Tag Archives: Buying and Selling Businesses

How to Start or Buy a Telephone Answering Service: Buying Accounts Only

By Steve and Chris Michaels

Updated January, 2007

How to Start a Telephone Answering Service
Get the latest info in the book How to Start a Telephone Answering Service.

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.

Read the complete series:

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 tas@tasmarketing.com.

Get the latest info in the book How to Start a Telephone Answering Service.

How to Start or Buy a Telephone Answering Service: Introduction

By Steve and Chris Michaels

Updated January, 2007

How to Start a Telephone Answering Service
Get the latest info in the book How to Start a Telephone Answering Service.

Now is an exciting time to start a Telephone Answering Service business, whether it isa new start-up venture, hosting your accounts on another system or a full-fledged seasoned operation. The opportunities are endless in this ever-changing, multi-faceted business.

Besides the conventional message taking that the industry is noted for, the Telephone Answering Service business also encompasses paging with text messaging, voice mail, fulfillment, order entry and Interactive Web Response (IWR). IWR integrates a website with a live operator for answering questions or taking an order while you are both on a particular website looking at your computer. In fact, the telephone answering service industry is quickly emerging into the contact center of tomorrow.

But in talking about starting a Telephone Answering Service (TAS), there are several starting points that one may consider: The first would be an Entry Level answering bureau. This would be a start-up business from scratch that would require a small capital investment. It could utilize a paper-based or paperless system for answering calls (hand written messages vs. typing them into a computer) and offer basic answering service. This would be for the individual who would like to own their call center equipment.

The second option for those with the entrepreneurial spirit would be to use a Hosted Service as your equipment vendor. What this means is that you would put your account database on another system being hosted by either an equipment vendor or another answering service. They would provide you with equipment & software thus enabling you to offer the services of the large Answering Service businesses without the costs. This option would also allow you to go virtual and hire home-based operators. All you would need is a PC with either a cable or DSL hook-up (which the operators provide themselves) and some training and you are in business.

This option is also advantageous for the Answering Service business that has outdated equipment and is looking for the added features and benefits that the larger, more expensive systems have to offer without the costs.

This by far is the easiest and fastest way to get started in the answering service business. If you elect to go with an existing answering service to host your accounts, they could also act as a back up for answering your overflow traffic or midnight shift. They could also purchase your accounts should you decide that the phone answering business is not for you. A win-win situation for both you and your elected hosting agent.

The third type would be someone who has an existing business such as a paging or alarm monitoring company who would like to complement his or her business with telephone answering. Let’s call this type of start-up venture Start-Up II.

The fourth type would be someone who is buying an existing service. These buyers are divided into two groups:

1)   Existing Owners, who are buying Answering Service accounts only for impact and rolling those accounts into an existing bureau.

2)   New Buyers, who purchase the business as a going concern who wish to either run the business themselves, or operate it as an absentee owner.

Read the complete series:

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 tas@tasmarketing.com.

Get the latest info in the book How to Start a Telephone Answering Service.

How to Start or Buy a Telephone Answering Service: Using a VoIP Hosted System

By Steve and Chris Michaels

Updated January, 2007

How to Start a Telephone Answering Service
Get the latest info in the book How to Start a Telephone Answering Service.

Hosted VoIP platforms are systems being hosted by a vendor or a Telephone Answering Service (TAS) that enables others to get into the answering service business or restructure their existing operation without the cost of equipment. This allows the answering service and telephone agents to process calls over the Internet eliminating the need for a site-based telephone switch.

This hardware/software development combined with VoIP technology make it possible for a start-up or existing service to expand its Teleservices/Call Center operations seamlessly. This model provides for limitless expansion without the costs associated with equipment and facilities. It also removes geographic barriers enabling the answering service to expand the work force in any location in the U.S. or offshore.

Once upon a time. there were 5 gentlemen who owned newspapers. These men all lived in small towns within a particular region. They all had their own printing presses and would print their weekly newspaper for their own town. One day, a salesman came through the region selling a new, improved printing press that was much faster, printed in color and was easier to use. But there was only one problem – it was very, very expensive.

Each of the newspapermen looked at the new press in awe but none could afford it until one of the men thought to himself – why can’t we join forces and buy this press as a group. The men all agreed.

Each printer got to use the press one day a week. They shared the reduced expense of the new press while benefiting from all the features; thus the inception of an alliance for the betterment of the entire group… and they all lived happily ever after.

Does this idea sound familiar?

Who are Candidates for the Hosted VoIP Program?

  1. Medium to large sized businesses that need to upgrade their equipment.
  2. The 10% – 20% of the forward thinking individuals in the industry who want to change to the VoIP platform.
  3. Businesses located in the gulf coast and on the eastern seaboard that are concerned about hurricanes and natural disasters destroying their equipment and businesses.
  4. Business owners who are interested in rolling up their operations that are located throughout the U.S. into a central location or utilizing the virtual phone answering service office idea.
  5. Current answering service owners who have vendors that will no longer support their outdated equipment.
  6. New Start-up businesses that don’t have the capital to start a new venture. Now they can offer the same type of services as their large competitor for a fraction of the price.

Features of a Hosted VoIP System

  • Pay as your grow
  • Disaster Recovery Options Available
  • No expense for equipment. Operators buy their own PC’s and DSL hook-up
  • More money available to spend on sales & marketing
  • Better reliability with redundancy by the service provider
  • Share overflow traffic and midnight operators with other hosted members
  • Go Virtual. No office needed with additional savings
  • Market worldwide with new features
  • Substantially reduce telco costs
  • Makes it easier to buy the competition or acquire accounts on the same platform

Another benefit of the hosted VoIP system over the premise based telephone switch is that it continues to evolve and doesn’t become obsolete as equipment often does within three to five years. With premise based telephone switches there is a hard cost to add more seats and oft times the equipment is limited to the number of seats that can be supported without buying more equipment. The virtual network can grow to an unlimited size and the expansion costs are borne, for the most part, by the agents who agree to provide their own equipment, telephone lines, and Internet connections so they can enjoy the benefits of working from a home office.

Collaboration – A New Alliance

And the small shall act big…

Up until now telephone answering call center owners had to turn away business because of their size limitation. If they had 20 seats and a potentially large client required 100 seats for a sales project, a marketing campaign or TV commercial, the service had to turn them away because of their size and the impact it would have on the entire service. Although the money was tempting, the owner had to analyze the impact on his present client base.

One solution to this problem is to put everyone on a large switch housed by either a vendor or answering service that has the capacity. Each subscriber has their own domain where their customers reside. When needed, the subscribers of the hosted system may share their overload traffic with whomever they choose in the system thus making them seem bigger to an outsider looking for a solution to their problem… thus the inception of an Alliance.

The most requested piece of information we are asked, is how do we make more money! Period. The hosted VoIP business solution offers its Alliance members not only the ability to save money on equipment, rent and labor but also to expand their customer base by outsourcing their high volume customers to other Alliance Members.

From his latest book, The World is Flat by Thomas L. Friedman, he states that “one way small companies flourish in a flat, ever expanding world is by learning to act really big. And the key to being small and acting big is being quick to take advantage of all the new tools for collaboration to reach farther, faster, wider and deeper”.

Hosted Systems – Pay as you grow: During the recent disaster of hurricane Katrina, the business owners not only lost their buildings, equipment and staff but the most important part of their business…their customers. These customers were not dissatisfied with their answering service but they were literally gone. They too had their businesses lost to looting, flooding and their customer base was also gone.

An important aspect to understanding the hosted concept is that customers don’t have to be in any certain geographic location. Your doors are now open to the world and you are only paying for as many seats as you want to on a monthly basis. If your customer base drops, your requirement for seats also drops and your monthly bill goes down. You only pay for what you need and use. Currently, business owners with large telephone answering service systems have to pay the monthly lease payment whether they need those seats or not.

On the flip side of this story, if a new customer comes on board with a larger requirement than what you can handle, the owner does not need to purchase extra operator positions and licenses, line cards and software that could easily run $5,000 to $10,000 per seat. If by chance that business then went away through lack of sales or brings the call center portion of their business in house, than you have an overabundance of equipment and labor, which can literally bankrupt your business.

Through a hosted environment, you can either put more seats on if you have the trained operators to handle the extra load or overflow your traffic to another hosted member. The important points are:

  • You only pay for what you need
  • You don’t have to turn away that large customer

Advantages of the virtual telephone answering service network: Home Based Agents

  • Answering Services experience very low turnover among telecommuting employees. The high cost of typical answering service turnover is greatly reduced in this model
  • Telecommuters provide their own equipment and Internet service, further eliminating overhead expense and reducing the cost for the service business
  • The reduction in cost associated with facilities and turnover, enables hosted subscribers to price services more competitively and compete more effectively with other providers.
  • Hosted subscribers are able to recruit agents in any geographical area in the United States or the world. This creates the ability to hire agents in areas where there is an opportunity to take advantage of specialized skills, language skills or affordable labor rates.

Summary of the Hosted VoIP Business Model: Hosted hardware/software systems supplied by either a vendor or host enabled answering service, provides an in-house or virtual contact center platform for the teleservices industry. The business model embodies the use of VoIP technology to provide the distribution of telephone calls, agent management, and customized reporting for both site-based telephone answering service/call centers located nationwide and their associated telecommuting employees. Teleservice clients will have the option to network together to provide telephone answering services to their customer base and to outsource overflow traffic to other hosted providers on the same system. They will also have the options to provide a number of telephone support services including inbound customer service, sales support, product support, emergency dispatch, help desk services and order processing to both large and small companies. These services are delivered utilizing an Internet based VoIP call distribution system. These virtual systems and network are capable of hosting and supporting an unlimited number of subscribers throughout the world.

[For more information, see VoIP in the Call Center by Wayne Scaggs.]

Business Strategy

The telephone answering service industry has three major problems today; a labor problem with difficulty in finding and keeping trained staff to answer calls, the exorbitant cost of purchasing and maintaining the equipment necessary to remain competitive and the lack of marketing and technology tools necessary to attract a new customer base.

Labor in the answering service industry is by far the biggest problem. Costing an average of 40% of revenue, good help is hard to find, difficult to train and in some cases they only stay with the service until they are offered a better paying job at Wal*Mart for twenty five cents more per hour.

The cost of phone answering equipment has gone through the roof. Answering Service owners are expected to spend from $100,000 – $200,000 every three to five years to merely remain competitive. With that horrendous price also comes the additional costs or software upgrades, monthly service agreement, spare parts kit and a back-up power system to maintain this huge switch should there be a power blackout. In most cases, an in-house tech person is also required to maintain and service this large switch.

Competitive Edge

Labor: To solve this industry wide problem, simply have to look at where the problem begins and that is with the employee. Surveys show that hard working, consciousness employees that have learned to take responsibility for their jobs are people who prefer to work from home. These self-motivated people understand that it is their responsibility to purchase and maintain their computer equipment along with a DSL or cable hook-up to remain employed. This benefit saves the employee the cost of a car payment, gas, parking and the time it takes to drive to work. It also provides the employer with the ability to call this person at a moment’s notice to help with the occasional spike in call traffic that goes unresolved in a conventional call center setting. This home based concept also allows the employer to schedule someone for a 3 to 4 hour shift which would be unheard of in the typical 8am – 5pm setting of a conventional telephone answering service since the employee is not going to come in for that short amount of time.

This idea has already been implemented in many telephone answering services with much success and is also incorporated in multi-billion dollar companies such as Jet Blue and Home Depot. One of the biggest perks about utilizing agents who are working out of their home is that there is a waiting list of good, qualified people wanting to go to work…something that never happens with a traditional answering service business.

If you wish to keep your operation in house, the same equipment and features apply with the outsourcing ability enabled for overflow traffic for the midnight shift and disaster recovery.

Hosted Equipment: This hosted system approach holds the answering services customer base in a totally private sector of a computer switch. This privatization process allows the new service to feel that their valuable customer base is totally secure while also providing them with the assurance that there will be no down time due to hurricanes, ice storms, power outages, earthquakes, floods or whatever mother earth fires our way.

Alliance: By having all of the hosted customers on one system allows overflow traffic between its partners. Now if one service on the system is going through a natural disaster or has a client that is too large to handle, they can offload some of that traffic to another hosted system user.

Marketing: Build a better mousetrap and they will come. When you are selling to a customer, what do you have that your competition doesn’t?

  • Price Competitive — when you have to pass on the price of a $150,000 switch, you have to charge a lot for your service. By hosting your service, you pay only one monthly fee that is suited for your business size but are able to offer all the bells and whistles.
  • Customizable Features — Your system can be customized, offering you expanded service capabilities to your clients.
  • Overflow Capacity — Many VoIP hosted systems have build in overflow features that allow you to handle more calls with less busy signals thus giving your customers better service. You can now share large accounts or even the midnight shift.
  • Disaster Recovery — If you decide to utilize an answering service to host your accounts, you still have the ability to back-up those accounts with the vendor in case of a disaster.

Pricing: Depends upon the system size and features you choose. Figure out how to downsize or eliminate your office and expenses. Other businesses are getting the job done with less expense so why not you? Jump into the VoIP pool, even if it is the shallow end, get your feet wet, and embrace the future of your business. VoIP is here and working. When will you start collecting your share of the profits?

“Change is inevitable…those who make the change easily and seamlessly are those who are more apt to survive” author – Unknown

Read the complete series:

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 tas@tasmarketing.com.

Get the latest info in the book How to Start a Telephone Answering Service.

Cashing Out? Be Prepared

By John Weikert

Maybe you started it, maybe you bought it. Either way, you’ve invested a lot of yourself in the business. You’ve made sacrifices. You’ve worked 24 hours a day. You’ve juggled schedules, tried to find operators/employees to handle the phones on Monday mornings when one or more of your staff called in sick, or worse, quit without notice. You’ve even bought a four-wheel drive vehicle just to pick up employees in bad weather, and much, much more. Indeed, a business you’ve owned has taken your time, effort and financial investment, and selling often is a bittersweet proposition. The challenge is to find an effective way to sell your business in a reasonable amount of time and on the best possible terms.

A word of caution. Once you decide to sell your business, it’s usually wise to keep your plans confidential. If word gets out that you plan to sell, your competitors will have a field day, and your employees and customers may become wary. Both situations could adversely affect your ability to continue in business and ultimately affect your selling price.

Selling a business can be very time-consuming. It can be an emotionally charged experience, as it is typically one of the most significant events in a business owner’s life. There is a lot to be said for planning to sell your business. In fact, if you are planning to sell in one to three years, now is the time to start planning for the sale.

After assessing your business, you should begin a preliminary calculation of your company’s value. Selling a company is hard work, and you will not want to proceed unless you are confident that your company’s value meets your expectations.

A common misconception is that valuation is an exact science. While the use of formulas in a valuation implies exactness, it is very difficult to set the worth of a company at a single figure. In the TAS industry we hear that bureaus are sold at a multiple of monthly revenues. These multiples range anywhere from three times to fifteen times. We also hear that another formula is used based on profit performance. However, don’t be fooled into thinking that’s all there is to it.

Another misconception is that value equals selling price. The final selling price can be either higher or lower than the estimated range of values for the company, depending on the eagerness of the buyer to buy and the seller to sell, the demand for the type of company, the form or consideration paid, the negotiating skills of the parties, etc. In fact, the selling price of a company sometimes does not seem to have much relation to its estimated value.

Unfortunately, too many TAS sales are handled poorly by business owners who don’t have a good understanding of the buy/sell process, and by incompetent intermediaries who should know better.

The following will take you through the key steps of the buy/sell process and explain each one. It will also point out some of the more common mistakes and pitfalls inherent to the process.

Start Preparing Financial Statements for Selling Purposes, Recast the Numbers

No, I’m not advocating an illicit set of books. However, financials prepared for tax purposes are designed to show income as low as possible within the confines of IRS regulations. Large corporations typically prepare a set of financials for the IRS and another for in-house analysis. You should begin this practice too and you should begin far in advance of the sale. It is much more effective than having to prepare a so-called restructured set or “normalized” set of financial reports years after the fact. It is very effective though if you have done it on a regular basis for several years.

In valuing a business, some typical financial adjustments may include the following:

  • Excessive management salaries.
  • Salaries paid to individuals who can be replaced at much lower salaries.
  • Retirement and health plans that provide better benefits than the plans of other companies in the industry.
  • Excessive perks, such as company cars, trips and club memberships.
  • Beneficial leases.

Personnel Changes: In an industry not noted for its depth of management, buyers are afraid that key employees might leave after they take over the company. If they are prepared to remain with the company through the transition, fine. If the employees are thinking of leaving, it is better that they leave sooner than later. This will allow ample time to train replacements who will remain with the company through a transition. In any event, it might be prudent to have all employees sign a non-compete agreement and keep it on file. This way a prospective new owner will have a higher level of confidence that the employees are more apt to remain with the business.

Talk to Key Employees: If you haven’t discussed your plans with key employees, do so now. They will hear of your plans anyway, so it is better that they learn from you and get the straight story. Also, you will need their support in assuring prospective buyers that the transition will be a smooth one.

Examine Contracts: Many TAS owners have contracts with customers and telcos. Take a close look at these. Those that would be beneficial to a new owner should be kept and extended if possible. However, if there are contracts that you are renewing because of habit, or for other reasons that are not financially prudent, now is the time to do something about them. Contracts that are harmful to a buyer will certainly lower the value of your company.

Review your Real Estate Lease: If yours is the type of business that depends on location, make sure that you can assure a buyer that he/she will be able to stay in that location for a reasonable period of time. Above all, make sure that your lease isn’t set to expire and be re-negotiated while you are actively selling your company. Negotiating a lease when you are all set to sell is like negotiating with a gun to your head.

Likewise, if your location might be inappropriate for a buyer, consider moving now.

Renewal options are generally better than long commitments because they give the buyer maximum flexibility to stay put or to move. At the very least, make sure you have a consent clause in your lease that permits you to assign your lease to a new owner without being reasonably withheld.

Examine Equipment Leases: If you are leasing equipment and the lease will remain in place after the sale, look at the rationale of the lease(s) from a buyer’s perspective. If a lease will have the effect of saddling the buyer with an interest rate well above prevailing rates and any tax advantages have already accrued to you, the lease may hurt your company’s value.

Formalize Your Records: Suppose your policy is to give customers terms of net 30 days. Suppose you’re like most TAS owners and make exceptions to most policies. Perhaps your brother’s wife and your college roommate are allowed to wait as long as they need to pay. The person who buys your company is not going to want to hear about preferential treatment for your brother’s wife or your college roommate, nor will he/she want to be the one to have to cancel the exceptions. It is better to enforce policy now to make the transition smoother. If that’s not possible, at least document the exceptions so the buyer is not hit with surprises.

Systemize Operations: Many TAS businesses rely on a mix of clearly documented procedures, and procedures that exist only in the owner’s head. Your company will be more salable if procedures are clearly systematized and documented so that a competent manager or new owner can take over with minimal training. Get it out of your head and into a procedure manual. Make sure the procedures are tested and refined before the sale.

Separate Real Estate: It sometimes makes sense to own real estate as a company asset. But when it comes time to sell, including it as part of a business sale can increase the complexity of the sale and make a business less attractive. Sophisticated buyers like to transact real estate separately from the business itself. Also, if real estate is separate, you can start showing rental to the real estate owner as a regular line item expense for the company, making it more clear and acceptable for a buyer to assume the expense.

Ownership Structure: If you are operating as a sole proprietorship or a partnership, now may be a good time to incorporate for two reasons:

First, it is better to have the corporation liable for payables and other debts. Otherwise you might find yourself responsible for the new owner’s liabilities or liabilities that he agreed to takeover. Make the change now because it takes time for creditors to change things over in their own records. Incorporating just before a sale to distance one’s self from obligations is not foolproof. In fact, if you wait too long, you may have difficulty meeting IRS filing requirements and other bureaucratic requirements that are notorious for taking too long.

Secondly, a corporation provides a clean vehicle for transferring a company in part rather than a whole. A buyer could purchase the proportion of the firm’s stock (at the agreed price) that would give him the agreed proportion of the company. If this sounds complicated, it is. I suggest you check with a good tax specialist.

Documentation: Entrepreneurs are not known for their fastidiousness in keeping records and documentation. In preparing to sell a business, you first must gather documentation. Audited statements prepared by a reputable accountant, while rare to the TAS industry, will help establish your business credentials. Tax returns also offer proof of business performance. Generally, three years of financial records will serve to establish where the business has been and its profitability. Among the items you’ll need to gather are:

  • Income statements.
  • Balance sheets and income tax returns from the last three to five years.
  • Records of accounts receivable and payable.
  • Bank statements.
  • Copies of any notes or mortgages owed.
  • Existing contracts with employees, customers or suppliers.
  • Detail ESOP, 401K and any other retirement plans in place.
  • Present lease.
  • List of equipment owned or leased and any maintenance contracts or other obligations associated with such assets.
  • Corporate books (if incorporated) or partnership agreement (if partnership).

Banking Connections: Bankers don’t like surprises. It is a good idea to tell your banker that you plan to sell the company in the near future. Don’t be afraid to ask him about the possibility of financing a buy out, or partly financing it through receivables, but don’t expect a firm commitment.

Review Terms and Structure of Sale: Terms are as important as the price. Decide the range of owner financing that you’ll consider and the degree of security you’ll demand. Remain flexible though, so as not to limit your options. A buyer may present you with a reasonable but unexpected financing package. There are as many ways to structure financing as there are businesses for sale. Also, all buyers are not equal. You may be happy to finance one buyer for 50% of the sale price, while another you might not trust for 5%.

In evaluating prospective offers, sellers should investigate the prospective buyer’s (1) credentials and track record, (2) creditworthiness, especially if a portion of the purchase price is deferred or is paid in notes or stock, (3) management style, and (4) integrity.

Selling a business is not and should not be a simple transaction. For example, you can sell all of the business or part of the business. You might sell your interest in a corporation to another corporation or an individual. Or, your corporation may sell its assets. It is not unusual for a business owner to sell the business but retain ownership of the receivables for the purposes of security. There are even instances where a business is essentially leased with an option to purchase.

In the final analysis, your company is worth only what someone will pay for it. Generally, a potential buyer’s offer will be influenced by how soon he or she expects to see a return on the initial investment.

If it is planned for in advance and done wisely, the sale of a business may be among the most rewarding moments in a business career. You have, no doubt, recognized the need to plan your business’s future. It’s never too early to consider and plan your future.

For instant information on J. Weikert & Company, LLC, you can access their fax-on-demand line by dialing 800-227-5638; ext 137.

[From Connection Magazine – September 1998]

One Way to Value Telemessaging Businesses

By Dan Joseph

One year ago, Dave Guttman and I came to the ATSI show with the hope of finding an answering service to buy. Although it was our first time at ATSI, we liked what we saw: good people offering an important service to customers in need. We also identified growth potential and felt that the requirements for success fit well with our backgrounds.

Having made several acquisitions, we are satisfied that the industry does indeed have strong growth prospects, and that we can achieve our goals by continuing to acquire good companies. Our plan is to create a publicly held, diversified “Tele Solutions” company.

Our strategy remains consistent: we want to buy good companies that will thrive in the 2lst century. We want to provide the people who run these companies with the tools they need to excel, liberating them from back office functions. And we want to generate additional value in each company by investing in sales, marketing, and new technology.

In the process of making our first few acquisitions, and evaluating many more, we developed a business model that guides our decision-making. Although we use it as a barometer and not a rule, it allows us to quickly assess the feasibility of a given situation. In that way, we don’t waste anyone’s time pursuing a transaction in which common ground is unattainable. The model’s key attributes are two fold:

  1. Classify each business generically.
  2. Value each business uniquely based upon a variety of characteristics.

CLASSIFICATIONS

Platforms:

Definition, These companies have broken the $5 million revenue barrier and are generating in excess of $1 million in EBITDA (Earnings Before Interest. Taxes, Depreciation, and Amortization). They typically have multiple locations, draw value from good equipment, and have built an infrastructure to handle growth. The companies have good management, employ well-trained operators, and have customer churn at or below 30%. Finally, these companies have diversified their revenue base by pursuing new opportunities, such as custom call processing and order entry.

Initial Valuation Perspective, Although this figure will vary, we typically value these companies at 3.5 4.5X EBITDA, depending on the amount of post-acquisition investment we need to make. Typically, these deals will be structured with a combination of cash, notes, and an incentive earn-out if the owner wishes to remain. We will also offer stock if the owner wishes to join us as a partner. These platform companies can command an overall premium when compared to industry norms.

Regional Leaders

Definition, These companies generate $1.5 – 5 million in revenue, with cash flow in the 2O-35% range. They invest in their businesses, look for ways to provide better service, and are leaders in their market. Typically, these companies have no more than three offices. The owners of these companies are focused on profitability, and do not actively seek acquisitions outside their home markets. Upon acquisition, these companies will require little investment or operations attention, allowing us to focus on growth.

Initial Valuation Perspective, We value these companies between 3.0-4.25X EBITDA, taking into account any post-acquisition investment. Again, these deals will be structured with a combination of cash and notes, plus an incentive if the owner wishes to remain. Under certain circumstances, we will agree to pay a percentage of the price in stock.

Solid Cash Flow Generators With Opportunities For Improvement

Definition, These companies have revenue between $1 million and $5 million, but they have not optimized profitability. Their cash flow, as a percentage of revenue, is below 20%, and they typically require an investment in technology, a cutback in infrastructure, or other operational adjustments that take time and money. The weaknesses detract from value and require management intervention in order to achieve targeted profitability.

Valuation Perspective, These companies will typically be valued based on a combination of a monthly revenue multiple (8-10X) and an EBITDA multiple (2.5-4X).

Under $1 Million in Revenue/10% plus Profitability

Definition ,These companies are typically well-run from a bottom-line perspective, but have not grown effectively, and are therefore at a competitive disadvantage. Typically, they have inadequate infrastructure and an over-dependence on the owner, although a solid customer base, good employees and above-market pricing allow for profitability.

Valuation Perspective, Typically, these companies will be valued at 2.0-3.5X EBITDA, depending on level of profitability above 10% and on deal structure. A desire for more cash will typically require a significant price concession.

Under $1 Million in Revenue/Less Than 10% Profitability

Definition, These companies have not taken the steps necessary to attain profitability standards, either because of mis-pricing and/or providing service that needs to be improved. As a result, we will need to devote resources and capital to the task of repairing certain operational elements of the business.

Valuation Perspective, Typically, these companies will be valued as a function of monthly revenue. Depending on deal structure, and the level of profitability below 10%, the multiple of monthly revenue will vary from 4-7X monthly billing.

Turnarounds

Definition, These are unprofitable or minimally profitable companies, and require a great deal of work to achieve an acceptable level of profitability. Their customer base might be mis-priced, they may have excess infrastructure to support their revenue base, or they may simply be operating inefficiently. Invariably, there are steps that we need to take over a six-month period that will bring the company in line with profitability standards.

Valuation Perspective, These companies will be valued as a function of monthly revenue. Depending on revenue size and deal structure, the multiple of monthly revenue will vary from 4-8X. In certain situations, we will allow the owner to reap additional benefit that results from his/her working with us through a transition period.

Specific Characteristics That Enable Unique Valuation

The second element of our business model looks at a variety off actors to assess where a company stands within a range of value. These factors help us to refine our valuation and arrive at a price and structure that satisfies the requirements of both parties.

Equipment That Must Be Upgraded, Poor equipment demands additional investment. Good technology is a critical element in this industry, and therefore, an important component in our valuation. We only pay full price (i.e. the high end of the range), when equipment is up-to-date and well maintained.

Limited Excess Capacity, If a company lacks excess capacity, we will need to invest in new equipment in order to grow. If we are to be successful, growth at a reasonable cost is very important. We always look for opportunities to better utilize our asset base.

Limited Infrastructure, Many companies are over-dependent on the owner. Great companies prepare for succession by creating a structure in which no individual determines success or failure. These companies require the owner’s time only for strategic direction. When we buy a company, we are buying its people; their attitude, skill, and desire create value.

Hardwired Accounts, Hardwired accounts provide an additional risk that lowers our valuation of the business.

Large Base of Unprofitable Accounts, Under-pricing, or flat-pricing, creates unprofitable accounts that diminish service quality. In most cases, we will have to raise prices to improve service and customer profitability, inevitably resulting in lost customers. We will not pay for customers with no real value.

Need to Invest to Bring Service Levels Up to Standard, Some companies, by virtue of poor equipment, training, or management, provide substandard service. Because our long-term success will be based on providing great service, we will need to commit time and capital to bring service levels up to or above standard.

One-Dimensional Revenue Base, This is a big negative. Given that the traditional TAS customer base is eroding, a company that offers diversified services has expanded its universe of potential customers.

As a final note, no two situations are alike. Although we use our business model as an advisor, we will always consider the owner’s perspective and allow ourselves to look at each transaction as its own entity. We believe strongly that in every case, a creative and mutually appealing transaction can be created.

Dan Joseph is the CEO of XACT Tele Solutions, a multi-site telemessaging service provider. Prior to forming XACT, Dan was the president of Brand Builders International, a marketing consulting firm. His background also includes management positions with Procter & Gamble and Bankers Trust Company. He can be reached at 201-462-0071.

[From Connection Magazine – July 1998]

How Not to Sell Your Telephone Answering Service

By Steve Michaels

Honestly, you’d think the word would have gotten around by now. You’d think that telemessaging service owners trying to sell their business would have heard from potential buyers, from their broker, or from Connections Magazine that when you overprice the darn thing, it’s going to have your name on it for a long time.

If you are really serious about selling, then get real and see what other businesses of your caliber are selling for. The gamut of answering services range from one person working out of their home with a cordboard to a sophisticated Teleservices Bureau with paperless equipment, voice mail, fax, email, Web-enabled capabilities, and a host of other services.

The Telephone Answering Service (TAS) business has a cyclic curve which moves up and down according to the times, demand and services provided. If you have just spent $200,000 on equipment, it is Not a good time to sell. You want to be in a position where the equipment is paid for, your monthly billing is up, and your receivables current. Another determining factor of your salability is your location. Are you in a suburb of a big city or 1000 miles from no where? Are you all call forwarding or do you have some hardwire accounts that will be hard to move? Have you had a recent price increase? Are you stuck into a lease? What is your average price per customer? This is important if you are only charging $40 per month for unlimited calls. The Buyer then has to figure T1 or 800 costs to bring that client to their service. And of course, are you making a profit?

Up-to-date equipment also enters into the picture but in today’s market, 54% of all existing TAS buyers buy the accounts only. So if you are thinking that you could get a higher price for your bureau with newer equipment, take the above figure into consideration.

As stated in the title of this article, How NOT to Sell Your TAS, here are some fairly stunning examples of the inventiveness of some TAS owners when it comes to pricing their business.

“You know, I’ve always wanted to move to Florida” Sellers often base their asking price on the amount of money they need for what they are planning to do next. Maybe they’ve figured out they need $600,000 to retire. Or they need $100,000 in seed capital for their next venture. Or maybe they’re planning a trip around the world. Those rationales have nothing to do with the current earnings stream, which is really what the buyer is buying. “Say I want to buy a new car, and I need $70,000 for a new Mercedes. Well, that’s great, but that has nothing to do with the value of my “Ford.”

“I’ve put a lot of money into this business over the years. Now I want it back.” So the buyer should care? Sellers often make the mistake of equating market value with cost. But there is only one test of value: the cash-generating ability of the business. An answering service has one major asset, its customer list, which is predictable into the future and drives a future net cash flow. That cash flow has a net present value and therefore one can arrive at an appropriate value of a TAS. “It would cost me half a million to start it from scratch.” This oft-spouted ploy is usually called “replacement value”. And sometimes it is germane to value. However, if it would cost $500,000 to recreate an existing business, but the market price for that business is $200,000, then the “replacement value” needs to be replaced with a better valuation method.

“I owe. I owe. So on the block I go.” Some sellers want to use the sale as an opportunity to get them out of the red, either commercially or personally. But the buyer would have every right to ask, “Why should I pay for your bad business decisions?” This would be considered a distress sale.

“Because I want a million dollars, OK?” They call this the WIFL method: “Whatever I Feel Like.” Sometimes setting a price is pure caprice on the part of sellers. And no amount of smooth talking will persuade them otherwise. Some bureau owners feel that they are pre-madonnas and that their service is worth umpteen zillion dollars. But in the same breath, if you ask if they want to buy, well only if its a distress sale.

“Earthquake? What Earthquake?” Subtitle this one “Well, we meant for there to be revenues.” Often times the new TAS owner who overspends, realizes that he is not able to generate enough cash flow fast enough to make the payments on the equipment, phone lines, rent and labor and has to file chapter 13 or try to sell at a loss. There are many different reasons why a TAS could fail. If you are interested in getting into the TAS business, first ask yourself, do you like to answer the telephone? Do you have enough financial backing to carry you through the bad times? Is there a market for your service?

“OK, here’s my price. Now I’ll just add fixtures and equipment and…” If you set a price based on an earning stream, the buyer is buying not only that earnings stream, but the means by which to achieve it. So tacking on an extra charge for fixtures and equipment is like selling someone a car then charging them for the keys.

“George said he’d give me $500,000 for my business. Let’s see, that was nineteen ninety …three?” Sellers often fixate on an offer they may have gotten a long time ago in a totally different market place. National and local economic factors have more than likely changed considerably since then, but the owners get that magic number in their heads, and there’s no dissuading them. I receive phone calls from people who remember the old days where all services sold for about the same price. Back then everyone had switchboards, paid their labor about the same and had very limited service. I don’t know where that practice started, but in today’s market a more sophisticated formula or formula’s are necessary to evaluate the fair market value of a Telephone Answering Service. I use three different formulas; a TAS formula using comparables, a CPA formula using (earnings before interest, taxes, depredation or amortization) and a formula based on profits. This gives you a much better evaluation process because it takes into account the monthly revenue, equipment and profit margin.

“I’m selling. Of course I want all CASH….” Now that you’ve decided to sell and have determined your price, what kind of terms are you willing to take. Banks do not lend money on an action base, or a cash flow. They want real property or something they can attach. There are all kinds of options when it comes to financing. If you are the seller you want all CASH and if you are the buyer you want nothing down and a note that goes on forever. A typical deal, for example, would be 6 to 8 times monthly receivables with 20% to 30% down, the balance in 2 to 5 years at 9% interest. But pricing could be as low as 4 times monthly billing to 15-16 times depending on what you have to sell, your location, equipment, management in place and of course your profitability.

Why should I share in the risks? Other concerns when you are selling your business is what is called a retention clause. This means that your accounts must stay with the new owner over a period of time in order for you to receive payment that can be anywhere from 30 to 90 days. The argument goes back and forth. The seller doesn’t know what kind of service will be provided to his customer base and the Buyer feels that if they are good customers then the seller should share the risk of the cut over to the new bureau. Expect at least 20% of customers purchased to leave. Often times it is much less than that depending on the customers and adequate preparation. You cannot sell a whole customer base and expect to move them in 10 days.

One more important item that you should not over look is the accounts receivables and who gets it. Much of it depends upon whether you bill in advance or in arrears. Typically upon closing the accounts receivables from that date on goes to the buyer. If you aren’t already, I would suggest you start billing in advance. This could mean a whole months revenues in your pocket verses theirs. Many TAS owners make the mistake of selling what they are billing instead of selling what they are receiving. If an account has not paid in 90 days, they are not an account. It is mainly a multiple of cash flows (profit) that drive the value of a TAS, not a multiple of revenues (monthly billing). In determining a fair price for your bureau, an average of six months monthly billing is recommended as some services have high paying accounts in the summer or winter.

This way it benefits the buyer and the seller. A buyer should not have to pay for something that is not there and the best way to prove to them that you do indeed have a viable business is through financial records- lots and lots of them. You may need to spoon-feed the buyer. You want to help the sale go forward, so you need to give the buyer what he or she will need to do the due diligence: equipment lists, customer lists (minus the names and DID numbers), supplier information, and the like. Bottom line: make it easier for the buyer to understand the business completely – where it’s been and where it’s headed.

If you can combine the right price with financials that have been audited by a reputable firm, you’ll be fighting off the bids from qualified buyers.

Steve Michaels is founder and owner of TAS Marketing, a business brokering company, focusing on assisting clients buying and selling telephone answering services and outsourcing call centers. Steve can be reached at 800-369-6126 or TAS@tasmarketing.com.

[From Connection Magazine – May 1998]

Knowledge is Power in Buying and Selling a Business

As Calvin Coolidge once stated, “The business of America is business.” In that respect, it’s no wonder that America is buying and selling businesses at an astounding rate. In fact, one of the latest surveys released from a 1996 Gallop poll showed that an amazing 3.5 million new businesses were started in the U.S. last year. Obviously, becoming your own boss has never been more popular. Not surprisingly, the Wall Street Journal reported that saving to start a new business is second only to a remodeled kitchen on American’s wish-list for big ticket items.

Of course, starting a new business can be extremely frustrating if not handled properly and the risk is high. Reportedly, 80% of all new businesses fail in the first three years due to factors such as poor location, low product quality, under-capitalization, and lack of management skills, However, there are things you can do to increase your chances of success. For example, purchase an established business! A mature business offers the advantage of providing you with a proven location, existing customer base, and product. The key is to look for a business that is established but has potential for growth. That way the business will be affordable while providing the opportunity to significantly increase your profits. Also, keep in mind that most business owners will be willing to train you in the daily operations of the business, there by helping to further reduce the risk.

So, how do you begin to pursue the American dream? The answer is to make sure you have a solid understanding of the process involved in the purchase of a business and to follow it. To get a better understanding of this process, let’s run through a few of the more important aspects of a typical transaction.

First, you must be totally committed to purchasing a business at a price and terms consistent with the marketplace. Once this commitment has been made, it is then time to consider using the services of a good, knowledgeable business broker. Remember that purchasing a business is even more complicated than the purchase of a home, and most of us would not attempt to buy a home without the assistance of a qualified real estate professional. If you elect to use a broker, choose one with a proven track record and one with whom you feel comfortable. To protect the business owner who is selling, you will be required to sign a non disclosure agreement promising to maintain confidentiality for all the information provided to you on the businesses discussed.

The broker will begin showing you businesses in the categories in which you are interested and will also begin to familiarize you with the important factors associated with each business: its history, previous sales, terms of purchase, etc.. The business broker will then arrange a meeting between you and the sellers. Usually a number of meetings will take place with various businesses before you decide on the one that best meets your needs.

The next step will be to write a purchase offer and present the offer to the seller. At this point, the business broker will share information on your background and pertinent financial history with the seller. This information will include your experience and specifics of how you arrived at the offering price, terms, and conditions. Your broker will then explain the purchase terms and conditions to the seller, who will either accept the offer or submit a counter offer. When both parties have agreed to the terms and an escrow deposit has been received, you will then be allowed to do your due diligence of the business to determine if everything is in order. At this point, all of the information should be substantiated that was presented to you on the listing schedule. If there has been any misinformation, the deal may be cancelled and you would receive your escrow deposit back or you may elect to renegotiate your offer.

If all questions are resolved and the financial records are in order, all contingencies will be removed from the agreement which then becomes a binding contract. The broker, seller, and yourself will work with the landlord to arrange an assignment of the current lease or to create a new lease with new terms. Once this occurs, you will provide all necessary paperwork to the transferring agent who will run a lien search. If the lien search finds everything is in order, the broker will make arrangements to assign any notes or equipment leases to you. Finally, arrangements are made for you and the seller to set a closing date. When this is completed, documents are signed and the deal is closed.

Thus, with knowledge, a little luck, and a good business broker, the process of purchasing a business can be surprisingly simple. Utilizing a good business broker can help you drastically reduce the time it normally takes to complete a transaction.

If you as a potential buyer follow these steps in purchasing a business and utilize all the information available to you, you will stand a much better chance of fulfilling your dream of owning a business. More importantly, if you want to continue to succeed after purchasing a business, the day you sign escrow papers and become the owner, your mind set must change from buyer to seller. Whether you plan on selling the business in one year, ten years, or never, strategies to maximize the value of the business are good management practice and should begin well before you ever decide to sell.

First and foremost, begin to position the business for sale from the day it is purchased. To build long-term value, in addition to ensuring short-term profits, it is essential to keep track of financial records, permits, licenses, equipment, and inventory. This is important throughout the life of the business, but is especially critical when you are trying to sell. If the business you purchase a franchise, care should be taken to learn the franchiser’s requirements for resale. These requirements are usually listed in the franchise contract.

Second, when the decision has been made to sell the business, determine the fair market value of the business. Business owners have the option of going to their attorney, accounting firm, appraisal firm, real estate broker, or business broker to have a business valuation performed. A business broker typically has the most complete and current information on actual business sales and pricing formulas.

Furthermore, continue to manage your business for optimal performance. A common mistake made by sellers is to pay less attention to the daily operations of the business once they have decided to sell. To maintain maximum value, continue to run your business with complete dedication and keep up your inventory, maintenance, advertising, and customer service levels. And again, as with buying a business, you must maintain confidentiality. Your business’ value could suffer if employees, customers, or suppliers know your business is for sale and you risk them no longer treating you “as usual.”

Finally, negotiate effectively. Don’t let inflexibility prematurely end a deal with a qualified buyer. At this stage, you benefit tremendously from the professional help of a business broker who is trained to develop creative (and responsible) terms that both help close the deal and ensure all interests are met.

As is very evident, with access to good information and the help of a qualified professional, buying or selling a business can be a much less stressful experience and become one of the most fulfilling as well as profitable events in your life.

Article reprinted with permission from the July issue of Business Opportunity Journal.

[From Connection Magazine, September 1997]

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]