Be Accountable, Part II — continued

The corporation
Millitzer says that many ISPs founded during the boom years of 1997, 1998, and 1999 were told by their lawyers and accountants that they should be a C Corporation so they could do IPOs. An IPO may not seem too likely now. "If you're a C Corp and you think you're going to hold onto your company for several years, you can transition to an S Corp. You'll need to ask your accountant if it's worthwhile."

Audited financials
Audited financial statements are what the big companies have, and if you're small, you don't need them, because they're expensive and time consuming.

"Any company doing $2.5 million to $3 million per year in revenues should consider doing audited financials," says Millitzer. "It costs about $10,000 per year. If you have audited financials then when you go sell your company and you give someone the audited financials, they don't ask if they're good financials, they know it. An acquirer may see it as another expense line that will be easy to get rid of when the business is acquired."

If you sell to a public company, you'll need to do more work than usual. "They need two years' worth of audited financials. I have sold to public companies. When I can lay down audited financials on the table, the transactions are done fast. The accountant doesn't have to be a big four accounting firm; it can be a large regional firm with a solid reputation."

Public companies are worth working with. "There's nothing like a public company with a fat wallet," says Millitzer.

Audited financials can have other benefits too. "A good accountant's going to help you in the long run, anyway. For example, when you first produce audited financials, the accountant may find some tax savings for you."

Regular financials
Even if an ISP doesn't get audited financial statement, the business requires regular examination. "Sometimes, people do their financials once a year. At the very least, you need to be able to generate a quarterly statement within 45 days of the end of the quarter."

But your customers are paying every month, so a monthly statement makes sense. "This is a nickel and dime business," says Millitzer. "ISPs deal with x thousand transactions each month. If the PRIs seem to have cost more in one month, and billing goes up 8 cents per customer, you could have problem."

Billing problems with the upstream are just part of the business, Millitzer says. "I don't recall any ISP that had a dispute amicably resolved with the provider. That's why you need to track it every month."

He cites an example. "I had a client in Texas. He was paying state sales tax on his lines, and expensing that as cost of goods sold. But the lines were tax free because, in Texas, you don't pay taxes on what you resell. We got him rebates of about $80,000, but he had to re-file several years' tax returns. If there's an ISP reading this, based in Texas, they might want to look into it for their own business."

Billing
Since it's a nickel and dime business, the billing operation needs to function well. "If you cannot track bills paid, you have a problem. You need to know how many customers you have added and deleted each day and each week. The data should be on a computer."

ISP valuations are based on an ISP's number of subscribers. "That's the most important report in the process of buying, selling, or getting an investor. I want to know how many customers the ISP has. I also want to know why the company lost a customer. The business is incremental. If you have PRIs and you're only running at 70 percent of optimum capacity, then each $18 per month of revenue lost comes right out of profit. Add two $18 per month customers, and you've got a nice dinner with your wife."

A buyer needs the data. "If they're reluctant to part with that information, I understand that. But if somebody tells me it'll take a week to produce a report of customers by type, such as standard dialup, prepaid quarterly dialup, prepaid annual dialup, and so on (it should be 20 or 30 lines long), because it's something they never looked at, that's not good."

In fact, there's a Millitzer pet peeve here. "If I ask for customer by rate type, and the report is 800 lines long, I'm upset. It means everybody's made a deal with the ISP owner over the past 7 years. That makes business management tougher. If you've got some customers at $17.93 per month and some at $17.95 per month and some at $17.99 per month, wouldn't it be easier to have them all at $17.95? With DSL, you can find that customers have every imaginable permutation of a speed package, none of which the ISP can guarantee anyway. Just give people only five choices."

Complex systems harm the bottom line. "It makes it hard for the employees, because they don't know what the caller is paying, and it makes it tough to generate an average rate for the business. It also makes it tougher for prospective customers. Time is money. Shopping is time. You have to make pricing simple."

—End

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