ARM M&A: What Do Business Buyers Ask Themselves?

Before a buyer chooses a business to acquire, especially in accounts receivable management (ARM), they must determine if the target seller meets certain criteria. Regardless of market conditions, interest rates, client matters, or the countless other value influencers of a particular business, the following are eight questions that a professional buyer will almost always ask when they look into ARM M&A.

How does the business distinguish itself in the industry that it services?

When it comes to ARM M&A, for example, there are thousands of companies that, on the surface, provide collection-related services to credit grantors. What makes your business stand out in a competitive marketplace? Perhaps your company specializes in providing a particular service or focuses on a particular segment of the marketplace that distinguishes it among other ARM companies. The follow-up question is whether the seller is exploiting their advantage to its maximum potential. Service businesses are service businesses, right? Wrong! Your client base, your approach to servicing and retaining your clients, and how you prospect and treat your staff is unique to your operation and should never be undervalued.

Also look at the financial performance of your business for distinguishing characteristics. Buyers will take note if your company is able to generate a relatively high level of profitability on a consistent basis, for example.

How is the business performing financially?

Are you coming off a rough year? What are you expecting for the remainder of this year? What is the forecast for next year? Are you able to determine profitability on an individual client level? Answers to these important questions will determine how your business is performing financially in the eyes of a buyer. Most owners do not have all of these boxes checked properly. If you do, you’re ahead of most.

How sustainable is this business?

Buyers will examine historical financial performance to determine if the business is generating consistent revenues month by month, quarterly, and on an annual basis. Businesses with sustainable financial performance are better positioned for sale than ones that experience significant spikes in revenue or profitability. Management needs to be able to explain the seasonality that exists within their business and how their company is positioned to deal with those fluctuations. Client concentration could also jeopardize sustainability and should be closely scrutinized and monitored on a regular basis. This last point is very important in ARM M&A.

What parts of the business will I need to remove?

A buyer will quickly identify any negative factors within your business. A large headache client that is not cash flowing. A disgruntled senior manager. An undercapitalized technology platform. You know the cancer, or worse cancers, within your business. Instead of taking the risk that a buyer won’t notice, or won’t value your business any less if they do notice, address the issues before you sell. It may be costly and time consuming, but it will be far less impactful if you dealt with the issues now instead of waiting until you sell your business when it comes to ARM M&A.

What parts of the business will I need to improve upon?

Perhaps your industry is rapidly changing and the need to invest in compliance or upgrade technology is not something you want to incur on your own. First, identify the specific needs that you’re confronting with your business. Second, identify companies from your industry that already invested considerably in their infrastructure that can support your needs. These companies may be the ideal buyers because their return on investment will be considerably higher than a buyer who does not already have the infrastructure in place and will have to incur these costs if they buy your business.

How critical is the current owner to business operations?

Many service businesses rely heavily on the owner/operator to run successfully. Those businesses that truly rely on non-owners to manage operations, upsell and support established clients, and prospect new clients stand out from competitors. Owners who pull themselves off the firing line when something goes wrong, or have others who envision where the business will be in the future, have distinguished themselves even further in the eyes of a professional buyer.

Does the leadership team have any holes that need to be filled?

As a business grows, owners need to add to their leadership team to support its expanding needs. Perhaps you relied on a bookkeeper to handle your company’s financial needs and you realize that you really need a controller or a strategic CFO instead. If you’re not planning on selling for a few years, you may want to fill this position. If you’re planning on selling in the next year to eighteen months, you may want to rely on your outside accountants to assist in the preparation of your financial information and not upgrade your internal finance person.

Another part of your leadership team that needs to be closely evaluated prior to a sale is the sales team. If your sales people are not performing, then a buyer will not retain them. If your sales people have the closest relationships with your largest clients, then you may have a dilemma that you should address in advance of a sale process. The buyer will seek to retain these people to ensure client continuity post-closing. If you don’t already have a non-compete, non-solicit agreement with your key sales professionals then you should consider putting one in place. Be careful not to concern your sales people because they may decide to leave and join another company that they perceive is more stable. One way to address this is to bring them into the sale process and bonus them properly.

What is my exit strategy from this investment?

Professional buyers want to know their exit alternatives before they invest in a business acquisition. Helping them answer this question by being able to explain industry trends, client overlap with competitors, expansion opportunities, and complimentary service offerings paves the way toward an attractive exit discussion.

Selling a business can be incredibly difficult, especially if you don’t know what the other side is thinking. Putting yourself in the shoes of a potential buyer can help you position your company for the best possible deal when it comes time to sell.

Even if you consider the buyer’s perspective, however, the sale process can be intimidating. Fortunately, Kaulkin Ginsberg can help you navigate those choppy waters. We have worked with small, mid-sized, and large privately-owned companies, Fortune 500 corporations, and financial investment firms on their ARM M&A strategies for thirty years. Whether you’re seeking professional sell-side representation, assistance forming a partnership or joint venture, or a transaction assessment, Kaulkin Ginsberg will guide you through the process. For more information, or to schedule a confidential discussion of your business goals, contact us at hq@kaulkin.com.

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