TNCI has teamed with the Agent Alliance buying consortium to revive the agent equity program first made popular in the late ‘90s as a way to give agents ownership in the telecommunications businesses they helped create.
Unlike many earlier efforts, including TNCI’s, which were tendered in part to take advantage of capital-rich dot-com market and went unfulfilled when the market tanked, the TNCI/Alliance Equity Plan has been designed in consultation with the investment community.
The TNCI/Alliance Equity Plan, which is open to all agents, enables partners to earn commissions, a windfall at the time of the transaction and evergreen commissions after the sale, said TNCI CEO Brian Twomey. Significantly, agents are not trading equity for reduced compensation before or after a sale. In addition, there is a timetable for payout to participating agents. It’s not exactly a date certain, but the plan calls for TNCI to be sold in 2011.
“Equity deals aren’t worth the paper they are written on if you can’t get to a transaction,” said Bill Power, CEO of the Agent Alliance, a post he took on earlier this year, in part, to spearhead creation of the agent equity plan. He said TNCI, in addition to being aligned with partner goals, has “the ability to get to a transaction.”
As proof, Twomey points to the successes of its parent company Trans National Group and its founder and chairman, Steven Belkin, a serial entrepreneur who may be best known as one of the owners of Atlanta Spirit LLC, the parent company of the Atlanta Hawks basketball team and the Atlanta Thrashers hockey team. Belkin founded his first company in 1974 and nearly 30 other companies, including TNCI, since then. Twomey said 14 of these were sold.
As added assurance of an eventual payout, the TNCI/Alliance Equity Plan also calls for TNCI to enter into a contract for the sale of the company, rather than only its assets.
Twomey said TNCI, as a reseller and facilities-based VoIP provider, expects to achieve EBITDA at near 15 percent. Conservatively, he expects an EBITDA valuation of 10X, or a multiple of 18X monthly revenue, at the time of a sale.
The revenue goal over the next two and a half years as a result of the program are north of $11 million, Power said. Combining that with the company’s existing revenue means the valuation at the time of the sale likely will be nearly $300 million dollars, Twomey said.
Agents can earn an equity share equal to as much as 7.5X to 9X of their monthly billing base at the time of a transaction, TNCI said. This equates to four to five years of commission.
To participate agents must meet a minimum threshold of $50,000 in billed monthly revenue by the end of 2010. “That’s 30 months to get them there,” Power said.
The program is open to existing TNCI agents, who need to sign a concurrence memo to take advantage of the terms that the Agent Alliance has negotiated with TNCI. Existing billings count toward meeting the threshold for participation, and Twomey said many of TNCI’s 175 agents already would qualify.
Prospective agents can become part of the program in two ways. They can contract with TNCI directly and sign the concurrence memo. Or, they can align under one of the Agent Alliance members. The latter arrangement is akin to being a subagent, but the support structure for the agent extends beyond the Agent Alliance member to include the Agent Alliance and TNCI, said Power.
Subagents of Agent Alliance members also may participate in the agent equity plan by signing an addendum to their contract.
Information on the program is available at www.agentequityplan.com. TNCI and the Agent Alliance also will sponsor a series of informational webinars with dates to be announced.
Power said the Agent Alliance hopes the partnership with TNCI is a springboard for similar programs with other providers and that it will change the dynamics of the relationship between carriers and agents.
The Agent Alliance spent considerable time identifying a provider partner for this program, he said. Its due diligence lead it to TNCI. The Agent Alliance signed a contract with TNCI in spring 2007. Power said the parties have spent the last year “perfecting the relationship and developing a level of trust.”
The TNCI/Alliance Equity Plan replaces the previous TNCI equity program rolled out in April 1999. The program has some similarities, such as the inclusion of the evergreen clause ensuring agents will continue to receive their residual commissions following the sale of the company.
The old program required a minimum $60,000 monthly revenue commitment in exchange for up to 15 percent equity. However, each quarter, additional points were added based on incremental revenue, starting at 1 percent for $15,000 earned per quarter and a half percent for each additional $5,000 per quarter.
Like other programs released around that time, the TNCI equity program did not take off because agents found it difficult to meet the revenue requirements when the telecom market went bust and sales became sluggish, Twomey said. In addition, he said they had little incentive to join when TNCI’s exit plan was unlikely in light of declining market conditions. “The whole opportunity for any of us to sell really dried up,” he said. “I would be surprised to see us back in the days of the dot-com era. There is a different wisdom that’s required today to be able to transact at a good valuation level.”
While the new program retains some of the features of the old one, Twomey said “those by themselves don’t get the transaction done today.” The difference between then and now is “huge,” he said, but primarily in the planning — driving the value of the organization in terms of the company’s service mix, its financial position and its relationships with customers and the sales channel. TNCI, he said, has spent the past two years working to understand the levers that impact valuation and to impact those in a positive way in preparation for a transaction. “We have aligned with where we need to be,” he said.
The other difference, he said, is bringing in the Agent Alliance as a partner. “Going back to 1999, I learned that you can’t do it yourself,” Twomey said. He noted that the Agent Alliance members heavily influenced the final structure of the program, but they also impact TNCI’s valuation by virtue of their strategic sales power. “By having such a strategic relationship and a measurable percentage of control of the channel when working with that group, that could take you from seven or eight to nine or 10 times the EBITDA number,” he said.
One of the earliest known agent equity programs was sponsored by Unidial, now Lightyear. In summer 2001, Lightyear paid an equity disbursement in excess of $6 million to each of its “founding agents” after a merger with VarTec Telecom Inc. Those “founding agents” enrolled in the original Unidial equity program at a fee of $25,000 in 2004.
In spring 2003, switchless reseller Telcorp Ltd. issued agent equity payments after its acquisition by NUI Telecom, the telecom unit of energy company NUI Corp. Payouts ranged from $25,000 to $700,000, or 12.5 percent to 65 percent of an agents contribution to the company’s revenue. Interestingly, the Telcorp equity program was begun in 1999 with the help of agents Gene Foster and Daryl Heller, who are today members of the Agent Alliance.
More recently, the acquisition of CLEC Mpower Communications Corp. by rival TelePacific Communications in summer 2006 triggered more than $500,000 in payouts to Mpower agents that earned warrants in the company. Mpower issued 1,054,576 warrants to agents since the program began in October 2003.
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