Collection Agency M&A: What Do Business Buyers Want?

Business buyers may be motivated by a variety of distinct factors, especially when it comes to collection agency M&A. Knowing what compels a buyer to make an acquisition will help an owner position their business to achieve the maximum price and most favorable terms when it comes time to sell. The following are common reasons for why a buyer may acquire a service business:

Revenue Growth

Most private businesses will expand organically and not by making one or more acquisitions. In cases where organic growth is not occurring, or where investors want to grow more aggressively, executives may look to augment their own revenue growth by acquiring another business. If the seller has a stable base of long-term (preferably contracted) clients, without concentration risk, a buyer will be willing to pay a higher purchase price with more favorable terms to the seller

Diversification

Companies seeking to add a new service offering, or expand their reach into a new geographic region, may determine that they could acquire a company cheaper and quicker than by growing organically. Owners who have a competitive foothold in a particular geographic region, or in a particular market segment, will generate a higher selling price than companies without any barrier-to-entry in their market.

Access to Cheap Capital

At times where the cost of capital is lower and readily available, business buyers will pursue acquisitions more aggressively as their returns will be more favorable. For example, during the years leading up to the Great Recession, business buyers were able to secure financing at very attractive rates. Once the financial crisis set in, many banks ceased lending and rates dramatically increased forcing many buyers to the sidelines. Owners contemplating a sale should pay attention to financial market conditions because access to inexpensive financing will impact some buyers’ ability to transact.

Increasing Profits

The selling company’s ability to generate sustainable amounts of cash flow is the best indicator to a buyer that they will realize a return on their investment. Everything else, such as a company’s client base, technology platform, and knowledgeable staff have little to no value to the buyer if the company is not able to generate a profit. If the buyer is already in the business, they will seek to increase profits by removing duplicative costs such as payroll and human resources. Buyers may also seek to keep their own team and infrastructure in place and eliminate redundancy. Knowing this, a business owner can highlight their own company’s strengths during their selling process.

Implementing a Rollup Strategy

Regarding collection agency M&A, for example, there was a ten-year period from 1997 to 2006 when private equity firms were driven by a “rollup strategy.” Outsourcing Solutions (OSI), a company formed by a proven leader and a private equity firm, bought numerous companies to quickly amass revenue. They acquired competitors Union Corp. and Payco American even though their client bases overlapped considerably. Integration was not part of their strategic plan. Today, roll-ups still exist within certain market segments and they are done with more of a purposeful intent to integrate the businesses and remove duplicative costs. Desirable markets for rollup strategies in 2018 include healthcare and government. Companies in these market segments will attract more buyer interest and competition will drive pricing upward.

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 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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