By: Jim Wooster, Jr., Alarm Financial Services, Inc.
This is the third article in our six-part series outlining the many aspects of making an acquisition and financing that acquisition using the recurring monthly revenue (“RMR”) accounts as collateral. The previous article was titled Determining How Much to Pay for RMR Accounts.
Let’s start with what the term “due diligence” means. It is the reasonable investigation a party should undertake before entering an agreement or transaction, commonly conducted by the acquirer of a company or a company’s assets. Due diligence is typically performed after the buyer and seller have agreed to some general terms and conditions spelled out in a Letter of Intent (LOI). The word “intent” signifies that the buyer intends to pay the seller according to the terms of the LOI, but only after due diligence reveals whether what the seller is selling is really as advertised.
A fundamental focus is determining exactly how much “qualified” or “eligible” RMR the buyer will be acquiring. Examples of accounts that are not qualified (or eligible) would be those that are significantly past due on their payments or those without good monitoring contracts. This step determines how much RMR the seller has to sell. Next, the due diligence attempts to determine how good that RMR is. This consists of a long list of factors, including whether the profit from the RMR accounts is a lot or a little, what the historic attrition rate of the account base has been, what future revenue opportunities the customer base provides, etc.
At the end of the day, the buyer is looking under the hood, and they are trying to avoid surprises. Surprises represent a great deal of risk to a buyer, and buyers don’t like risk. So, if you are a potential seller, anticipate what the buyer will want to investigate, perform due diligence on your own accounts first, and have that information well-organized for the buyer. If you are a potential buyer, use due diligence to really get to know the accounts you will be buying. Be able to answer the question, how will these accounts perform for me when I own them? If you can’t at least come close to answering that question, you haven’t completed your due diligence.