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Publisher's Outlook
January 2001


Dreaming Of A Cutting-Edge Customer Interaction Center?
All It Takes Is Money


Go Right To: Creating Liquidity For Call Center Owners

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.


Nadji Tehrani
Executive Group Publisher

[ Return To January 2001 Table Of Contents ]

Creating Liquidity For Call Center Owners


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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