By Steve Michaels
The following is an ongoing segment detailing real life transactions between buyers and sellers in the industry. Here is an example of what can happen when selling a business with unprofitable accounts.
Scenario: A person called our office wanting to sell her accounts only. She was billing $18,000 per month for 90 accounts so she figured her average for those accounts was $200 each. She wanted to sell her business for 5.2 times the monthly billing.
Problem: The seller received an offer within days for her asking price. Once the due diligence process had begun, it was determined that 40 percent of the accounts were non-performing. An offer was made for her profitable accounts only but she wanted to sell all or nothing. The offer was pulled off the table. In the end, the business was never sold. This lady charges on a flat rate basis and has not instituted a rate increase in years. She figured that $200 revenue per account per month was good. She had one account that was generating 1,800 incoming message units per month, with an equal number of pages. The client was only being billed $430 per month, in total.
Solution: When an owner looks at the profitability of his or her customer base, he or she cannot simply take the total and divide it by the number of clients. Instead the seller should look at each individual account in the evaluation process. How does one evaluate client profitability? Begin with the amount of time and effort spent on each client and determine what each client is being charged. The seller in our example should have made modest yearly increases to her base rate with a justification to her clients that she wanted to keep attracting and maintaining good employees who would naturally expect to receive yearly raises. After the modest base rate increase, she should have looked at each client’s income per minute. She should have determined what needed to be charged to make a profit and do a “make or break” rate increase to those clients. In some cases this may have doubled or tripled those clients’ rates.
If a client absolutely refuses to pay the increase, then she could offer to lower that client’s bill by offering automated services such as voice mail screening or to eliminate some of the information needed to take a message. To minimize labor costs, she should try to get to the point where her staff is never delivering messages verbally to the client. Using email, fax, paging, or voice mail to deliver messages will cut down on her labor time, allowing her to handle more clients without increasing staff. It’s all about labor. She should ask herself how many calls are taken for each client, what is the duration of the call and how much labor is involved in the message-taking process.
Although rate increases are a fact of life, there is no hard and fast rule that states that she has to increase all of her rates in one billing cycle. She could limit rate increases to a certain percentage of her clients but if she has an account that is paying her $65 to $95 per month and gets only seven to 15 calls each month, then she could leave them alone. Those are the kind of accounts that we all want.
Another key factor that this person should consider when structuring price increases is how promptly each client pays. Most of us know about per minute revenue, but what about the cost of collecting from the chronic slow paying accounts? Never let a client get past due more than 45 days. It may be cheaper for a client to change services than pay his or her bill to you. Also, never give a chronic late payer a preferential rate because your follow-up and collection process probably wipes out most or all of the profit on the account.
If this lady does what it takes to make her individual clients profitable, I’m sure that when she lists her service with me again in three to six months, the sale will go through with an even higher multiple.
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 previous article.
[From Connection Magazine – Jan/Feb 2003]