The Big Idea with Ron Davis
Financing Lends A Hand in Grasping Your Biz
If you had just one really great idea you could share with the alarm industry, what would it be?
This month's BIG IDEA comes from Jim Wooster, Alarm Financial Services.
"Financing is the easiest part of managing a business."
EVERYONE I TALK TO IN THE INDUSTRY has money on the mind. Money for growth, for inventory, to hire new salespeople, to move into better quarters, to buy out a partner, for an acquisition, etc. And while there are a significant number of lenders and companies that will be glad to acquire legitimate RMR, no one really has a handle on what bankers look for when they try and help an alarm dealer by lending him money that is used for capital in the business. That’s where Jim Wooster comes in.
Wooster is a personable young guy with a perpetual smile. He could play the role of the big brother you look up to. If you’re around his age you might look at him as a contemporary or, maybe the guy you wish your daughter would marry. If you’re Jim Wooster Sr., a guy who has been around for a long time, you call Jim Wooster Jr. your son.
He is the president and founder of AFS (Alarm Financial Services), a San Francisco-area financial lender working exclusively with alarm dealers. I’ve known Wooster since he was a little boy, always liked him, and always thought he would do well. And he has. Wooster fills an important niche in the industry by lending money to small- and medium-sized dealers who would be hard pressed to borrow money from traditional lending sources. The only other alternative for them is to sell their accounts, to a consolidator that buys alarm accounts. And, of course, when an alarm dealer sells his accounts, he is giving a portion of his equity away.
KNOWING NUMBERS REVEALS BETTER UNDERSTANDING OF OPERATIONS
I asked Wooster about his “great idea” for the industry, related to financing. His simple response? “Financing is the easiest part of managing a business.” I think what he was hinting at is that in preparing all of the information that you need to have in order to develop a financing source, you are automatically getting a handle on your business as a result — understanding how much is coming in, and of greater importance, knowing where it is going after it comes in.
It seems like when someone needs to borrow money, at least in this industry, they are terrified of what they considered to be a gut-wrenching process. Actually, based on what I’ve seen from lenders, both large and small, they are nice people, and do everything within their power to make it easy to understand. But when a dealer decides to start that process, it’s incumbent upon that dealer to fully understand all the questions a banker may ask. This applies to large loans as well as small loans. It causes the dealer to step back and look at the business that he is in. It causes him to answer three questions bankers invariably ask: “How much money do you need? How are you going to use it? What is your recurring monthly revenue?”
To answer those a borrower has to dive into his financials. Most people in the industry can pretty much tell you off-the-cuff what their RMR is. However, they can be off by as much is 10% to 20%. When a banker asks that question, he wants an exact number. So the borrower has to check, and that causes any executive to become more familiar with their business. When they have to decide how much money they’re going to borrow, they have to be very specific, because the next question deals with how are you going to use it.
DEALERS CAN BENEFIT FROM SOME MORE BUSINESS SAVVY
Because most of Wooster’s customers run relatively small companies, he’s found they are inexperienced with that process and has to help each learn exactly what is needed and how to get that information. In so doing, both the dealer and Wooster learn an important element of the banking relationship — to establish a level of trust with one another. That is probably the grease that allows the train to go down the track at a pretty good pace without rocking back and forth.
Wooster tells me he works with 25 to 30 clients at a time. Seems like a small number, but when you are spending a great deal of quality time with a client, it can keep you pretty busy. One of the questions he will eventually ask is, “Do you have financial statements?” He is figuring out just how business-oriented his client is. Then, in going through the financials, he is able to help clients understand the various elements of their business that they need to keep a handle on — marketing, finance, operations. In other words, the guts of an alarm business.
Regardless of what size business you are operating, at some point you’re going to need additional capital. If you have prepared well, you should be able to borrow it. If you haven’t prepared well, the only alternative is selling some of your equity. Given the choice, I would rather pay off the loan than lose equity in my business. How about you?
Ron Davis is Security Sales & Integration's "What's the Big Idea?" columnist and contributing market analyst. He is president of Davis Group, a full-service consulting firm serving the security industry, which also includes GraybeardsRus. He has 35 years of industry experience, including founding Security Associates International in the 1980s.