Q: I am in the process of purchasing some teleservice accounts billed on a twenty-eight-day billing schedule. The seller wants to go back thirteen billing cycles, or one year, to average out the monthly billing, but I only want to go back four months since he has lost some accounts and the monthly average will be lower. Can you shed some light on how to resolve this?
A: This comes up frequently with more and more services going to a twenty-eight-day billing schedule. The seller is trying to get as much for his business as possible using a higher billing average, while you are trying to base the offer on what the billing is right now – not one year ago. To get the average monthly billing, consider that $10,000 billed every twenty-eight days, thirteen times a year, results in $130,000 in annual billing. Divide that by twelve months in a year, and the result is $10,833 per month.
To determine a purchase price based on the average of four billing cycles on a twenty-eight-day billing schedule, use thirteen times the average of the last four billings, which in this case would be $10,000 x 13 = $130,000. Divide that by twelve to get $10,833.
However, if the billing has gone down to an average of $9,500 for the past four months, then it would look like this: 13 x $9,500 average per billing for the past four billing cycles = $123,500 per year, divided by 12 = $10,291 billing per month.
Using this methodology, the purchase price is then determined by applying the agreed upon as the multiple. It’s simple, but it works!