates of the new owner and even if the subscriber does not cancel at their first opportunity, they will require a lot of “handholding” to get through the transformation.
While it’s admirable to have great sales skills and to have a broad network of personal contacts, this scenario creates a major problem for the Buyer (particularly if the Seller is “out the door” after the sale). The Buyer is faced with building a sales force (even if the Seller remains on staff, his customer service commitment preclude sales growth – not adequate selling time available). Further, the Seller will not be honoring the basic principal of “highest and best use of his time”. An employee costing the company $50 per hour should not be spending a large portion of their time dealing with business issues that should be handled by $12 per hour employees.
The more compact the footprint of the subscriber base, the more valuable the business. If a significant percentage of the subscribers are more than an hour’s drive from the office, this can be a strong negative to the Buyer.
Any time a single customer represents more than 15% of the revenue and/or profit of a business, this is a negative for the Buyer. Losing a single customer representing a third of the business, is extremely worrisome. (Ever hear the one about the alarm company had all 150 stores of a grocery chain – and then the chain was bought by another chain; that had its own central station!)
Major problem for the Buyer. Most Buyers have a substantial overhead structure in place to ensure that they can provide professional service on a timely basis (when you have 10 or 50 service requests per day, having Johnnie Serviceman catch it on his way home doesn’t work). Most companies figure that their raw cost for putting a serviceperson on the street is about three (3) times the hourly wage (includes salary, benefits, training, vehicle, fuel, insurance, management, callbacks, facility, etc.). Accordingly, a tech paid $20 per hour costs $60 per hour to be in the field. In order to make a 50% gross margin on service revenue with this cost structure, a $120 per hour labor charge is necessary. A subscriber accustomed to “no charge” service is not likely to be pleased when billed at the service rates of the new owner and even if the subscriber does not cancel at their first opportunity, they will require a lot of “handholding” to get through the transformation.
In summary, think about your company’s business practices from a Buyer’s perspective and implement whatever change is necessary to ensure that all of your “fool’s gold” has been minimized.
