Agency Channel: Taking Stock in Equity

By Tara Seals

Posted: 08/2000

Taking Stock in Equity
By Tara Seals

The unveiling of several landmark equity programs for agents two years ago sparked optimism and frenzied contract signings. But the resellers that pioneered the concept still have not fully executed their business plans.

With undelivered promises of high-multiple acquisitions, agents now are looking for equity in the form of a large
payout after a sale, and in something more tangible.

Instead of simply a back-end bonus in the event of a sale, equity now is considered a component of ongoing compensation, taking the form of stock options or warrants, higher commissions, bonuses based on sales thresholds and various regular promotions.

“A vendor needs to have a very cutting edge approach in terms of incenting agents, otherwise they’re not going to be looked at very seriously,” says master agent Vince Bradley, president and CEO of World Telecom Group
(www.commerceconsultingcorp.com).
"CLECs or ICPs tend to have a much fresher perspective, and that can balance out the diminishing rate per minute as long distance becomes a commodity.”

In fact, agents may begin to reap the rewards of a competitive market for the channel.

“It’s an evolution. We’ve learned what works and doesn’t work,” says Steve Samuels, president of Telcorp Ltd.
(www.telcorp.com). “It’s grown in sophistication, and the carriers are also getting an education. Within the next six months, I predict we’ll see many new equity-type programs.”

Piece of the Pie

Heightened exposure of the concept at conferences and in publications, as well as fierce competition for agent bases, has made equity into a standard piece of the package–a must-have in order to remain competitive.

“In order to retain their agents, they have to offer a good equity program, and the reason they want to retain the agent program in the first place is because of the benefits we offer in customer acquisition costs and market penetration,” says Kieren J. McCobb, president and CEO of master agency TeleConfusion Removal Inc.

Many of the earliest agent equity programs were hinged on the reseller’s exit strategy. In the event of a sale, therefore, participating agent partners are paid part of the profit according to the value of their customer base. Although details vary, the model has been duplicated across the industry–and for good reason. This type of equity program retains agents but requires no out-of-pocket expenditures on the part of the provider. The payments will come directly from the profit of the sale.

TMC Communications
(www.tmccom.com) offered in 1997 the first agent equity program that did not require a buy-in fee. When TMC is sold, agent equity partners will find the multiple of the acquisition applied to the value of their monthly sales, providing for a large balloon equity payment.

“It’s the only opportunity out there for agents to increase their net worth along with their income in the normal course of business activities–just by selling. There’s no buy-in fee. It’s simply a partership with the agents. They help build the company and they get to share in the rewards.”

For agents, the balloon payment is future insurance in the event of a sale or merger. The problem is there is no guarantee the reseller will find a buyer at all, let alone one that’s willing to provide a sales multiple that would translate into big bucks for the agent.

To date, no reseller has completed a transaction according to its business model.

“There was a lot of attention paid to equity two years ago,” says Rick Sheldon, co-founder of California-based Intelisys Inc.
(www.intelisyscorp.com). “It’s tapered off because no one’s succeeded yet in pulling the trigger and accomplishing the goal, and people aren’t as jazzed up as they were about the idea. If I took a look at my agent base, I’d have to say that most of them do not buy into it.”

Reseller Telcorp has had an equity program in place for two years. Samuels explains that while many agents do not believe in equity plays as they have been structured, a payout would change
that psychology.

“As soon as the first reseller gets bought and pays out, that will give the process some validity,” he says.

At least one reseller is hinting that day is not far off. TMC’s John Marsch says, “TMC is operating on a three-year business plan, and we hope to fulfill that business plan this year.”

A Pool of Offers

Meanwhile agents are faced with a growing pool of equity offers–not all of which are created equal. There are several factors to consider when choosing an equity program. Among them are carrier history and reputation, back-office support, timely commission payments and the actual terms of the equity play.

“Agents need to eliminate the risk associated with the selection of a specific equity program,” says Brian
Twomey, president of Trans National Communications International Inc. (www.tncii.com). “You are betting on their ability to succeed. To that end, you need to fully understand the business plan.”

Sheldon agrees. “You should be choosing a carrier or reseller providing equity because you feel that that’s the right place for the business to go,” he says. “Look at yourself in the mirror and say, would I put this customer with this supplier regardless of the equity? And if you can’t say yes to that, you shouldn’t be putting them there.”

Once satisfied with the carrier’s ability to deliver service, agents need to look at the terms of the equity offer, which vary considerably. For example, some carriers may reduce the amount of equity to offset the risk of customer attrition.

Other carriers figure the equity payment will equal the projected value of an agent’s commission stream over a certain amount of time. In other words, if an agent makes $10,000 a month in commission, present value analysis says the value of the base
during the next three years is $360,000. If the company is sold within that time, the agent still receives his due amount.

While this is a guarantee against future earnings, it doesn’t take into account the agent’s ability to increase revenue over time with new customers, and new products and services.

“The dilemma in equity plays is that the whole model of value has changed from a pure dollar
revenue stream to more of a longevity or subscriber model,” says Stu Johnson, vice president of Lightyear Communications Inc.
(www.lightyearcom.com). “A data customer is worth more than a voice customer, and $100,000 worth of business can actually be worth $75,000 or a million [dollars], based on what kind of business it is. So a flat rate of a multiple applied to a sales base is difficult to determine since we don’t control the market.”

Lightyear, formerly Unidial, provided the first agent equity play in 1993, when it offered its agents a stake in the company at a buy-in price of $25,000.

After coming under fire for “franchising,” the company paid out a percentage of the holdings plus the original $25,000 in 1998, for a total of $8 million in paid equity. This is the only major equity payout to date. The carrier has not added any partners to this equity program since then, choosing to focus on other forms of compensation.

Eschewing the equity concept, Lightyear instead offers bonus programs. The ICP provides increased commissions on certain data products, which the company perceives as having a higher value in market. It also provides regular bonuses for increased business in certain product, service or geographic market segments.

Similarly, Trans National, in addition to its existing equity offering, gives new business bonuses based on new sales generated in a single month if sales exceed a minimum threshold of $3,000. The amount of the bonus ranges from 20 percent at $3,000 to 80 percent when sales are in excess of $10,000.

Taking Stock

Like bonuses, many agents express a preference for the tangible equity stock affords. The reality is that most publicly traded carriers are not offering equity.

“If the publicly traded companies began giving equity programs, there’d be a tremendously renewed interest in this because that’s a tangible value,” says Sheldon.

One company offering stock warrants, or
pre-IPO shares, based on threshold commitments is PaeTec Communications Inc. (www.paetec.com). Paetec is garnering praise and loyalty from many agents, who say the stock warrants are far more exciting than a privately held company plan based on an impending event.

“PaeTec will be a very aggressive company once they go public in the agent arena. I’m applauding their commitment to their equity style program,” says Sheldon. “If and when they finally do come out, we’re going to be even more excited about what was already a good program.”

Increasingly, agents will be looking to ICPs for a piece of the businesses they are helping to build in the form of stock.

“Businesses are looking towards ICPs and CLECs to provide their services, and those companies are financing their buildup by offering stock options as incentives,” says Greg Praske, president of Association Resource Group. “Again, sales agents are going out and building business while direct salespeople are receiving options, and so we’re saying once again, this is a good way for us to participate. We’ve looked to add that into our agreements because we need to be earning shares of stock based on production.”

TMC is reexamining its model with an eye toward the future. There’s a bigger play in becoming acquired by a public company or ICP, according to Marsch.

“Agents would then have the ability to be offered stock options and stock incentives,” Marsch explains. “And the greatest value is TMC being acquired by a ICP, because it allows our agents to move into the data and IP space and transition away from traditional switched voice.”

Tara Seals is agent channel
editor for PHONE+ magazine.