The Big Idea with Ron Davis
Your Attrition May Be Worse Than Imagined
If you had just one really great idea you could share with the alarm industry, what would it be?
This month’s great idea comes from Anastasia Bottos, executive vice president of business development and acquisitions, Alarm Capital Alliance.
Bottos’ great idea:
Alarm dealers need to manage their attrition rate in such a way as to always know exactly what it is.
Anastasia Bottos, executive vice president of business development and acquisitions for Media, Pa.-based Alarm Capital Alliance, exudes a low-key demeanor. Yet, you might never know she is one of the most powerful people in the alarm industry.
Bottos is responsible for the due diligence at ACA, one of the larger buyers-financiers of alarm accounts. When an owner of an alarm company wants to sell its accounts to ACA, Bottos is the person they send out to confirm all material facts in regards to what is being proffered by the dealer. Her work has more to do about what a typical alarm dealer does not know or understand, rather than investigating whether or not the dealer is attempting to deceive in some manner. This fact relates directly to her great idea.
As Bottos recently pointed out to me, if you were to ask the typical alarm dealer what their annual attrition rate is at least half of the answers would be under 5%. Most of those answers would either be erroneous or wrongly “comparing apples to oranges,” she says, because sometimes the dealer talks about gross attrition, sometimes net attrition, sometimes approximate attrition and occasionally, no attrition. After due diligence is performed and an accurate attrition rate has been determined, dealers are oftentimes amazed at how high the actual number really is.
Very simply, when a potential buyer asks about attrition, almost always they are referring to gross attrition without any recognition of replacement, activation or gross sales. If you are keeping statistics on gross attrition, it probably wouldn’t be too hard to keep statistics on how many replacements you have out of the attritted numbers. That will give you a net attrition number. This is just one kind of statistic that alarm dealers need to have at their fingertips.
With the information you can extrapolate out of attrition you may learn, albeit indirectly, how well you are serving your customers and how well they are responding to the products and services you sell. With an accurate accounting of attrition, you are then able to manage your business most effectively as a byproduct of understanding the least understood aspect of your operation.
Minding Your Receivables
Once you get a handle on attrition, then you’re going to want to learn other statistics that will give you a precise barometer of how well you are really doing. For example, a key metric in analyzing business success is answering the question, “How are your receivables?” It frequently amazes due diligence executives like Bottos how little attention is paid to receivables. If you were to substitute the word “cash” for “receivables,” it might take on a whole different look to you.
Receivables, as well as payables, really reflect how closely you are attuned to the day-to-day processes through which your business goes through. Let’s assume your 30-day receivables are current, your 60-day receivables are 12 days overdue, your 90-day receivables are 28 days overdue, and receivables more than 90 days overdue constitute 10% of all of your receivables. It doesn’t take a genius to figure out that something is wrong here. Rather, what it takes is a manager who has their arms around the business in such a way as to avoid judgmental errors in business decisions.
When Bottos is called in to perform due diligence, she sees the dark underbelly — the part very few people ever see (including owners!). Strangely, most alarm dealers don’t really want to see all of those “darned statistics” that give them so much grief each quarter. Sooner or later your business will change hands. How effectively that happens and how seamlessly transparent it is to your customers, the more value you will hand over to your heirs or future buyers. And the more you will enjoy the retirement you’ve earned.
Ron Davis is a SSI Hall of Fame inductee and President of Davis Mergers and Acquisitions Group Inc. Also known as The Graybeards, the company is active in acquisitions and mergers exclusively in the alarm business.