Web businesses are ranked by the number of impressions and clicks. Hotels are scored according to occupancy rate. When it comes to collection agency valuations, the best marks are given to companies that meet the following criteria:
High levels of client concentration elevate a business’ risk profile. In the accounts receivable management (ARM) industry, client concentration risk exists within most consumer market segments. It’s not unusual for an ARM company to serve a telecom or bank client that generates a disproportionately high percentage of that company’s revenue. Ideally, your company’s largest client should generate less than 10% of revenue. A client that generates over half of your revenue, on the other hand, could pose a severe risk to your company’s value. This risk could be offset by serving multiple lines of business from the same client. Another way to mitigate concentration risk is to serve clients from multiple verticals, such as healthcare and financial services.
A company is performing well when a consistent level of top line revenue growth is achieved over a long period of time. Ideally, revenue growth is coming from a combination of new business from existing clients and by onboarding new clients.
Sustainable Profit Margin
A company is performing well if it has consistent profitability levels year after year. Adjustments may be needed to account for one-time events, like a move, or if the company is incurring excess operating expenses, like if a family member is on the payroll.
It’s essential for an owner to have a good handle on his or her company’s financial performance throughout the year. Many closely held businesses wait until year-end to generate a financial statement, while some don’t generate one at all and instead rely on tax returns. Vendors, clients, leaders, landlords, new partners, and others may require an updated review of a company’s financial performance. However, very few owners hold managers accountable to a budget. Ways to drive value through bookkeeping include maintaining a monthly budget-to-actual report and/or a forecast.
Strong Compliance Protocols
In today’s industry, ARM companies must continuously invest in compliance through improved technology, increased compliance staff levels, knowledgeable attorneys, outside advisors, and active participation in industry advocacy groups. Compliance trumps performance for many consumer credit grantors, so lacking proper controls could be detrimental to a business.
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 annual formal collection agency valuations 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 with collection agency valuations. Topline’s nationally certified experts offer ARM owners and executives with an in-depth assessment of their company’s strategic opportunities and enterprise value with their 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 at firstname.lastname@example.org.