You DON'T Want to Buy This $15M Healthcare Call Center Business

0:00Welcome to Acquisitions Anonymous. Today's episode is a cool deal that we did from a generational Equity is the name of the broker. And I think you'll enjoy what we figured out with it. It's a super fast growing, super highly profitable, but questionable call center business located in the Midwest. So dig in with us and the whole thing. I also gave a rant about my experience with call centers, which I felt like couldn't be missed. It happens a bit later on. And then stick around to the end. We will tell you what we thought of the deal. And you can figure out if you want to call in on this one or not.

0:32All right. Here's the episode. We'll start Acquisitions Anonymous. Hello, another episode of Acquisitions Anonymous. We don't have 100 % beers anymore. I'm thumbs downing on just the plus inventory. Hey everyone, it's Bill. And I want to tell you about maybe the most exciting sponsor we've had in a long time on the pod. It's called CapitalPad. And it is the thing that I wish existed when I started my journey of operating and investing in small businesses. So CapitalPad Capital Pad is a marketplace for acquisition entrepreneurs, that is people who want to buy a business and need capital, to list their deals and solicit capital from other people who want to invest in acquisition deals.

1:16So if you want to back somebody buying a small business, Capital Pad is the place to do it. And if you want to buy a business and need capital, you can go on Capital Pad to be introduced to investors. So the really great thing too from the investor side is that CapitalPad takes care of all of the details that can get hairy with small business acquisitions. They handle standardized terms, standardized governance, standardized distributions all up front in black and white. Basically, CapitalPad professionalizes investing in small businesses and the returns can be really, really good. I'm so stoked they exist.

1:53It's founded by my friend Travis, who is a phenomenal entrepreneur in his own right. so if this sounds like something that's appealing to you if you want to buy a small business and need capital or if you want to invest in small businesses go check out capitalpad.com and tell them that acquisitions anonymous sent you mills happy friday yes sir uh did you watch my most recent youtube video about quiznos no i didn't i'm sorry i highly recommend checking out i did some I did some live reporting, which meant I went over and ate a sandwich at Quiznos. You were a secret shopper? I recorded myself eating.

2:29Yeah. You're like, the unit economics of Quiznos. Well, there's only one Quiznos left in all of San Antonio, which kind of surprised me, down from there being thousands of stores. But it's basically a case study in how a franchisor can just totally take a great concept and kill themselves. What happened? Did they overregulate the franchisees? There was kind of a combination of things. Number one is from the beginning, they set up Quiznos to not make as much money on other typical ways a franchisor makes money, like owning the land like a McDonald's does. Instead, what they did was they created a captive food service company and forced everybody to use that one.

3:17Yeah. So a typical Quiznos would have 40 % of its basically food cogs, whereas a Subway would have 30%. And in a super low margin thing, like a Quiznos or a salmon shop, 10 % matters a ton. So they did that. And then number two, the franchisor went out and overpopulated stores. They just would build franchises right next to franchises. Yeah, cannibalize their... Number three, which is usually the thing that kills these businesses. After they alienated all the franchisees and they started leaving and started causing them not to make money for these reasons, they put a bunch of debt on the business and then eventually they couldn't keep up.

4:06And as more and more of the franchisees started to close, then eventually there's not enough money to do any marketing. And most people are like you and me, which is like, yeah, what happened to Quiznos? Well, the reason you think that is because they don't advertise anymore because they don't have scale. Or you know what? You could invest 12 minutes and watch your friend's video. I will. I promise I will at this point. I'm committed now. I'm hooked. You have a Quiznos, Heather? I have a Quiznos trivia. Just because what stuck out in my mind many years ago when they were kind of in their growth mode, they actually bought, there are several non-bank SBA licenses allow you to make SBA loans and not be a depository bank.

4:43And they bought one and they were going to use it like just to drive their own franchisee loans it was kind of crazy you know that's an interesting concept yeah like we'll be the bank to open more locations it didn't work you have some amazing fresh flowers in the background did you have like a birthday or an anniversary i did have a birthday and these are from these are from what will now be uh known as our favorite lender. Amazing. Well, what birthday was it for you? I mean, you're what, 27, 28 years old? Yes, I was going to say, are you really asking this question? I was like, oh gosh, Michael.

5:21How dare you? Yes, I am 27. What day was it, Heather? It was Monday. Oh, happy birthday. Thank you, thank you. My wife had a great line the other day. She's 52, 53. Getting ready to turn 53. You shouldn't be telling us. She goes, I said something. She goes, I'm a 53-year-old woman. I don't give a crap. Yes, this is great. There is a funny video going around, and it's like the We Don't Care Anymore club. And it's super funny. I get it. Well, since we're talking about my wife's age, I brought a deal today that I came across at my desk. It's from our favorite brokerage, DealForce by Generational Group.

6:07uh mills i know you you're there you see that uh they just got the naming rights to a professional sports stadium maybe tampa i think is where they're based um it's like called the generational equity you know arena or something like that so m &a m &a world must be going great for them uh there is a fireworks company that has an arena naming thing really In Youngstown, Ohio. It's the Phantom Fireworks is there. They're the biggest business in Youngstown, I think. Those are expensive deals. Wow. Well, this is minor league hockey in Youngstown. All right. Maybe not. Price point is a little lower than NFL.

6:49That's a discount version. So Mills and I like this when we're talking about it in the chat for a couple of reasons, Heather. It's not something we've done before, and it's actually a pretty big business. So let me pitch you guys on this deal from Generational Equity. And it's a healthcare contact and enrollment center. And the company is a leading healthcare contact center that specializes in member and patient engagement for both the payee and provider markets. The company assists clients with helping their members navigate complex health plan enrollments as well as other services that include invoicing, premium payment processing services, and member-centric call center solutions.

7:28And it's located in the Midwestern U.S. EBITDA is$4 million estimate this year, and revenue is$15 million. So they are doing pretty good. That's what, like 26%, something like that? bill gpt is not here today usually he's got the calculator out and uh so hi here's the investment appeal high earnings growth ebit has consistently increased over the last several years and expected to increase from 3.2 million to 2024 to 4 million this year historical sales have grown from 5.8 million in 2022 to nearly triple 14 million dollars in 2024 representing a compound annual growth rate of 56 % per year. They have significant barrier to entry with high trust and SOC type 2 certifications that allows the company to meet a wider range of customer and prospect security requirements.

8:21The high trust certification and SOC type 2 attestation processes provide a strong third-party validation and are required for major healthcare systems and insurance groups. They have blue chip healthcare clients and the customer base includes major insurance carriers and hospital systems. They have strong networking capital. As of December 31st, 2024, the current assets totaled$4.1 million and current liabilities of$1.2 million, representing a networking capital surplus of$2.9 million. And it is listed by Lisa Lippey-Smith, who is the director of M &A Marketing for Generational. Michael, if you click on that See More, they usually have a good one-page PDF too.

9:03Yeah, I'll pull that up. So do you understand what this does? Mills, can you like gist it for us? I'm trying to figure it out. So it says that they are a contact center that specializes in member and patient engagement, but it's for the payer and the provider. So I'm thinking that's Blue Cross Blue Shield or Aetna or, you know, any of the major unum. Those are the payers. The provider is the health care system, the doctor's office, the hospital. and it's member and patient engagement. They say they help them navigate complex health plan enrollments as well as other services, invoicing, premium, premium.

9:50So I'm thinking that this is, I don't know if it's on the group health side or the individual health side, but if I am looking for insurance, this is going to help me go from not being a customer to being a customer. I think this is an enrollment. that's the only kind of tagline that they mention. But who's paying them? You know, that's where I'm confused. Like I was actually going to go with, they work, they do this for big employers and it's like an outsource, like a BPO. But, you know, maybe I'm wrong about that. This may help. I just pulled up the one pager per your suggestion. Generational does do nice PDFs.

10:29I'll get to them there. The 92 % of their business is the insurance companies and 8 % is hospitals. So the providers are not like doctor's offices. These are like big. Blue Cross. It sounds like what they're doing is specialized contact and call center for these insurance companies and hospitals. Okay. So they're an EPO to the insurance companies is I guess how I would package it up. Yeah. Yeah. And they're really good at getting people from first phone call, kind of first outreach, maybe it's on the website or maybe it's through like a referral source and getting them through the, you know, the phone call and the enrollment process.

11:13You know, payment processing services is also a big part of that, which they mention. But yes, I mean, this is a volume game. It's probably a very, very, very low cost per kind of task, so to speak. Blue Cross Blue Shield pays us$1.87 for every phone call we receive and we get to this step. There's probably some kind of hurdles, right? They say they have 160 non-union employees. The big thing to me about this that could get lost in the weeds is it's a call center. Call centers are notorious for nosebleed levels of employee churn. So the attrition rate, I knew somebody who owned a healthcare-related call center business, actually in Texas, Michael, in the FW area.

12:04And I think the industry average attrition for call centers is like high 80s to low 90s per year. It's unbelievable. Right. And I think the growth probably represents a pretty big customer concentration. That's how you get 56 % growth. both you pick up a big new insurance company or two, but it's probably one or two big companies. And overall, this has probably got just a few clients in that blue part of the pie chart that we're looking at here that shows most of the revenue coming from insurance companies. It's probably not very many. So you've got concentration risk. They're big companies, but you can't have that many clients when you're doing something like this.

12:50Well, and there are certain industries like this, mainly automotive manufacturing and aerospace manufacturing, where if you sell to a company in that market, there's only a couple customers, right? In this case too, there's only so many insurance carriers on the health insurance side left. And so it's not like you can just go to, you know, any Joe Schmo on the corner. There's like less than 10 probably You can't diversify. And then that 56 % growth can turn into 56 % shrinking. If you lose that one customer, they're not happy. So that's the downside of it. And you have to be able to scale up fast for those big wins that you might get.

13:31So I'm sure that they did that, which is impressive. So because of this HIPAA, HITRUST, SOC 2, in theory, you don't have to worry about somebody coming in and undercutting you with an Indian or a South American call center. Is that how you guys see it? I think that that still could happen, but I think it is some barrier to entry. I just looked up the HITRUST certification. I think there are some different levels to it. I think it's probably more of an indication, not that they have something that is like truly proprietary and unique, but they probably have paid or enrolled in some type of back end software that makes it so that, you know, patient information isn't, you know, disseminated unnecessarily that like you don't have, you know, 10 ,000 people's social security numbers that can get downloaded to a flash drive, you know, in your call center.

14:28and walk out the door. Yeah, to your point, Heather, if we think that the dynamic here is a handful of big clients dumping a lot of business on these guys very quickly, that's not inspiring. It's scary. It's kind of scary too, operationally speaking, because you just doubled the size, potentially, maybe not doubled, but you just massively increased the size of your call center, your people. So that whole turnover dynamic is probably still... playing out right now. And it's not an easy business to run, is my opinion. Do we think these guys pay their people per call, so mostly hourly, or do we think they are motivated to maximize enrollments?

15:12Like this company's employees? Yeah. Not how does the carrier pay this company, but how does this company pay their employees? Either or both. How does the profit chain kind of flow through from, you know, from customer to the call center owner, who would be the business owner here, to the employee? Like, is there, first and foremost, do we think that the insurance companies are paying incentive fees based on success rates for call-in and call completion? And then do we think that the owner of this call center is turning around and paying their employees based on incentive kind of payments as well?

15:51You would hope so. You would hope this can go, right? Yeah, the only hints I have is they say non-union employees. So it must mean that competitors do have unionization somewhere. I don't know if they would be allowed to pay those kinds of incentives. You know, this is highly regulated. So it could be that there are rules that prevent them from doing that. I would kind of expect that there would be, actually. Hey, everybody. If you've listened to the show, you've probably heard us talk about franchises. While franchises can be a great path to business ownership for the right person, like there's a lot of pitfalls.

16:23And it's important to be really careful as there are certainly good franchises to be in and bad franchises that you don't want to be in. Conor Gross is a friend of the pod and a resident expert on franchises. And Conor not only owns and operates his portfolio of multiple franchises, but he's also a franchise consultant and helps others work through while picking the right franchise for them. So as he's sponsoring today's episode, everyone should totally click in the show notes below to join Conor's newsletter and attend one of his Gateway to Franchise Ownership workshops. If you're ready to move and move quickly, schedule a call with Connor and his team today.

16:54The elephant in the room on this to me is that most of the time the insurance company knows what parts of the value chain are worth owning and what parts are not worth owning. So I've got a friend who is really high up in Blue Cross Blue Shield who handles their M &A arm and they own a ton of businesses that aren't blue related is the way they talk about it. And they derive revenue from all these other sources that are similar in the sense that they're really good at like claims processing and pushing paper and, you know, compliance driven tasks, but they own a ton of things that aren't health insurance related and they insource things that are worth owning.

17:37And then they, you know, prefer to delegate things that aren't worth owning. It makes me wonder if all the insurance companies don't own this task and self-perform it, is it more commoditized? The margins don't look commoditized, but is it one of those things that maybe there's very low switching costs for this versus other parts of the service chain? I have a question. Can AI make this more efficient? Oh my gosh, Heather. I hadn't thought about that yet. That's the billion dollar question for every deal right now, right? Mm-hmm. But this seems like one where you could, you know, like you could actually, AI agents, you know, could you do a blend of human and AI to handle some of these cases that they handle?

18:23Aren't you a little surprised that nowhere in this teaser does it say anything about AI? Yeah. People over-ascribe AI involvement in things now, and this doesn't have any mention of it. Yeah. Speaking of call centers, can I go on a call center rant for 45 seconds? Oh, yeah. So, you know, we switched to Google Fiber here at the Girdley House, and I called Spectrum and said, hey, we don't need our cable modem anymore. They're like, well, hey, if you stay, well, by the way, we've been overcharging you for the past year. We raised your rate, but hey, don't worry about that. If you were to renew at this even better deal, it would have been less than half the cost.

18:59Would you like to stay? And I'm like, wait a second. So you want me to be a loyal customer after you've been screwing me for the past year by overcharging me? That's what you're telling me? that's what was going on in my head. The lady was very sweet. And I said, no, thank you. We're already happy with Google Fiber. See you later. And that was it. But the one interesting thing that, reflecting on it, was how they clearly were, the retention and churn questions, they had written them in a way that they wanted to get specific answers. They wanted me to tell them the reason I was leaving was because the service went down all the time and they weren't very helpful.

19:34Like that is what, and they were plenty helpful. Just the service went down all the time. but clearly they got the answer they wanted by phrasing the questions the way they wanted to be it was it was very enlightening which i think goes back to my point about attrition right is 99 of the time when somebody's calling your call center they're already you're already starting off on the wrong foot they don't call just to say hey by the way spectrum or blue cross blue shield or etnam hey you're doing a great job i just wanted to let you know it's you took some of my money and I want it back and I disagree with you and I'm ready to walk out the door.

20:08Like the employee, right? In this case, these 160 employees, they probably get yelled at like 90 % of the time. You know? And these are health issues. So people are very upset, very emotional usually. Yeah. I went to the pharmacy and, you know, my medicine isn't$20. It's, you know, 220 and I I can't afford that. Like, there's a reason why, you know, there's layers of separation between the patient and the provider. And this is just one, you know, aspect of that. Which is just like, yeah, it's like the DMV. It's basically how it feels. You are going to have a better time in the DMV than you will calling these guys.

20:46Yeah. But there is, I mean, a tremendous opportunity, assuming that there is some kind of sticky relationship, whether it's contractual, whether it's high switching costs, if there's some kind of tether between you and the insurance company, even if it's not, you're not going to have a 15 year contract for something like this. There's probably performance requirements and they can cancel on their side if you're not keeping up. But my best case scenario is if you, if you sign the NDA on this and you have a conversation with the owner, the seller, my best case scenario would be they have an incredibly sophisticated onboarding workflow for new employees where you can go from not knowing anything about how to answer the phone in a call center to being a self-sufficient employee who can handle the majority of the cases in like a very, very small amount of time.

21:45Yeah. That would be an amazing, like that would be a great green flag on this to say, okay, they can ramp up employees, you know, when needed, when call volume, you know, starts to become overwhelming. Yeah. Or they had already gone down the path of starting to build some custom AI and systems to give themselves a competitive advantage. Because I mean, I've seen businesses like this when they're a big service provider for the customers like these insurance companies, at some point, they're going to put this contract out for bid and you're going to be up against other folks. And you need to have, hopefully, table stakes is that you've been doing a good job the past few years, but also be able to have built up enough efficiencies and effectiveness in what you're doing that the other folks can't compete anymore.

22:30But I'm not seeing that with this. I'm just seeing they've been like, hey, we'll hire more bodies, which is not the right answer. I wanted to mention something, the boring part of this teaser, working capital. But it's exciting to me. So they brag about$2.9 million of net working capital. But what that tells me, because they've got a lot of assets, guess what that is? That's accounts receivable and a long cash conversion cycle, which is very expensive all the time to run this business. So they're pointing it out as a plus, but I'm kind of saying, eh, not too excited about that because your$4 million of EBITDA, you've got a whole bunch of cash,$2.9 million tied up all the time in a long cash conversion cycle because these insurance companies, you think they don't pay your claims fast.

23:18Guess what? They don't pay their service providers fast either. They have a year's worth of EBITDA tied up in AR. Yeah. Yeah. This is a super long cash cycle. There is a very decent chance they have two or three people whose job is every month just to fight with the insurance companies to get paid as a vendor. Yeah, could be. And if there's any complexity, like you mentioned, to how they get paid, like their incentives or something, I have a feeling there's something there, right? It's not just straightforward, oh, this is the straightforward invoice for our services. There's some kind of metric in there that is performance-based.

23:57And there you have it. They're fighting it out every month with the numbers and, you know, justifying their invoice or whatever. That's probably one of the not only running a big call center that is, you know, compliance oriented, but you're also this is a this is another hard part of this business is managing your working capital. They don't say anything about it, but I wonder if this is a kind of a remote workforce or a captive kind of in office workforce. Of course, that dynamic, especially for something like this, we have a vendor, I'm not going to say their name, where it doesn't matter what time of day we call, but we have to leave our service rep a message and then they call us back.

24:43And it's because I know that the service rep works from home and I hear their kids and their dog in the background. And I can't get them at the drop of a hat because they're not sitting at their desk. They're sitting at their kitchen table, which is fine. But it would impact the ability to kind of scale up and scale down your infrastructure. Like 160 people, if they're all in the office, you have to have a desk for them. You have to have phone lines. You have to have a computer. You have to have a break room. You have to have a, like, you have a lease, you know? And if you need to go from 160 to 320, you probably have to double the amount of square footage that you lease.

25:17And those are three to five-year leases, maybe seven-year leases, depending on your market. So it's just a very, it would tell you a lot about how this business functions. This ultimately smells to me like one of those businesses I would love to have started. I'd be happy to own it. And I am not as enthused about buying it as other stuff. Yeah. I don't know this space. And the skeptic in me is like, well, they're telling me about the high trust and SOC 2 certifications. But what certifications do they not have? And I don't know that I like I need or it would make me more valuable as an operating entity in dealing with the insurance companies.

25:59My mind immediately goes to I think this business would be inherently a lot more valuable if they were doing something that that was harder to replace through automation and AI. So like if if it was the next kind of step in the chain of like telehealth and it's a call center that helps get you connected with like a nurse to do telemed, I would like that better. But I think the insurance company owns that. I don't think they delegate it out to my point earlier. Yeah. And I think that your point about whether you're running an in-person call center or not, I'm leaning towards it's probably in person because of the compliance issues.

26:38And or, you know, maybe it's not. And to get that other certification that would make you more valuable, that's what it would take. Yeah. And that's a very expensive move. So that's a really important question. You know, where is the staff and why? How much do you think these guys are expecting to get for this business? Yeah. 25 million yeah I don't think they get it no I think that there's probably also a lot of consolidation you know that drives that multiple and that value expectation higher and there's some reason this one hasn't been consolidated and that's why it's on this type of you know this type of M &A platform would be good for like a super searcher I could see that happening somebody backed by an FO I mean you're not gonna it's too big for SBA lenders are going to be worried about the growth and the lack of hard assets to lend against.

27:35And the cash conversion cycle is yucky based on what we're seeing. You would need a partner with a ton of insurance and health compliance expertise to help you navigate this because otherwise you're going to be the sucker at the table. So yeah, it feels like a perfect, like some of these like super searchers that we see that are tied into a single family office, maybe made their money from medical or healthcare or dealing, you know, any sort of ends of dealing with this sort of world and understand it super well. And, you know, would be okay with, hey, more cash is going to be acquired as this thing grows to keep up with the capital requirements.