Collection Agency Valuation: Approaches & Methods

When it comes to business valuations, specifically a collection agency valuation, there are three broad approaches used – asset, income, and market – that will yield differing, sometimes extreme, results. There are multiple methods associated with each approach; for example, the book value method and the adjusted net asset method are both categorized under the asset-based approach. Other approaches, with their own distinct methods, exist as well, though they are used far less commonly than the three mentioned above.

Choosing the right method for your business depends on the relative circumstances of your case – and you certainly want to choose the right method for your collection agency valuation. As such, it is important to have a qualified valuation professional determine the value on your business so that you are not caught off guard during estate planning or the sale of your business, for example. With the above frame of reference, the following section provides a brief description of the three approaches and examples of different methods used for each.

Asset Approach

The asset approach is a general way of determining a business’ value using one or more methods based on the value of the assets net of liabilities. It is typically used when looking at liquidation value or asset-heavy businesses whose true value may not be captured by their earnings.

There are a variety of methods associated with the asset approach. The book value method, for instance, subtracts a company’s liabilities from its tangible assets. While this is relatively straight forward, the book values used in this calculation may not capture the true present value of a company’s assets and liabilities. The adjusted net assets method, on the other hand, adjusts the book values of a company’s tangible and intangible assets and liabilities to fair market value and finds the net. Other asset-based methods include the liquidation value method and the excess earnings method.

Income Approach

The income approach is a general way of determining a business’ value using one or more methods that convert anticipated economic benefits into a present single amount. It is typically used when looking at the valuation of production or service-based companies with more consistent revenue. Income-based methods include the capitalization of earnings method, which estimates a company’s future benefits using earnings or cash flows and capitalizes them at an appropriate rate, and the discounted earnings method, which estimates the present value of a company’s forecasted future earnings and terminal value (i.e., future earnings beyond the forecast projected to perpetuity).

Market Approach

The market approach is a general way of determining a business’ value using one or more methods based on references to comparable companies whose transaction values are already known. Comparable companies, or comps, are usually identified by analyzing their risk profiles for similarities with that of the company being valued. On one hand, the market approach requires fewer assumptions than other approaches; on the other hand, comps can be extremely hard to find.

Knowing the true value of your business can give you a significant advantage when it comes to selling, passing on, or strategically planning for your agency. Performing an annual formal collection agency valuation could potentially save millions of dollars in real costs in the long run.

Valuing your business is a complex process, requiring significant expertise and extensive industry knowledge. Fortunately, Topline Valuation Group, Kaulkin Ginsberg’s sister company, is here to help. Topline’s nationally certified experts offer accounts receivable management (ARM) owners and executives an in-depth assessment of their company’s strategic opportunities and enterprise value with its product, the Strategic Valuation Assessment (SVA). An SVA provides an understanding of value, relative to transaction structures and current market conditions, and is a more strategic tool used to aid in business discussions and planning. For more information, or to schedule a confidential discussion of your business goals, contact us here or by email at hq@kaulkin.com.

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