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The following article is courtesy of Connections Magazine. Please visit their website at http://www.connectionsmagazine.com. The article was written by Thomas G. O'Roark and published in the March 1994 issue. Please check back often for more articles.

Buying and Selling Telephone Answering Services

By Thomas G. O'Roark (March 1994)

I find buying and selling Telephone Answering Services (TAS) to be aninteresting subject. There are over four thousand TAS in the United States, andmost are small, closely-held, family owned and operated businesses. The value ofa TAS is almost entirely intangible. Assigning value to an intangible asset isalways tricky. In this case, the customer list is the intangible asset which, inmy opinion, represents most of the value in a TAS. Buying a TAS is particularlyviable because seller financing is usually available as part of the terms, andbecause significant changes are taking place in the TAS industry which havestimulated buying and selling activity.

As to financing the purchase ofa TAS, in my experience, most bankers will not loan money against an intangibleasset. The TAS customer list is a recurring revenue base of service bureausubscribers, representing a cash flow stream not unlike an annuity. A futurestream of recurring cash flows can be discounted to a net present value, similarto 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 aloan, such as real estate. They tend to completely ignore the value ofintangibles, 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 retirementplanning, developing exit strategies for becoming liquid, and actually realizingtheir hard won capital from the business. Often the business represents decadesof "sweat equity." The customers are also friends and neighbors who often havebeen loyal subscribers since the inception of the business. Providinguninterrupted, high-quality service is of utmost concern. Management successionand training are critical.

Can the Owner/Operator replicate him orherself? Can he or she afford to?

Not every individual owner has an heirwho is interested in or capable of running a TAS. As they say, you can lead themto water, but you can't make them take over the business.

Also,forecasting profitability and cash flow projections are vital to both buyer andseller. It's often the case that a small TAS can support one family quitenicely, but not two. So both Mom and Jr. can't both be drawing a full managementsalary.

How does Mom get her retirement nest egg out of the business,but still pass on the business to Jr.?

Alternatively, how does Momretire, but continue to own the business, if she has to replace her owner's drawwith a manager's salary?

Similarly, if an absentee owner/investor buys aTAS, the new owner must pass on all or part of the owner's compensation to themanager and also service the acquisition debt, which leaves little or no drawfor the new owner.

This cash flow dilemma is often the motivation forselling to a competitor who can consolidate two offices into one, or can dividemanagement time between both offices, thereby freeing up enough cash flow toservice the acquisition debt. Consolidating offices eliminates duplication inoffice rent, supervision, night shift operators, etc., and helps leverageexisting over heads for support staff, billing, collections, equipment capacity,telephone trunkage, etc. In my experience, a large, reputable competitor isusually the best choice when selecting a buyer.

Selection of a buyer iswithout a doubt the single most important decision to be made after an ownerdecides to sell. Unless the price is all cash, consider critical success factorsin selecting a buyer.

• Is the buyer qualified to operate a TAS?
• Will the customers stay on service after the sale or will there be excessiveaccount loss?
• Can the new owner make a profit operating the service as-iswhere-is? Could you?
• Or, will he/she have to move it or upgrade theequipment?
• Will the new owner be able to make their debt payments to theseller?
• Is the new owner dependent upon the cash flows from the businessbeing acquired to service the debt?
• Or does the new owner have other cashflows from other sources that will enable them to pay for the business?

We all know how quickly a service business can decline, and trying torepossess an answering service is not very practical. Sellers need absoluteassurance that they'll be paid irrespective of what happens to the businessafter the sale.

Conversely, the prudent buyer wants to be guaranteed ofreceiving full value for the purchase price, and will normally require theseller to warranty the accounts for some period of time after the closing of thesale. The buyer and seller typically compromise on a mutual sharing of thebusiness risk involved in transferring the accounts to the new owner, with somewell defined criteria for qualifying the accounts. Qualification might typicallyinvolve an account remaining on service for some period of time following thesale and becoming a paying customer of the new owner.

I suggest bothbuyers and sellers look closely at the competition. The easiest place to findTAS is in the yellow pages. Shop them.

• What are theircapabilities?
• How do they price their services?
• What about newentrants into the market?

Most TAS experience occasional (albeittemporary) loss of customers (usually high volume users) to "flat rate"competitors offering unlimited usage, so consider the pricing trends in thelocal market, and whether usage is billed per call, per message or per minute.Consider the difference, for example, between day service (only answeringbetween eight am and six pm, Monday through Friday) and full-blown 24- hours aday, 365-days a year, type service. What do most customers demand from ananswering service in today's market?

There are very significant TASIndustry trends which affect the value of a TAS business, such as thecontracting TAS market. Every analysis of the TAS industry that I have seenindicates a shrinking market for traditional TAS services. Alternativetechnologies such as cellular, voice mail, alpha-numeric paging, etc., haveseverely impacted demand for traditional answering services. The industry isundergoing a rapid consolidation with fewer and fewer competitors, and largerremaining call centers. The level of buying and selling activity within the TASIndustry 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 sellare forced to buy their competitors and/or diversify into new and differentvalue-added types of services. Diversification often demands expensiveinvestment in automated equipment with capabilities that are more flexible, morecomplicated, and more fully featured than even most automated TAS systemscantraditionally provide.

As TAS change their focus away fromtraditional messaging services and toward other service niches, their appetitefor acquiring the customer bases of their competitors may naturally wane. Themargins and the prices charged to customers of traditional,take-a-name-and-number type messaging services, are not particularly attractivein light of other niche services that yield higher revenues per minute and thathave the potential for exponential growth. Scarce capacity will naturally beallocated to the higher ticket, more profitable service niches.

Timingis everything in life, and TAS owners should carefully consider if and when theymight be in a selling mode.

In a declining industry such as telephoneanswering services, the durability of existing cash flows is in question, whichresults in lowering of values for the businesses. It may well be thattraditional TAS businesses will never again be worth as much as they are rightnow. Outside investors are typically not attracted to declining industries. Thenumber of competitors keeps steadily dwindling and those that remain have largershares of a smaller market. Most TAS systems have definite upper limits forcapacity in terms of numbers of ports and/or numbers of operators. Competitorsmay be aggressively buying accounts today, but may satisfy their demand. Once acompetitor has maximized the utilization of his/her TAS system, then a secondsystem would be required before any new accounts could be added, the cost ofwhich may be prohibitive. Experts disagree over the optimal size for a callcenter, but consolidation has definite limits.

The larger a call centerbecomes, the fewer competitors there are who could consolidate it into anotheroffice. Industry consolidation tends to have a self dampening aspect to it thatgradually slows the pace of the process.

There are new and emergingcustomer needs and market driven demands for innovation as well as upgrading ofthe service. Even if retirement is not a factor to a TAS owner, replacement orupgrading of plant and equipment requires careful cash flow planning. Considerthe investment required for technology, service enhancements, productivitytools, opportunities to reduce costs, obsolescence of old equipment. TASveterans well remember the advent of answering machines and the resultingreduction in the size of the TAS market, and the transition from hardwiredsecretarial lines, cordboards and concentrators to DID's and call forwarding.Today's customers are demanding their TAS offer fax, paging, fully integratedvoicemail, modem access, remote printing, order-taking, credit cardverification, scripting, label printing, and Interactive Voice Response (IVR).

• How comfortable are you with new technology?
• Do you understandcomputerization, data base management, networking, data file manipulation andtransfer?
• Most importantly, how will you finance the new hardware andsoftware?
• It isn't cheap, and it won't always work as well as or easily asadvertised. After it's installed, how will you maintain it, and at what ongoingcost?

New buyers should consider the skills and commitment required by a24-hour per day, 365-day per year business, that never closes for holidays,Sundays, blizzards, storms, volcanoes, earthquakes, riots, or anything else. Infact, the more disastrous the local situation, the more customers need you, withzero fault tolerance. Also, any failure to answer the phones can havesignificant consequential damages to a customers business, as in the case ofdoctors or other emergency service providers. It can be oppressive. One reason Iconsistently hear for selling is a yearning for freedom to travel and to enjoythe well deserved fruits of hard earned success.

The labor intensity ofanswering service is sometimes overlooked by new entrants into the industry.Recruiting, training, supervising skills are essential. I am occasionallycontacted by a bleary-eyed seller who is motivated to sell sooner rather thatlater due to recent turnover in key people. If a new buyer is not from a laborintensive 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 willinteract 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 neglectedat all. It's amazing how quickly an answering service can decline due to poorservice.

Finally, before buying or selling, one must consider suchexternal factors as recession, inflation, global economy, U.S. economy, and mostimportantly for a local service bureau, the local economy. It's hard to collectwhen your customers are going out of business, or when your competition isdesperate for new business. Also, there are issues of inflation, newgovernmental regulations which add cost, and office lease escalation clauses toconsider and plan for. Be sensitive to labor force changes and to legal andregulatory issues.

In closing, it is my opinion, that the TAS industryis undergoing important changes. As the industry declines, rapid consolidationis occurring resulting in fewer, larger call centers. Owner/operators arediversifying into new value-added services and are transitioning away fromtraditional message taking. Therefore, the availability of willing buyers andsellers 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 withregards to diversification into new service niches.

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