By Steve and Chris Michaels
Updated January, 2007
It makes a lot of sense for existing Telephone Answering Service (TAS) owners to buy the customer base of their competitors instead of spending a lot of money on advertising and sales people to acquire new customers one at a time. Since the buyer already has the location, staff and equipment, it is more feasible to purchase just the accounts and roll those accounts into your existing business.
The best scenario for purchasing accounts would be to have the accounts in the same central office of the phone company as that of the seller. Then the purchased customers could keep the same DID (call forwarding) number and the buyer would just switch them over to new DID trunks. If the buyer is across town, then new DID or 800 numbers will have to be assigned to the newly purchased customers.
If a buyer who is out of state purchases a customer base, the customers may forward their calls on 800 DID numbers which are the same as DIDs only forwarded to 800 numbers. Another option for long distance buyers is to use what is called a T1. Basically, the buyer leases a phone line from the phone company going from point A to point B. The T1 has the ability to compress 24 talk paths into one phone line giving you 24 lines from point A to B. Now it becomes cost justifiable to purchase a sizable amount of accounts in far off locations. What you have to do is compare the cost of the equipment and phone line to that of the monthly billing of the proposed acquisition to see if you can cost justify the purchase. There are CLEC’s out there who can also provide you with wide area coverage plan depending upon where you are located and what areas you want to cover.
In most cases, a phone answering service’s assets are non-tangible making it difficult to borrow money from the bank to use for the acquisition. A bank likes to see tangible assets, such as buildings, land or something that they can attach a value to. However, in the answering service business the telephone answering service has one major asset, its customer list. This list is predictable into the future and drives a future cash flow.
You are buying profitability and future cash flow. In most cases, it is mainly a multiple of net profit that drive the value of an answering service, not a multiple of revenues (monthly billing). But in purchasing the accounts only, there is value even though there may not be profits. To consider a reasonable price, use historical data for comparable telephone answering services that have been sold.
Even if the seller is just breaking even, the new owner will not be burdened with the sellers’ overhead or debts. The only costs for the buyer are the service debt for the accounts, phone lines to move the new customers, and some additional equipment with staff to service those new accounts.
The average drop off ratio for buying new accounts is anywhere from 10% – 20%, although I have literally seen from 0% to 60% loss depending on how the accounts are moved. That number may be decreased through several factors. One way is for the seller to stay on for 30 to 60 days after the sale to help with the transition of those accounts. This is especially true if you are buying a small number of accounts that have been pampered by the previous owner. Another way is for the buyer and seller to draft a joint letter to the sellers’ accounts stating that the two businesses are merging operations for the benefit of the customers. In the letter, state that the new company will be able to serve the customer with more sophisticated and enhanced services such as voicemail, fax and email services, alpha dispatch and voice logging. The new company also expects less hold time due to the speed of the newer equipment. This way the customer feels they are receiving a better deal for their money and will not start looking around for another service. Of course, this would not be possible if they were going from a paperless environment to a paper based system, but this is rare in the industry.
People hate change. If the buyer is going to move the customers out of state, change their DID number, change the operator answering their calls, give them a new call-in number for messages and bill them differently from a new location, then the buyer will lose customers. The more change you put them through the more customers you will lose. Sometimes buyers will leave a storefront office in the newly purchased city to give the appearance of being a local company while answering the calls from their main facility located elsewhere.
An important factor to consider in the purchase of new accounts is how they are being billed, especially if you are moving the account a great distance. Beware of purchasing services that charge a flat rate for their service. You may not be able to justify their traffic flow for the amount of money charged. One billing structure is to charge a monthly fee for a predetermined amount of calls and then so much for overcalls. A second, and more profitable way to charge is by time. An example would be $20.00 per month and 80¢ per minute or $89.00 per month including 60 minutes and 99¢ per minute thereafter. Make sure that you find out if they charge on a per call or a per message basis, because there is a BIG difference.
If you are a buyer, you will want to check the seller’s call volume and number of phone lines used to service those accounts. That way you will be well prepared and staffed for the additional flow of traffic to your location. Another item to check is if the seller has any voice mail or paging accounts: many times you will also be able to roll these into the purchase price. Check to verify that all of their customers are using call forwarding or ISDN. If they have some hard wire accounts, you will have to convert them to call forwarding in order to transfer them to your service. It would be wise for the seller to convert them before thinking about selling. Also, check to see if any of the sellers’ accounts are using the DID number that the seller issues to them. Sometimes a client will not have a local telephone number and will want the service to provide them with one of their DID numbers to be used for their business cards or Yellow Pages advertising. This is not advisable and will only cause you trouble in the future if and when you want to sell your business. This also prevents you from reusing that number for another customer if your present customer leaves the service. If that client decides to leave or not pay, then you have a number that can no longer be used. A way to get around this dilemma is to have your new client order remote call forwarding in their name and then have it call forwarded to your DID number.
Items to check before signing on the dotted line; Is the seller tied into a lease they cannot break? Have all of their employment taxes (which includes federal, state, workman’s compensation and unemployment) been paid? Do they have any liens against the business? Have you filled out a supersedure form from the phone company taking over the responsibility of the seller’s telephones and Yellow Page advertising? All of these items must be considered and verified before the closing.
Once you have bought this group of accounts, you will need time to input the account information into your system as well as ordering the appropriate number of phone trunks to handle the volume. Make sure you give yourself enough time for this process. It will depend upon the number of accounts that you are purchasing, but two to four weeks would be a minimum, since it may take the phone company that long for your new trunks. You may want to consider hiring the ex-owner and employees from the seller’s service since they are familiar with the accounts. The larger phone answering systems now have the capability to put remote operator positions in the houses of the agents who would like to stay on. You may not have to retrain them unless you have different answering service equipment than the seller. If they are coming from a paper based environment, you will want to make sure they have typing experience, especially if you have paperless computerized equipment.
Most buyers elect to keep the business phone numbers of the seller along with the Yellow Page advertising and Web address. This business has spent a long time building up their reputation and establishing a presence, so why not capitalize on it? I’ve seen several answering bureaus that have only one location, but many phone numbers utilizing different ads in the phone book and different websites. When a prospective customer “lets their fingers do the walking or browsing”, it gives you a definite advantage over your competition.
When buying customer accounts, the buyer would like to pay as little down as possible and stretch the payments over a five-year period. Of course, the seller would like all cash. An average deal used to be 20% to 30% down with the balance due between two to five years at one point over prime depending upon the size of the purchase. But as of 2003, most of the deals that I have been involved with have been all cash.
Another important item to consider is what is called a retention clause. Basically stated, it means that if I am the seller, I will guarantee that you will receive X number of accounts billing X amount of dollars. Of course, the buyer would like this and the seller would not. The argument for the seller should be, if I sell these accounts to you and you lose them because of poorly trained operators, then that is not my fault and you should pay for them. The argument for the buyer is, ” How do I know that these are all good paying accounts that are still on service,” and “Why should I pay for something that I never receive?” They are both correct. Flexibility is important in this particular facet of the negotiation process.
Another problem arises concerning the accounts receivables. Typically, receivables go to the buyer so they may have a steady cash stream in which to operate the business. But in some instances, the seller may say that they have worked for that money, so it is theirs. Stating in the offer that it includes the accounts receivables, or offering an amount for the accounts and an additional amount for the accounts receivable can resolve this. Sometimes the seller will sell their accounts receivable for a percentage on the dollar because the buyer most likely will not be able to collect all of the receivables. If the seller keeps the receivables, it is not a good idea for both of them to bill the customer for payment. The question arises that when a payment comes in, does it go to the seller for a past due account or to the buyer for services performed? It can get pretty sticky. It is my recommendation that any account that is 90 days past due is not a valid account and should not be considered as part of the sale.
An important question is when is the account information transferred to the buyer? If the buyer waits until closing, they have to scramble to input the account information into their computer system. Meanwhile the operators from the old service are aware of the sale and are out looking for jobs possibly leaving the seller in a lurch, especially if there is a retention clause in effect. To solve this problem, use an agreement called, “Satisfaction of Due Diligence” whereupon the buyer has agreed to buy the accounts and has done their due diligence. Once this document is signed, the account information is then transferred to the buyer for input prior to closing. If for any reason the deal is not consummated, the buyer agrees not to solicit those accounts for a period of five years and if any of those accounts do transfer to the prospective buyer, than the buyer will pay the seller the agreed upon multiple that was established in the selling price.
If you are the seller make sure that you have plenty of documentation to back up what you are selling. This should include bank statements to verify your deposits, a current Profit and Loss statement and a Balance Sheet along with three to five years of tax returns. The more documentation you have, the better and faster the sale will go. It is always easier to expand your business through acquisitions as long as you do your due diligence, verify what you are buying and give yourself plenty of time for the transition.
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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 email@example.com.
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