By Steve Michaels
The following is our first installment of an ongoing segment of real life transactions between buyers and sellers in the industry. Here is an example of what can happen when one buys another business without doing thorough due diligence and research.
Scenario: An answering service owner was buying out its competitor’s client base. The buyer was on a paperless system and the seller was on a paper-based system. It was an all cash deal with no retention clause. The seller was quite apprehensive about allowing the buyer access to the operator room, thinking this would tip off the staff that there was a sale in progress. The seller stated that they were taking 15,000 units or messages per month.
Problem: Once the accounts had been transferred to the buyer, the call traffic started going through the roof. It was then determined that the seller was charging for messages only, not calls. For example, a doctor’s office that was supposed to open at 9:00 AM wouldn’t open until 9:20. Many calls would be answered during that twenty-minute segment but the seller’s operators would simply tell the caller to try back in a few minutes without generating a message. The seller stated they took 15,000 messages a month where in reality the call count was closer to 35,000; a 133% increase. Thankfully, the buyer’s equipment was able to handle the overflow traffic but there wasn’t enough time to hire and train any new operators. When the increased traffic came into the buyer’s office, it overloaded his staff with a net result of a sixty-five percent loss of clients.
The buyer was told from other industry owners that there would probably be a fifteen to twenty-five percent increase in traffic when converting from a paper messaging system. He was unprepared for the 133% jump. Another problem was created. The remaining clients purchased by the buyer had their bills more than double with the more accurate call count. The buyer had to reduce his normal rates to keep the remaining clients.
Solution: If it is not possible for a buyer to observe the incoming traffic patterns of the seller’s service, then the buyer should research and ask if the seller is charging by the message or by the call. There is a big difference. If they charge by the unit, then define what a unit is. The buyer should request from the seller, details of the activity (incoming and outgoing) for a minimum of six months, also showing the dollar amounts. The seller would omit the accounts name and DID numbers from this list until the business is sold. This list should detail the type of account, billing statistics with call count, length of time on service, and the rate structure with past rate increases. Then the buyer can determine how to boost up his staff and equipment for the new acquisition. In this scenario, the buyer quizzed fifteen other telemessaging owners as to what the paper to paperless increase should be and was quoted that there should be anywhere from fifteen to twenty-five percent increase in the call count. Also, ten percent holdback of funds would be a prudent move in an all cash deal. Make sure that in the purchase agreement the seller attests to the accuracy of all of the documents, a stipulation that all the books and records are accurate. It is also important that the seller sign the contract as an officer (if a corporation) and individually so that if there is a large discrepancy in the call count or any other discrepancy which could involve a lawsuit, then you can go after the Seller individually. If you are not comfortable with the information provided, do not be afraid to just walk away from the deal.
Steve Michaels and TAS Marketing have been serving the TAS industry in the mergers and acquisitions arena for over 23 years with over 220 businesses sold. His years of experience have widened his scope and experience in buying and selling businesses nationwide. He may be contacted at 800-369-6126, firstname.lastname@example.org, or visit www.tasmarketing.com.
For more TAS Tips, see Steve’s subsequent article.
[From Connection Magazine – Sept/Oct 2002]