Fortunately, When There's A Will, There's
A Way
I hope you had a pleasant holiday season and would like to help you to
start out the new year (the new millennium) effectively.
The recent extinctions of so many dot com pure plays have only served
to underline several important facts: the utmost importance of a customer
base, the vital need to maintain and increase that customer base, the
devastating effect of providing poor customer service and that people want
to communicate with people. We have seen so many companies fall under the
misguided belief that all that was needed to provide a satisfying customer
interaction was to give them a shopping cart and a FAQ (frequently asked
questions) page and you were in business. But the Internet can be a cruel
medium, providing not only the ability for companies to reach a vast new
universe of potential customers, but also giving those same potential
customers access to tens if not hundreds of alternate suppliers in a
matter of seconds.
The last years of the 20th Century have seen a great transformation of
communications technology and, perhaps, the place where the change has
been most evident is in the call center. The powerful impact of the
convergence of voice and data networks has indeed turned call centers into
customer interaction centers, where agents handle inbound and outbound
calls, answer e-mail, or assist customers while they are online, either
through VoIP callthroughs and callbacks or online text chat. The new
communications networks have also limned the benefits of forming
partnerships '- allowing the exchange of critical information so each
partner can concentrate on what it does best.
A customer interaction center manager is now confronted with a vast
array of choices and the resulting questions they bring. Should I update
the network, get rid of the old PBX for a packet-based system? Do I
outsource my telephony and data services to an ASP? What new routing
technologies will I need to get the customer to the right person and make
sure they have all the customer data they need? What about the new Web
initiative? How will that drive new traffic into my center and how can we
make sure all these new contacts are responded to in a timely manner? How
do I implement all the technologies needed to facilitate effective CRM?
How will I train my agents for these new tasks? How do I set up and
maintain a portal for my partners so that I can leverage the quick
exchange of information to keep my supply chain running and completed
orders flowing to my distributors? How do I keep up with all the changes
going on in the industry when I have so little free time and the changes
are occurring at such a rapid pace? Where will the funding come from for
all this new technology?
These problems exist not only for in-house call centers, but for
teleservices agencies as well. For them, the urgency of taking their call
centers to the next level looms even larger; for if they hesitate, they
will soon be left behind as others who are already taking advantage of the
new technologies and network services have gotten there first with
multichannel customer interaction centers. These new players will win away
business at an alarming rate. And the problems are magnified for those
that are not part of a giant, multinational corporation with the personnel
and financial resources to stay several steps ahead of the competition.
For all of you ready to take your call center to the next level, but are
held back by a lack of capital, I urge you to read the sidebar to this
column by Scott Frayser and Pack Fancher of Matrix Capital Markets Group
to learn more about financing options.
As the customer interaction industry's leading publication since 1982
and referred to as "The Bible of the Industry" by The Wall
Street Journal, it is our paramount responsibility to inform you, our
valued readers, in the best possible manner as we have done over the past
19 years. I urge you to inform yourself and keep abreast of the latest in
the technologies needed to take your call centers to the next level and by
taking advantage of the many, wide-ranging informational outlets we
produce: from a daily-updated Web site, TMCnet.com, to four monthly
magazines (with both print and online versions) to 18 targeted e-mail
newsletters to four separate trade shows and conferences put on by TMC six
times a year. I take pride in the fact that we can provide you with such a
wealth of information on the technologies and services you will need to
keep your business profitable and look forward to seeing you at the next
TMC event, INTERNET TELEPHONY
Conference And Expo' in Miami, February 7-9.
As always, I welcome your comments.
Sincerely,
Nadji Tehrani
Executive Group Publisher
Editor-in-Chief
[ Return
To January 2001 Table Of Contents ]
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Creating Liquidity For Call Center
Owners
BY SCOTT FRAYSER AND PACK FANCHER, MATRIX CAPITAL MARKET GROUP
When it comes to planning an exit strategy or creating personal
liquidity, today's call center owners have a unique opportunity to
"have their cake and eat it, too." With more than $90 billion in
cash and a strong lending market, private equity funds have become a
dynamic force fueling competition in the market for acquiring privately
held companies. Unlike strategic acquirers, who purchase with a view
toward eliminating overhead redundancies, private equity funds prefer more
passive or board-level involvement and a collaborative relationship with
management. The result is a strong appetite for a recapitalization style
deal structure. Matrix has developed the Staged Liquidity Transaction as
an approach to structuring such a deal.
As the name suggests, a Staged Liquidity Transaction gives call center
owners the opportunity to sell a portion of their company while still
maintaining a significant ownership stake -- in essence, creating
liquidity and risk diversification today, while setting the stage for a
second "payday" down the road. These transactions enable
entrepreneurs to partially cash out of their investment in the business
and capitalize on the enormous amount of sweat equity they have
contributed to the business over the years. The Staged Liquidity
Transaction, however, is very different from that of an outright sale of
the company.
Traditionally, business owners seeking to "cash out" or
monetize their equity in a privately held business have had one option:
sell the company. If the company possessed enough scale, it would be
attractive to a larger corporate acquirer, who would purchase 100 percent
of the equity or assets of the company. While the owner might stay on for
a while, the new management's approach was often at odds with the
seller's, inevitably resulting in a sooner-than-expected parting of ways.
The upside for the seller was the initial purchase price, and the
remaining "key employees" would either sink or swim under the
new ownership regime. In some circumstances, this is the best option for
the exiting owner. In many other cases, the impact on the seller and the
company is less than desirable.
The Staged Liquidity Transaction offers a very different solution with
a significantly different outcome. The existing owner, in essence, takes
on a new partner, the private equity group, with the capital and contacts
to help grow the business. Substantial liquidity is created for the owner
through a partial sale to this new partner, while a significant ownership
stake is still retained. Private equity groups fund these types of
transactions through a combination of non-recourse loans and equity
capital. As the private equity funds are, for the most part, financial
investors, the company's owner and management usually commit to continue
their operational management of the company during a 3 to 5 year
transition period. During this time, a strong successor management team is
internally groomed or recruited from outside the company, and a strategic
plan is formulated to dramatically ramp up the growth of the business. In
essence, a Staged Liquidity Transaction allows call center owners to
continue to participate both operationally and economically in the growth
of the company, while simultaneously allowing them to pull a significant
amount of their risk capital off the table. Given the growth potential of
the call center industry, an entrepreneur's residual ownership after the
recapitalization may eventually be worth more than the total value of his
or her company today, in effect giving the owner a "second bite at
the apple" that may exceed the value of the initial transaction.
A typical Staged Liquidity Transaction might be as follows:
The selling price for the ABC Company is negotiated between the
shareholders of ABC (the "Selling Shareholders") and the private
equity group. In this case, assume the value of the ABC Company, free of
any debt, is agreed to be $20 million.
The private equity fund agrees to purchase 70 percent of the ABC
Company, with the Selling Shareholders retaining 30 percent. The $20
million purchase price would be financed with a conservative level of
senior debt; for example: 65 percent of the purchase price, or $13
million, which is carried by the ABC Company as new debt, but without any
personal recourse to the Selling Shareholders.
The Selling Share- holders will receive the full purchase price of $20
million, less the cost of a 30 percent interest in the ABC Company, which
will be reinvested on a tax-deferred basis. However, with a new debt level
of $13 million, ABC Company's new equity value is $7 million (the
previously established purchase price of $20 million less the new debt of
$13 million). Accordingly, a 30 percent interest in the ABC Company after
leverage is now valued at $2.1 million (30 percent of ABC Company's new
equity value of $7 million after leverage).
Therefore, the owners would receive $17.9 million in cash at closing
(the purchase price of $20 million less the cost of a 30 percent ownership
stake valued at $2.1 million). In essence, the owners have extracted 90
percent of the current value of the company in cash, but have maintained a
30 percent ownership stake.
In this example, the private equity fund would contribute equity
capital of $4.9 million and arrange the senior financing of $13 million,
which would be non-recourse to the Selling Shareholders. ABC Company's
cash flow in the first few years would be used to retire the new debt and
finance growth, thus quickly "rebuilding" the equity value of
the firm. The owners can build into the new shareholder agreement a
mechanism for their final exit strategy, allowing divestiture of their 30
percent ownership stake at a future date. A "put option"
requiring the company to purchase their 30 percent stake at a
pre-established valuation formula is standard. In five years or so, the
value of the 30 percent residual interest in the ABC Company may be worth
more than the value of the entire firm today.
The numbers above are used only as an example and would be negotiated
in terms of purchase price, leverage percentage and percentage sold.
However, they do provide a general idea of the Staged Liquidity
Transaction process and structure. Business owners may choose to reinvest
more or less in the company than the 30 percent used in the example, which
would subsequently increase or decrease the amount of cash they initially
receive.
The Staged Liquidity Transaction is a financial tool that takes
advantage of present economic prosperity, the growing number of private
equity funds in the marketplace and the willingness of lenders to provide
aggressive non-recourse financing to these "institutional
buyers." This alternative liquidity strategy leaves room for future
company growth and significantly reduces the risks associated with
entrepreneurs having all of their personal wealth concentrated in a single
business enterprise.
The Staged Liquidity Transaction sets the stage not only for more
dynamic company growth, by having the resources of a well-positioned and
capitalized partner group, but also for an orderly management transition,
from founder/owner to a strong successor management team. And the best
part of this strategy, the have your cake and eat it, too part, is that
not only has the call center owner diversified risk, created a significant
liquidity event and set the stage for a management succession plan, he or
she still participates significantly in the upside in value that the
future holds for the company.
Scott Frayser is a principal and Pack Fancher a vice president at Matrix
Capital Markets Group (804-780-0060), which provides investment
banking services to middle market companies with annual revenues ranging
from $10 million to $200 million.
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