How to Start or Buy a Telephone Answering Service: New Buyers to the Industry

By Steve and Chris Michaels

Updated January, 2007

You’ve seen an ad in a newspaper or trade publication with a telephone answering service for sale and wondered what it would be like to get into this industry. Your first question should be, do you want to run the service as an owner/operator or as an absentee/owner? Let’s discuss these two options separately.

Owner/Operator: When purchasing an existing Telephone Answering Service (TAS) company there are a few key items that you should address. One of the main questions is to ask will the present management stay? You are going to need help with understanding the day-to-day operations of the business, scheduling of operators, up keep of the equipment, etc. If the bureau that you are buying does not have a manager, then make sure that the seller will stay on for a period of time to fill you in on all the details. It is important not to make any radical changes when you first take over the business. The staff will be nervous as it is, so try to keep the business running as usual but keep your eyes open for areas of improvement. If you are new to the business, hiring a consultant to evaluate what you have purchased could be valuable. In fact, you may want to consider having an expert evaluate the business before you buy it.

In evaluating a business, take into account the phone answering equipment manufacturer and age of the equipment that is servicing the bureau: Are you going to be able to continue on with the present computer equipment? Is it feature rich with options for your customer base such as alpha dispatch, voice mail, fax, and voice logger with email delivery? Are you able to become Web-enabled with the current equipment? What kind of software does it come with and is the system upgradeable? Is it on a service contract, is the licensing transferable and does it come with a spare parts kit? If the equipment is old and out dated, then the price should reflect that fact. If it is brand new is the seller going to pay off the lease or are you going to assume the payments? These are just a few questions concerning the phone answering equipment.

There are a few tricks in making your business more profitable. After you have settled into your new business, start to incorporate a 28-day billing cycle if your call volume can support it. This will give you an additional month’s revenues for the year. You will also want to incorporate any new features that will cut down on your operator labor, since that is going to be your biggest expense. A well-run answering service can generate a 30% profit. Your labor should run you around 40%, with 10% going to phones and taxes, and 20% for administration. Utilizing a voice mail system along with faxing and email for message delivery should reduce your labor by at least 10% to 15%. Instead of having to staff up for your busy times, which incurs additional labor, the messages for your customers have already been delivered so there are no highs or lows in your staffing. The three most convenient ways of message dispatch are voice mail, faxing, delivering them to their alphanumeric display pager or delivering the messages via email. Another way to drastically cut down on your labor is to offer auto-answer to your customers, with the option to press 0 to reach an operator.

There are three basic ways to price your services. The first is the old way that bureaus used because of the paper-based equipment and to save labor, which was to price the service on a flat rate basis. The customer would be charged a flat rate of, say $95 a month for unlimited calls. If the customer were receiving a substantial number of calls, then the owner would simply increase the rate. The flat rate system saves labor by not having to count the calls at the end of the month; however, it usually restricts your ability to make extra money and is not fair to all customers concerned. The second is to charge a rate of $95 a month for 70 calls and then to charge approximately 90¢ for overcalls, patches, pages, etc. This method is preferable because it can be used by paper based as well as paperless equipment. Of course different packages may be established such as live answer with voice mail dispatch or a service with a pager for different customers’ needs. With this method, it is customary to bill the basic service in advance and the message units in arrears. The third and most profitable way to charge is by the minute or message unit, which will require a paperless, computerized system with this capability. With this method of billing you are able to offer a low monthly rate, for example, $30 per month, with a per-minute charge of say, 99¢. Every time the operator logs on to that account, the clock starts ticking. So if the customer wants to check in for messages live and chitchat with the operator, they will be paying for her time. By far this is the most fair and profitable way to charge for your service.

As a new buyer you should be prepared to pay cash for a business. The prior methods of a down payment with the seller holding a note are changing although some businesses may still be purchased that way. If a service is in distress and the owner just wants out, you may be able to pick it up for a percentage of the receivables per month with nothing down. And then again if a service has sophisticated equipment, a good staff with large billings and ample profits, you may have to pay all cash. There are as many variables as there are services.

Your best advertising is word of mouth, the second is by having a website on the Internet and the third is an ad in the Yellow Pages. You may also elect to hire a sales person or do some direct mail advertising. Some bureau owners use their existing customer base for referrals. In your bills, simply put a stuffer advertising a free month, or something that will entice your present customers to bring you some new business. When you become Web-enabled, a good source for your advertising would be to buy a banner on one of the major search engines.

Absentee/Owner: If you are purchasing an existing business and are planning to run it as an absentee owner, then take a good look at the net EBITDA profit (Earnings Before Interest Taxes Depreciation and Amortization) to figure out what your profits will be. Some individuals in the industry do not think that absentee ownership works but there are many who run absentee businesses and are doing quite well. Check the staff, especially the manager to see if he or she is trust worthy and can run the operation with little supervision. Verify that the software on the computer equipment has been updated, financial information checks out and to verify there is enough cash flow to operate the business, pay the staff and have some money left over for you.

We would suggest using your CPA to validate the Income Statements, Balance Sheets, and tax returns. Your attorney should look over the purchase contract. Most of the other items that you should check on have been covered above. Remember, the rules for buying a business are: 1) never fall in love with a particular business, and 2) always be willing to walk away from a deal.

There is all sorts of help out there if you need it. The beauty of this business is that it is almost recession proof due to the diversity of its client base. When one market segment is in a lull, another one picks up. For example a company starts to downsize and lays off a secretary or receptionist and will hire an answering service to pick up the slack. If you are looking for a business with a steady cash flow, diversity of customers and a good profit margin, then an Answering Service business is for you.

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Steve and Chris Michaels operate TAS Marketing, a business brokering company focusing on assisting clients buying and selling telephone answering services and outsourcing call centers. Contact them at 800-369-6126 or tas@tasmarketing.com.