Buying and Selling Telephone Answering Services

By Thomas G. O’Roark

I find buying and selling Telephone Answering Services (TAS) to be an interesting subject. There are over four thousand TAS in the United States, and most are small, closely-held, family owned and operated businesses. The value of a TAS is almost entirely intangible. Assigning value to an intangible asset is always tricky. In this case, the customer list is the intangible asset which, in my opinion, represents most of the value in a TAS. Buying a TAS is particularly viable because seller financing is usually available as part of the terms, and because significant changes are taking place in the TAS industry which have stimulated buying and selling activity.

As to financing the purchase of a TAS, in my experience, most bankers will not loan money against an intangible asset. The TAS customer list is a recurring revenue base of service bureau subscribers, representing a cash flow stream not unlike an annuity. A future stream of recurring cash flows can be discounted to a net present value, similar to the way that bankers discount loan payments or the way that bonds are valued. Within the financial community, most lenders like to have solid collateral for a loan, such as real estate. They tend to completely ignore the value of intangibles, relying only on the “tangible net worth” a business. Therefore, seller financing is an essential part of any sale or purchase of a TAS.

The first step in buying or selling any business is strategic planning. An individual owner of a TAS should focus on internal factors such as retirement planning, developing exit strategies for becoming liquid, and actually realizing their hard won capital from the business. Often the business represents decades of “sweat equity.” The customers are also friends and neighbors who often have been loyal subscribers since the inception of the business. Providing uninterrupted, high-quality service is of utmost concern. Management succession and training are critical.

Can the Owner/Operator replicate him or herself? Can he or she afford to?

Not every individual owner has an heir who is interested in or capable of running a TAS. As they say, you can lead them to water, but you can’t make them take over the business.

Also, forecasting profitability and cash flow projections are vital to both buyer and seller. It’s often the case that a small TAS can support one family quite nicely, but not two. So both Mom and Jr. can’t both be drawing a full management salary.

How does Mom get her retirement nest egg out of the business, but still pass on the business to Jr.?

Alternatively, how does Mom retire, but continue to own the business, if she has to replace her owner’s draw with a manager’s salary?

Similarly, if an absentee owner/investor buys a TAS, the new owner must pass on all or part of the owner’s compensation to the manager and also service the acquisition debt, which leaves little or no draw for the new owner.

This cash flow dilemma is often the motivation for selling to a competitor who can consolidate two offices into one, or can divide management time between both offices, thereby freeing up enough cash flow to service the acquisition debt. Consolidating offices eliminates duplication in office rent, supervision, night shift operators, etc., and helps leverage existing over heads for support staff, billing, collections, equipment capacity, telephone trunkage, etc. In my experience, a large, reputable competitor is usually the best choice when selecting a buyer.

Selection of a buyer is without a doubt the single most important decision to be made after an owner decides to sell. Unless the price is all cash, consider critical success factors in selecting a buyer.

  • Is the buyer qualified to operate a TAS?
  • Will the customers stay on service after the sale or will there be excessive account loss?
  • Can the new owner make a profit operating the service as-is where-is? Could you?
  • Or, will he/she have to move it or upgrade the equipment?
  • Will the new owner be able to make their debt payments to the seller?
  • Is the new owner dependent upon the cash flows from the business being acquired to service the debt?
  • Or does the new owner have other cash flows from other sources that will enable them to pay for the business?

We all know how quickly a service business can decline, and trying to repossess an answering service is not very practical. Sellers need absolute assurance that they’ll be paid irrespective of what happens to the business after the sale.

Conversely, the prudent buyer wants to be guaranteed of receiving full value for the purchase price, and will normally require the seller to warranty the accounts for some period of time after the closing of the sale. The buyer and seller typically compromise on a mutual sharing of the business risk involved in transferring the accounts to the new owner, with some well defined criteria for qualifying the accounts. Qualification might typically involve an account remaining on service for some period of time following the sale and becoming a paying customer of the new owner.

I suggest both buyers and sellers look closely at the competition. The easiest place to find TAS is in the yellow pages. Shop them.

  • What are their capabilities?
  • How do they price their services?
  • What about new entrants into the market?

Most TAS experience occasional (albeit temporary) loss of customers (usually high volume users) to “flat rate” competitors offering unlimited usage, so consider the pricing trends in the local market, and whether usage is billed per call, per message or per minute. Consider the difference, for example, between day service (only answering between eight am and six pm, Monday through Friday) and full-blown 24- hours a day, 365-days a year, type service. What do most customers demand from an answering service in today’s market?

There are very significant TAS Industry trends which affect the value of a TAS business, such as the contracting TAS market. Every analysis of the TAS industry that I have seen indicates a shrinking market for traditional TAS services. Alternative technologies such as cellular, voice mail, alpha-numeric paging, etc., have severely impacted demand for traditional answering services. The industry is undergoing a rapid consolidation with fewer and fewer competitors, and larger remaining call centers. The level of buying and selling activity within the TAS Industry is good, with fair availability of willing buyers and willing sellers. In order to maintain their revenue levels, TAS owners who do not wish to sell are forced to buy their competitors and/or diversify into new and different value-added types of services. Diversification often demands expensive investment in automated equipment with capabilities that are more flexible, more complicated, and more fully featured than even most automated TAS systems can traditionally provide.

As TAS change their focus away from traditional messaging services and toward other service niches, their appetite for acquiring the customer bases of their competitors may naturally wane. The margins and the prices charged to customers of traditional, take-a-name-and-number type messaging services, are not particularly attractive in light of other niche services that yield higher revenues per minute and that have the potential for exponential growth. Scarce capacity will naturally be allocated to the higher ticket, more profitable service niches.

Timing is everything in life, and TAS owners should carefully consider if and when they might be in a selling mode.

In a declining industry such as telephone answering services, the durability of existing cash flows is in question, which results in lowering of values for the businesses. It may well be that traditional TAS businesses will never again be worth as much as they are right now. Outside investors are typically not attracted to declining industries. The number of competitors keeps steadily dwindling and those that remain have larger shares of a smaller market. Most TAS systems have definite upper limits for capacity in terms of numbers of ports and/or numbers of operators. Competitors may be aggressively buying accounts today, but may satisfy their demand. Once a competitor has maximized the utilization of his/her TAS system, then a second system would be required before any new accounts could be added, the cost of which may be prohibitive. Experts disagree over the optimal size for a call center, but consolidation has definite limits.

The larger a call center becomes, the fewer competitors there are who could consolidate it into another office. Industry consolidation tends to have a self dampening aspect to it that gradually slows the pace of the process.

There are new and emerging customer needs and market driven demands for innovation as well as upgrading of the service. Even if retirement is not a factor to a TAS owner, replacement or upgrading of plant and equipment requires careful cash flow planning. Consider the investment required for technology, service enhancements, productivity tools, opportunities to reduce costs, obsolescence of old equipment. TAS veterans well remember the advent of answering machines and the resulting reduction in the size of the TAS market, and the transition from hardwired secretarial lines, cordboards and concentrators to DID’s and call forwarding. Today’s customers are demanding their TAS offer fax, paging, fully integrated voicemail, modem access, remote printing, order-taking, credit card verification, scripting, label printing, and Interactive Voice Response (IVR).

  • How comfortable are you with new technology?
  • Do you understand computerization, data base management, networking, data file manipulation and transfer?
  • Most importantly, how will you finance the new hardware and software?
  • It isn’t cheap, and it won’t always work as well as or easily as advertised. After it’s installed, how will you maintain it, and at what ongoing cost?

New buyers should consider the skills and commitment required by a 24-hour per day, 365-day per year business, that never closes for holidays, Sundays, blizzards, storms, volcanoes, earthquakes, riots, or anything else. In fact, the more disastrous the local situation, the more customers need you, with zero fault tolerance. Also, any failure to answer the phones can have significant consequential damages to a customers business, as in the case of doctors or other emergency service providers. It can be oppressive. One reason I consistently hear for selling is a yearning for freedom to travel and to enjoy the well deserved fruits of hard earned success.

The labor intensity of answering service is sometimes overlooked by new entrants into the industry. Recruiting, training, supervising skills are essential. I am occasionally contacted by a bleary-eyed seller who is motivated to sell sooner rather that later due to recent turnover in key people. If a new buyer is not from a labor intensive background, then managing a call center could be quite a challenge. It’s the nature of a service business that even your lowest paid employee will interact with your most valuable customers. There is a demand for a uniform, consistent level of service that requires constant monitoring, observation, training and retraining. These service businesses cannot stand to be neglected at all. It’s amazing how quickly an answering service can decline due to poor service.

Finally, before buying or selling, one must consider such external factors as recession, inflation, global economy, U.S. economy, and most importantly for a local service bureau, the local economy. It’s hard to collect when your customers are going out of business, or when your competition is desperate for new business. Also, there are issues of inflation, new governmental regulations which add cost, and office lease escalation clauses to consider and plan for. Be sensitive to labor force changes and to legal and regulatory issues .

In closing, it is my opinion, that the TAS industry is undergoing important changes. As the industry declines, rapid consolidation is occurring resulting in fewer, larger call centers. Owner/operators are diversifying into new value-added services and are transitioning away from traditional message taking. Therefore, the availability of willing buyers and sellers is presently good, but timing is critical, and capacity is limited. Strategic planning by owner/operators is very important to determine when and if they might become a buyer or a seller, and what their strategy will be with regards to diversification into new service niches.

[From Connection Magazine, March 1994]

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