How Not to Sell Your Telephone Answering Service

By Steve Michaels

Honestly, you’d think the word would have gotten around by now. You’d think that telemessaging service owners trying to sell their business would have heard from potential buyers, from their broker, or from Connections Magazine that when you overprice the darn thing, it’s going to have your name on it for a long time.

If you are really serious about selling, then get real and see what other businesses of your caliber are selling for. The gamut of answering services range from one person working out of their home with a cordboard to a sophisticated Teleservices Bureau with paperless equipment, voice mail, fax, email, Web-enabled capabilities, and a host of other services.

The Telephone Answering Service (TAS) business has a cyclic curve which moves up and down according to the times, demand and services provided. If you have just spent $200,000 on equipment, it is Not a good time to sell. You want to be in a position where the equipment is paid for, your monthly billing is up, and your receivables current. Another determining factor of your salability is your location. Are you in a suburb of a big city or 1000 miles from no where? Are you all call forwarding or do you have some hardwire accounts that will be hard to move? Have you had a recent price increase? Are you stuck into a lease? What is your average price per customer? This is important if you are only charging $40 per month for unlimited calls. The Buyer then has to figure T1 or 800 costs to bring that client to their service. And of course, are you making a profit?

Up-to-date equipment also enters into the picture but in today’s market, 54% of all existing TAS buyers buy the accounts only. So if you are thinking that you could get a higher price for your bureau with newer equipment, take the above figure into consideration.

As stated in the title of this article, How NOT to Sell Your TAS, here are some fairly stunning examples of the inventiveness of some TAS owners when it comes to pricing their business.

“You know, I’ve always wanted to move to Florida” Sellers often base their asking price on the amount of money they need for what they are planning to do next. Maybe they’ve figured out they need $600,000 to retire. Or they need $100,000 in seed capital for their next venture. Or maybe they’re planning a trip around the world. Those rationales have nothing to do with the current earnings stream, which is really what the buyer is buying. “Say I want to buy a new car, and I need $70,000 for a new Mercedes. Well, that’s great, but that has nothing to do with the value of my “Ford.”

“I’ve put a lot of money into this business over the years. Now I want it back.” So the buyer should care? Sellers often make the mistake of equating market value with cost. But there is only one test of value: the cash-generating ability of the business. An answering service has one major asset, its customer list, which is predictable into the future and drives a future net cash flow. That cash flow has a net present value and therefore one can arrive at an appropriate value of a TAS. “It would cost me half a million to start it from scratch.” This oft-spouted ploy is usually called “replacement value”. And sometimes it is germane to value. However, if it would cost $500,000 to recreate an existing business, but the market price for that business is $200,000, then the “replacement value” needs to be replaced with a better valuation method.

“I owe. I owe. So on the block I go.” Some sellers want to use the sale as an opportunity to get them out of the red, either commercially or personally. But the buyer would have every right to ask, “Why should I pay for your bad business decisions?” This would be considered a distress sale.

“Because I want a million dollars, OK?” They call this the WIFL method: “Whatever I Feel Like.” Sometimes setting a price is pure caprice on the part of sellers. And no amount of smooth talking will persuade them otherwise. Some bureau owners feel that they are pre-madonnas and that their service is worth umpteen zillion dollars. But in the same breath, if you ask if they want to buy, well only if its a distress sale.

“Earthquake? What Earthquake?” Subtitle this one “Well, we meant for there to be revenues.” Often times the new TAS owner who overspends, realizes that he is not able to generate enough cash flow fast enough to make the payments on the equipment, phone lines, rent and labor and has to file chapter 13 or try to sell at a loss. There are many different reasons why a TAS could fail. If you are interested in getting into the TAS business, first ask yourself, do you like to answer the telephone? Do you have enough financial backing to carry you through the bad times? Is there a market for your service?

“OK, here’s my price. Now I’ll just add fixtures and equipment and…” If you set a price based on an earning stream, the buyer is buying not only that earnings stream, but the means by which to achieve it. So tacking on an extra charge for fixtures and equipment is like selling someone a car then charging them for the keys.

“George said he’d give me $500,000 for my business. Let’s see, that was nineteen ninety …three?” Sellers often fixate on an offer they may have gotten a long time ago in a totally different market place. National and local economic factors have more than likely changed considerably since then, but the owners get that magic number in their heads, and there’s no dissuading them. I receive phone calls from people who remember the old days where all services sold for about the same price. Back then everyone had switchboards, paid their labor about the same and had very limited service. I don’t know where that practice started, but in today’s market a more sophisticated formula or formula’s are necessary to evaluate the fair market value of a Telephone Answering Service. I use three different formulas; a TAS formula using comparables, a CPA formula using (earnings before interest, taxes, depredation or amortization) and a formula based on profits. This gives you a much better evaluation process because it takes into account the monthly revenue, equipment and profit margin.

“I’m selling. Of course I want all CASH….” Now that you’ve decided to sell and have determined your price, what kind of terms are you willing to take. Banks do not lend money on an action base, or a cash flow. They want real property or something they can attach. There are all kinds of options when it comes to financing. If you are the seller you want all CASH and if you are the buyer you want nothing down and a note that goes on forever. A typical deal, for example, would be 6 to 8 times monthly receivables with 20% to 30% down, the balance in 2 to 5 years at 9% interest. But pricing could be as low as 4 times monthly billing to 15-16 times depending on what you have to sell, your location, equipment, management in place and of course your profitability.

Why should I share in the risks? Other concerns when you are selling your business is what is called a retention clause. This means that your accounts must stay with the new owner over a period of time in order for you to receive payment that can be anywhere from 30 to 90 days. The argument goes back and forth. The seller doesn’t know what kind of service will be provided to his customer base and the Buyer feels that if they are good customers then the seller should share the risk of the cut over to the new bureau. Expect at least 20% of customers purchased to leave. Often times it is much less than that depending on the customers and adequate preparation. You cannot sell a whole customer base and expect to move them in 10 days.

One more important item that you should not over look is the accounts receivables and who gets it. Much of it depends upon whether you bill in advance or in arrears. Typically upon closing the accounts receivables from that date on goes to the buyer. If you aren’t already, I would suggest you start billing in advance. This could mean a whole months revenues in your pocket verses theirs. Many TAS owners make the mistake of selling what they are billing instead of selling what they are receiving. If an account has not paid in 90 days, they are not an account. It is mainly a multiple of cash flows (profit) that drive the value of a TAS, not a multiple of revenues (monthly billing). In determining a fair price for your bureau, an average of six months monthly billing is recommended as some services have high paying accounts in the summer or winter.

This way it benefits the buyer and the seller. A buyer should not have to pay for something that is not there and the best way to prove to them that you do indeed have a viable business is through financial records- lots and lots of them. You may need to spoon-feed the buyer. You want to help the sale go forward, so you need to give the buyer what he or she will need to do the due diligence: equipment lists, customer lists (minus the names and DID numbers), supplier information, and the like. Bottom line: make it easier for the buyer to understand the business completely – where it’s been and where it’s headed.

If you can combine the right price with financials that have been audited by a reputable firm, you’ll be fighting off the bids from qualified buyers.

Steve Michaels is founder and owner of TAS Marketing, a business brokering company, focusing on assisting clients buying and selling telephone answering services and outsourcing call centers. Steve can be reached at 800-369-6126 or TAS@tasmarketing.com.

[From Connection Magazine – May 1998]

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