Valid and Enforceable Contracts
Potential buyers evaluate a number of factors to determine the value of your accounts. Valid and enforceable contracts are essential for establishing your qualified account base in a sale. They are also critical for protecting your company (whether you are selling or not) and your potential buyer.
You must have a valid and enforceable agreement for each and every account you intend to sell.
What does valid and enforceable mean? Your contracts contain the necessary information and that they comply with state and federal laws, especially those relating to consumer contracts for residential accounts. They should also contain key provisions that protect your company from legal and financial liability and specific language that allows you to transfer or “assign” the account to a buyer.
Accounts without contracts that meet the necessary legal standards and provide appropriate protections to you are worthless to most buyers – and they expose you and any buyer to huge potential legal and financial risks.
The essential information. At a minimum, you must have a subscriber agreement that includes all of the necessary information about the account: the date, the subscriber’s name, site address, monthly billing amount, and phone number. The agreement needs to be dated and signed by the subscriber and your sales person or other agent. Make sure that your contract is up to date and reflects all of the services and technology you currently offer (video, home automation, mobile, etc.).
Provisions that protect you (and your buyer). Your company’s subscriber agreements must include provisions limiting your company’s potential legal responsibility to your subscriber and its insurer, including one that requires the subscriber to insure against property loss, personal injury and claims by third parties, and limits the subscriber’s recovery to that insurance. To protect your company in the case of a subscriber loss, your agreement should also include provisions limiting your company’s financial responsibility to a specified amount and requiring the subscriber to pay for any claims brought by others, even if your company was at fault. Another necessary provision is a “waiver of subrogation,” which means the subscriber waives its insurer’s right to file a claim againstyour company to recover payments made to the subscriber or third parties.
Assignability. In order to sell your accounts, your subscriber agreement must include language that says that the contract is assignable to another company. Without this provision, any potential buyer would have to get a new contract from every one of your customers. The time, cost and risk of cancellation are enough to make most buyers walk away.
Clear language. The best contracts are written simply and clearly, so that the terms, rights, and responsibilities are understandable by the customer and the provider. Important provisions, especially those that limit your legal or financial liability, should be prominently and conspicuously displayed, and should be written clearly and explicitly, or they may not be enforceable.
Consumer Laws.Contracts for residential alarm services that are signed anywhere other than at your company’s offices (subscriber’s homes, booths at home shows, etc.) must give the subscriber three days to cancel the contract under the Federal Trade Commission’s “Cooling-Off Rule.” State consumer protection laws, which vary from state to state, may also require very specific right-to-cancel language. Your salespeople must explain the three-day right to cancel in their sales pitch and give customers two written copies of a form cancellation notice should they decide to cancel. Make sure your customers sign a form acknowledging that they received the explanation of the right to cancel, and keep a copy of the signed receipt in your account files to prove you’ve complied with federal and state consumer protection laws. If you fail to follow these state and federal laws, your contract could be “voidable” by the subscriber – and accounts with potentially voidable contracts are worth much less to potential buyers because the attrition potential is much higher. Likewise, none of the contract’s protective terms will apply to limit your responsibility or financial exposure, and your insurance company may refuse to cover any claims or to pay your costs if you are sued.
If your company has not documented every account with a valid agreement (or you don’t know or cannot prove that this is the case), you can still take action. Take the time now, before you want to sell your accounts, to review your account records, identify any accounts that don’t have proper contracts, and have the subscribers sign new contracts.