Customer Service, Contracts and Equity

Posted: 01/1999

Customer Service, Contracts and Equity
An Agent Roundtable
–Part One

PHONE+ recently hosted an editorial roundtable with several members of the now-infamous
20 Group, a band of independent agents that frequently assembles to share experiences and
insights on the business of selling telecommunications services independently.

As every agent manager knows, independent agents won’t hesitate to speak their mind.
This dialogue was no different, but some of it was not for attribution. In those
instances, we utilized a fictitious character named "Fat Pipe." The discourse
was so compelling that we’ve decided to publish it all–in three parts. This first
installment concerns agent equity programs. Next month, we’ll pick up with our esteemed
panelists as they discuss customer service, and in March, we’ll hear what they have to say
about contracts.

Roundtable Participants

Bob Titsch Jr.: Companies increasingly are introducing equity programs to
attract agents like you, the idea being, everybody exits and everybody is happy. So tell
me what you think about this wave of equity programs. What do you like about them? What do
you dislike?

Michael Parizanski: We all have to be careful that somebody’s not just putting a
carrot in front of us. Making a sale at the multiples many of these companies are
projecting requires a very talented organization. Anybody can put projections or analysis
on paper, but we have to be careful as far as what we’re sucked into. I think there’s some
good programs out there, but we need to be extremely careful.

Ladd Richland: My concern with equity programs is that it goes against our
general business model, which is to take care of our customers. And most resellers, in my
experience, do not do a good job with our customers. As a result, we’ve migrated to the
second-tier carriers. If we were to look at an equity play, we would be compromising the
service that we provide to our customer. So if we were to consider an equity program, the
company would have to prove that it could provide the level of customer service that we
require.

Jim Butler: We share Ladd’s concerns, so we partnered with a provider that’s
using a first-tier carrier. That gives us a certain level of security, and it gives our
customers more reliability and brand recognition. And we’ve done well with it so far. From
my perspective, we can’t turn a blind eye to equity. We simply need to partner with people
who have good relationships with their underlying carriers and who are savvy enough to
understand where this market is going and how to exit.

Richland: Maybe we’re putting our heads in the sand and ignoring the fact that
rates are in free fall right now. The multiples that companies are offering and getting
right now may not be there in two years. We all need to be very careful about the promises
that are being made.

Greg Praske: I think we’re always faced with the issue of whether we’ll be
compromised if we work with a particular underlying provider–whether equity is involved
or not. We can still work in the best interests of our customers, regardless of where we
put them.

Having said that, we need to be cautious, especially if we’re going to forego current
commission for a potential payoff down the line. I don’t know that that’s a reasonable
expectation on the carrier’s part.

Ben Humphries: We’re not as interested in the model that says, "We’re going
to trigger an event in two years." We’re looking for an equity partnership with a
company that will continue to thrive two years from now if it doesn’t get acquired. If the
equity play comes in two years, that’s great. If it doesn’t, we’ll be fine, as long as
we’re partnered with a company that adapts to market changes–I’m thinking of IP [Internet
protocol] telephony, ATM [asynchronous transfer mode] and local services–and continues to
build value until it’s attractive enough to be bought.

Gene Foster: I have a hard time understanding how there is so much research
looking into an equity provider, but there’s not the same amount of research going into a
traditional agent contract. I guess we’re all guilty of this. Some of us have been talking
about equity for the last two or three years. But in the last six months, I made a
conscious decision to choose an equity provider and I’ve got almost $300,000 of
equity-invested revenue that’s worth nearly $2 million today. That $300,000 with other
carriers wouldn’t be worth anything other than the relationship I have with the
customer–and I don’t really own that. So I think it’s important to look at the first-tier
carriers, the second-, third- and fourth-tier carriers, and look at their offerings. But
understand that we’re all businesspeople. There’s a risk factor here. If we’re going to
concentrate on a first- or second-tier carrier, we’re not going to be able to realize or
maximize as large of a reward. They don’t need us as bad as third- or fourth-tier carriers
do.

So we take a much higher risk for potentially a higher payout. It’s a trust issue, just
as we’ve all trusted in the agreements that we’ve signed with all of the different
carriers that we sell for. A lot of us have been burned. A lot of us have been incredibly
successful. I think all of us have had our share of negative experiences. We just need to
jump out there instead of talking about it, and start putting a little bit of our business
into them. And then we can sit around the table and talk about facts. Who is providing
what? Who’s servicing the accounts? How’s the management? Right now, we’re really grabbing
at straws.

Bill Power: As entrepreneurs, the great majority of our net worth is tied up in
our company, which is a very liquid asset. Having an on going commission stream that
provides operating income is very important. An equity opportunity that, to a large
extent, is out of our control in terms of when the payoff will come and how much it will
be worth, is very important. But I think there’s a third leg. Until recently, Greg
[Praske] and I were guilty of ignoring this: We should all be taking money out of the
company and putting it somewhere else, so that some of our net worth is a little more
protected and not completely tied up in our company.

I’m not comfortable with betting on the outcome and hoping that whomever the carrier is
will make me a wealthy man somewhere down the road. We all do ourselves a disservice if we
just look at that as the end game. We’ve got to be making meaningful commissions. In my
opinion, we need to be taking money out of our companies and sheltering it elsewhere, and
we need to get involved with equity opportunities.

Foster: That goes back to investigating the equity contracts and looking into
the evergreen clause. Of the carriers offering equity positions today, I think very few
have an evergreen clause, which means you will receive the same commission as you are paid
today over a period of 24 months, for example. That allows for us, as agents, to
transition the customer base over to the new carrier. It also increases the value of the
company that is acquired, due to the fact that the attrition is limited. It’s widely known
that attrition rates are considerably higher when the agent is paid off and exits
entirely.

There’s a lot of talk out there from vendors, but not much contractual language that
specifically protects the agent and guarantees a continuing commission stream.

Parizanski: But you can negotiate and get a clause inserted into the contract.

Foster: Sure, you can do that with any contract. The point is there aren’t many
guarantees in the standard contracts that are out there.

Humphries: We’re in the process of negotiating an equity deal right now, and I
would be interested to know what everyone is seeing out there in terms of commissions.

Praske: Obviously, you have to evaluate the offer to the customer and how
compelling it is, the commission, the rate, the equity or multiple and the business plan
of the provider. It could be a high percentage of a bad business plan. It could be a low
commission on a very compelling offer for a customer. It’s a pretty involved matrix.

Humphries: I would agree with that, but I think the way it’s been positioned in
the market so far is as a percentage of base. I’d like to know what different people are
talking about in this regard. I think TMC’s program goes up to 70 percent. (Editor’s
note: Agent equity programs generally stipulate that the agent gets the same sales
multiple as the underlying carrier, but for a percentage of his monthly base. The
percentage usually is scaled by volume; the more an agent bills, the higher the
percentage. For example, if a carrier with an equity program is acquired for seven times
its monthly sales revenue, an agent billing $300,000 a month might get the same multiple,
but for 40 percent of his base, i.e. $300,000 x 7 x 40 percent, or $840,000.)

Foster: I don’t see how a provider could ever go beyond paying us 70 percent. If
anybody has ever looked at the paperwork that determines the valuation of a company that
is going to be acquired, there are a lot of parameters that are examined to determine what
the multiple is. Of course, the principals of the carrier that’s being acquired are out to
get as much as they possibly can and give away as little as they possibly can.

Obviously, all of these programs are structured differently. As new programs are rolled
out, they will be structured differently. But we will continue to see a lot of smoke and
mirrors as we do with rates. As companies introduce equity programs, we’ll see more
programs trying to compete with that 70 percent factor, or increase the commission
percentage and/or the payoff on the back end.

There are still a lot of questions that we as agents need to ask these equity
providers. One real important question that everybody seems to overlook is just who the
company’s underlying carrier is. And what is the company’s monthly or annual commitment to
that underlying carrier. Everybody that’s offering an agent program out there, for the
most part, is far over-committed, which is why they’re giving away rates just to meet
their commitments. Most all of their commitments are "take or pays," meaning
that if they don’t make their minimum, they have to pay the difference.

Richland: If a reseller or carrier doesn’t make its commitment, will the
underlying carrier take over that customer base?

Foster: The underlying carrier does not really want to take over that base. It
has no relationship with the customers. Typically, the carrier will offer a payment plan,
like any creditor would. I’ve seen them extend payments as far out as 18 months.

Ronald Bohm: When you’re dealing with people whose objective is to exit the
business as soon as they can with the most money they can, you’re not necessarily dealing
with people who are interested in your base and paying you commission on it. In fact, they
may be interested in avoiding paying you commission as a way of maximizing their own asset
value.

Foster: That’s why we really need to do our homework, whether we’re looking at a
standard agent deal or an equity play.

Titsch:Is it conceivable that folks like you and others could collectively
champion a particular program and essentially build it from the bottom up? (A
resounding "yes" from everyone)

Power: That was one of the purposes of us forming this group: to band our buying
power together and go after a big deal.