Collection Agency M&A: Non-Financial Factors that Affect Pricing

The sale of a business is challenging on many levels. Arguably, the most difficult aspect of every transaction is establishing a mutually acceptable valuation. Like beauty, value is truly in the eye of the beholder. For an owner, determining the value of a business he or she started is an emotional process. Ultimately, the seller’s goal is to maximize the amount of cash the buyer will pay for the business. This blog is part 2 of a series that explores how certain aspects of your business affect the value it will fetch on the market. Part 1 can be found here. This part explains how various non-financial operational factors impact pricing when it comes to collection agency M&A.

Small or mid-size businesses – including most accounts receivable management (ARM) companies – have needs that are vastly different than large public companies or divisions of billion-dollar conglomerates. The following are key drivers of value for such firms in the event of a sale:

Market Position

In today’s ARM industry, buyers are placing a higher value on companies with a defined position in healthcare, government, and commercial market segments. Ten years ago, it was financial services. Establishing and maintaining a dominant position in the marketplace that your company services is critical for achieving maximum valuation.

The type of sector your firm services can affect its value in collection agency M&A as well. Some client sectors are known for generating lower profit margins than others, for example. Lower margins are often the result of increased cost and competition in those sectors. In the collection industry, for example, credit card companies have cut their vendor networks and notoriously “squeezed” rates downward that they pay their agencies. Such clients may be less attractive to some buyers who seek higher margins from an acquisition.

Services Offerings

Companies with diversified service offerings are typically more attractive to buyers than those with a more limited set. If a seller offers multiple services, it can entrench itself with its clients and strengthen those relationships. For example, collection agencies that provide pre-collection or customer care services as supplements to third-party work are harder to replace from a client’s perspective than agencies that only collect defaulted debts. Providing an array of services is useful in attracting new clients and is understandably sought-after by potential buyers if the services generate significant profits.

Client Diversification

Red flags are generally raised by a buyer when a selling company generates the bulk of its revenue from only a handful of clients – the old 80/20 rule: that 80% of a company’s revenue comes from only 20% of its clientele. The issue is risk, but interested buyers may structure deals to offset concentration. For most buyers, a well-diversified client base is preferred because it eliminates significant risk elements.

We all witnessed what happens when significant client concentration exists when the U.S. Department of Education (ED) decided not to continue contracting with large (unrestricted) ARM companies. We also witnessed significant revenue loss due to the impact of the financial crisis on large banks a decade ago. Less is more when it comes to concentration risk.

Current Leadership

A big key for most buyers is whether or not a quality management team exists and whether it will remain in place after the deal. Will the shareholders stay? What does the management team look like beyond the current owners? This can affect a buyer’s confidence level regarding the stability of the company, its client relationships, and its internal organization. Regardless of whether your business is purchased as an add-on or a platform, having a strong team in place to maintain financial performance and retain clients will give the buyer confidence needed to pay top dollar for your business.

Presentation

What impression does your office give when people arrive at the front door and after they walk through it? Are your managers and employees working hard and chipper, or do they appear to have a chip on their shoulder? Businesses don’t need to resemble 5-star hotels with fine china and turn-down service, but in order to “show” well they should convey a clean, organized environment filled with professionals who enjoy their work.

When it comes time to sell, obtaining the highest price for your business should be one of your main objectives. Of course, the sales process is complex even beyond pricing. 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 collection agency 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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