Mind Your Business: Reconciling Billing Cycles

TAS Marketing

By Steve Michaels

Q: I am in the process of purchasing some teleservice accounts billed on a twenty-eight-day billing schedule. The seller wants to go back thirteen billing cycles, or one year, to average out the monthly billing, but I only want to go back four months since he has lost some accounts and the monthly average will be lower. Can you shed some light on how to resolve this?

A: This comes up frequently with more and more services going to a twenty-eight-day billing schedule. The seller is trying to get as much for his business as possible using a higher billing average, while you are trying to base the offer on what the billing is right now – not one year ago. To get the average monthly billing, consider that $10,000 billed every twenty-eight days, thirteen times a year, results in $130,000 in annual billing. Divide that by twelve months in a year, and the result is $10,833 per month.

To determine a purchase price based on the average of four billing cycles on a twenty-eight-day billing schedule, use thirteen times the average of the last four billings, which in this case would be $10,000 x 13 = $130,000. Divide that by twelve to get $10,833.

However, if the billing has gone down to an average of $9,500 for the past four months, then it would look like this: 13 x $9,500 average per billing for the past four billing cycles = $123,500 per year, divided by 12 = $10,291 billing per month.

Using this methodology, the purchase price is then determined by applying the agreed upon as the multiple. It’s simple, but it works!

TAS Marketing

Steve Michaels is a business broker with TAS Marketing; he can be contacted for questions at 800-369-6126 or tas@tasmarketing.com.

[From Connection Magazine May 2010]

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