Reasons to Join Alarm Dealer Programs
There are a lot of really good reasons to join alarm dealer programs. There are also some things to watch out for.
This is the most obvious and largest benefit. Without a security dealer program initial profits are low, averaging $100-$200 per customer. Monthly you can expect to net $15-$18 of the RMR after expenses.
Compare that to an alarm dealer program which grosses $1600 up front. Even if you provide free equipment you will net $1200-$1400 per account. That’s about the same as collecting 5+ years of profit on an account you keep in house. That’s 5+ years of chasing down billing information, running service calls, handling tech support, replacing equipment, and hoping another alarm company doesn’t steal them away from you. An average customer stays with you for around 7 years. Is a couple hundred dollars of extra profit over 7 years really worth it?
A one or two man operation can realistically expect to net $8,000-$10,000 monthly from 2-3 sales each week. To reach that level of income with in-house accounts you would have to generate and maintain almost 600 customers. This may seem easy on paper but very few small operations can break past 200 customers, let alone 600.
Buying alarm equipment is all about volume. For example if you go to a distributor and set up an independent account you can expect to pay around $145 for a 2gig panel and up to $25 for a door/window sensor. Becoming a dealer allows you to add your volume to hundreds of other companies and get pretty significant equipment savings, anywhere from 15% to 30%. If that doesn’t get you excited, consider that even smaller alarm dealers will spend $50,000 annually on equipment and those savings can be worth $10,000-$15,000 per year.
Sales Training and Lead Programs
Most alarm dealer programs offer some kind of sales training assistance to those who have become their alarm dealers. This can range from pamphlets and marketing materials all the way to in-person and on-the-door training with a highly experienced and motivational trainer. Additionally the leads that can come in, often for a price, can make for a few extra sales when you partner with a security dealer program.
Resources and Branding
The kind of branding you get by becoming an authorized dealer for ADT can be a very powerful force for your sales team and could potentially help close a few extra sales. Likewise the software and systems that dealer programs provide can make things smoother, easier, and are often provided free of charge to alarm dealers in the program. Spend some extra time understanding what kind of software and resources the alarm dealer program will provide for you. It can make a big difference.
What to Watch Our For In Alarm Dealer Programs
For all the benefits of alarm dealer programs, there are plenty of things to be aware of. Up until now most of this information could only be learned the hard way. So read on and take advantage.
Exclusivity and Liens
Very few people know what a UCC lien is until they have to fight one; and they can be a pain. The language allows the lien holder to claim all of the current and future assets of your alarm company, not just those affiliated with the security dealer program. Everything. That means your inventory, bank accounts, pens, trucks, and even paper towels.
The bad news is that almost all dealer programs file a comprehensive UCC lien against their dealers. The good news is that they don’t randomly claim your business assets. The lien is put in place to protect against the dealer putting on bad business and refusing to repay any chargebacks that result. The frustrating part is when you need to take out a business loan in the name of your alarm company. Many lenders will see the lien and ask for extra steps, such as a lien release, before they will approve any kind of loan.
Exclusivity is also something to watch out for as just about every program has an exclusivity clause. Once you sign up for a dealer program it can be very difficult to get out of the security dealer program contract. You will only be able to sell accounts to your program for a 3 year period, so make sure you like the company and want to have a long term business relationship with them.Violating these provisions can and does result in legal action, so don’t try and skirt the system.
Most alarm dealer contracts last for an initial term of 3 years, and with very few exceptions you cannot get out of it. You cannot close down the original security company and start a different one either, it’s been tried and failed in court. Once you have signed on to join an alarm dealer program you will be there for 3 years, like it or not. Also, some of the dealer programs are very strict when it comes to cancelling the contract. If you don’t follow the steps outlined in the dealer contract perfectly, you could easily find yourself locked in for another 1 or 3 year term.
Since the program is advancing so much money, you must guarantee each account, typically for 12 months. If a customer moves, passes away, or stops paying their bill for any reason during the guarantee period you must repay the full purchase price of that contract. This policy is fair and reasonable, but the true cost can escape security dealers. Some programs even have extra costs like repaying the balance of the first year of service. Spend plenty of time understanding how your chosen alarm dealer program handles chargebacks so you aren’t surprised later.
If you were paid $1500 for an account, most alarm dealer programs (and alarm sub dealers as well) will deduct $1500 dollars from your next funding. However you aren’t out just $1500. You are out the installation cost, the equipment cost, and the cost of any commissions paid. You can recover some of those costs, but this is something many new dealers miss until it’s too late.
Be prepared for fundings to come back much lower than expected. This can be from over selling by the program but also from simply not understanding how the funding calculation works.
All security dealer programs value the contracts based on the present value of the future stream of revenues. As a result they all place very similar value on each account. They all package their payouts differently but at the end of the day the true payouts are pretty similar. Unless you have some serious leverage (like volume) it’s uncommon to negotiate a deal that’s significantly better at one program versus another. In other words, once the smoke clears most alarm dealer programs have very similar payouts. The tough part is getting a true apples to apples comparison.
Almost all alarm dealer programs have a 10% holdback, all will have a pass through deduction, and all will have some bonus multiples that you can earn for things like volume, 60 month contracts, ACH payments, better credit scores, and some other factors.
Many people mistakenly ballpark their up front payout to be the best multiple they can earn times the RMR. For example a dealer may earn 39X on a perfect sale and charge the customer $49.99. They expect a funding of $1,949.61. In practice the actual multiple, after holdback, is around 33. The RMR will be about $5.50 lower after factoring in interactive pass through rates. So instead of getting the $1,949.61, the actual payout is $1,468.17, with a 10% holdback potentially coming 12 months later.
Don’t count on the residual
Some programs offer a residual that can be very enticing and a few dealers manage to earn some residual for a time. But long term, alarm dealer programs structure the residuals so that it’s very difficult to earn them for more than a year or two. Most dealer programs offer a 10% residual if your attrition is less than 5%, and 5% for attrition below 10%. That seems great at first but long term any residual that is tied to attrition will go away.
3-5% attrition happens from customers losing jobs, moving, passing away, divorce, and other factors that are beyond your control. The real kicker is that these alarm dealer programs take very liberal definitions of attrition. Several define attrition by comparing all the customers you’ve ever sold to the ones that are currently active. Others tie monthly production into the calculation, so a bad sales month could kill the residual. The biggest residual killer is customers completing their initial term and cancelling. A CFO recently told me that around 30% of customers cancel at the end of their initial term. And the best he’d ever seen was 18%. That counts against attrition and all but guarantees that it goes away after the third year.
Cashflow can make things difficult
Hiring a sales team or doing big volume with your alarm dealer program will require careful cashflow management. Funding typically happens weekly and it’s common for some accounts to have paperwork or other issues that delay it. On paper you will sell an account, float the equipment and labor costs, and receive funding in a couple days. In reality there will be incomplete installations, permit requirements, or paperwork mistakes that delay the funding for an additional cycle or two. Be prepared to float costs for a couple of weeks longer than you were originally planning. The number one reason any business fails is cash flow issues. That is especially true in the security industry.