Business & Marketing
How to deal with account attrition
Not allowing for increased attrition levels in an account base after buying it is a lesson that many of the buyers in Canada learned the hard way back in the late 1990s. It nearly bankrupted some.
November 2, 2011 By Victor Harding
I don’t remember ever seeing attrition on an acquisition coming in at less than 10 per cent in the first year after closing. Often, I saw attrition at 12 to 15 per cent per year. (This compares with six to eight per cent for normal attrition on the same account base before it was bought.)
Why does attrition increase in an account base after an acquisition has been done? Can this be prevented?
If you are a seller and are responsible for attrition in the first year, there are clauses you can try to get inserted in your purchase and sale agreement. And there are things to watch out for to reduce your exposure to attrition.
Regarding the purchase and sale agreement, try to make yourself responsible for attrition only above a certain level. Make the buyer responsible for the first few percentage points. This will make the buyer pay closer attention to the integration process. Second, make sure that as a seller you are not made responsible for the buyer’s post-closing bad service. Some say it is a tough issue to determine why an account cancelled. All I can say is that, in deals where I have seen this clause inserted, the sellers have always benefited. Finally, not all attrition guarantee periods have to be a year in length. Try to negotiate a shorter guarantee period.
In terms of how the accounts are handled post-closing, here are the things a seller has to watch out for. Accounts whose monitoring A/R is older than 90 days are likely to get more lenient treatment than they would in the new owner’s world. So I always tell prospective sellers to spend time collecting A/R before they sell. Second, know that the buyer is less likely to offer free service on the systems he has just bought than the seller. This can cause attrition.
The process of converting an account base from one owner to another almost always causes attrition, unless great care is taken. For example, the subscriber did not get the letter telling them that the seller had sold or did not read it when it came — and so is shocked when they get a bill from an unknown alarm supplier. I suggest sending the notification letter by email, as well. Some customers just don’t like their alarm monitoring business being sold to another supplier without their consent. The problem here is finding these customers in the account base. Nothing beats having the buyer call every newly bought account — something that very few buyers do.
Sometimes, the cause of attrition can be as simple as the monitoring bill coming from the new owners. Mistakes are made and not corrected fast enough. The customer gets annoyed and quits.
One very common problem is that the new monitoring station does not know the newly bought accounts very well from a monitoring perspective and follows “standard monitoring procedures” in monitoring the accounts. Calls are made by the new station that the old station knew were unnecessary. Unnecessary dispatches are made. This can cost money and annoy customers.
If this problem occurs more than once on the same account, you could be looking at a cancelled account. Sometimes, believe it or not, the specific instructions regarding monitoring are simply not followed by the buyer’s station.
The list goes on and on. As a seller, you need to be aware of where the problems can occur and work with the buyer to prevent them from happening.
Victor Harding is the principal of Harding Security Services. He can be reached at email@example.com
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