Monitoring contract provision can stand in way of sale

LAS VEGAS—Read the fine print on your contract with your third-party monitoring center. You may find there's a clause buried in it that says the monitoring center has the right to buy your alarm company before you can sell it to somebody else.

Such “right of first refusal” language is not in every monitoring contract, but it is in enough of them that Ron Davis, president and CEO of Davis Mergers and Acquisitions Group, warned potential sellers about the problem at an educational seminar at ISC West, held here last week.

“We are in the process of trying to expose this to the industry,” Davis said during “The Anatomy of a Transaction,” a session on buying or selling a security alarm company.

Davis cited a situation in which an alarm company owner was trying to sell in a hurry because of a potentially life-threatening health situation, but a right of first refusal found in the final page of his monitoring contract derailed the process just as the final sale papers were being drawn up.

Marc Katz, an Indianapolis attorney who specializes in sale and acquisition transactions in the industry and who was one of the panelists at the March 28 session, said the clauses are “more common than I would like to admit.”

He said that some third-party monitoring centers “do not point it out when you go to sign an agreement with them, and it's really, really important because that is an impediment for you to sell.” He compared it to a bank lien that has to be resolved before a sale can close.

Davis said sometimes such clauses added to contracts by wholesale monitoring companies are fair, but sometimes they're not.

“This is the most dishonest, dishonorable thing that any company can do, unless there is consideration,” Davis said. “In other words, if a wholesale monitoring company gives you 12 months of free monitoring but they ask for a right of first refusal, that's legitimate. But if they just throw it in there and nobody knows it's actually there, that's dishonest. So be very careful if you're monitoring with any wholesale company. Go back and look at your contract not because you want to sell today or tomorrow, but if it's there you need to get rid of it.”

How does an alarm company get rid of such a restriction?

Katz said, “You need to go to that central station and say, 'I've cut a deal with somebody. Will you waive that [clause]?' That's the first question I would ask and if they say, 'How much are you getting?' then you quite frankly have to 'fess up … because otherwise they're not going to give you that waiver and without that waiver I don't care who you are, no buyer can touch it because it's called an impediment.”

But John Lombardi, another panelist who is first vice president of the Central Station Alarm Association and president of CIA Security of Fishkill, N.Y., believes alarm companies have more clout because “central stations are a very competitive industry.”

He said alarm companies that have a right-of-first-refusal clause in their contracts for which they have not received any compensation, such as free monitoring, should be blunt with their monitoring companies.

“If you've been with a monitoring company for many years and you've paid your bills fairly and you review it [your contract] because you're anticipating a sale, you go back and say, 'Hey, listen, I'm out of here or you're going to clean up this contract a little bit,'” Lombardi said.