When it comes time to sell a business, the selling company’s historical financial performance and projected growth rate will have a direct effect on how certain types of buyers will approach pricing and deal structure. Let’s assume that your business’s revenue and profitability have consistently grown, year over year, at an annual rate of, say 20%, and you’re forecasting the same rate for the next three years based upon market conditions and your company’s sales pipeline. This is an attractive growth rate for buyers interested in collection agency M&A. If a consistent growth rate is achieved over time, then a buyer will feel comfortable that management understands the business dynamics and the expectation will be that the company will achieve the same rate in the future regardless of the buyer’s contribution. The buyer will approach pricing with that growth rate in mind.
Let’s suppose, however, that the selling business did not grow two years ago, grew at a 50% rate last year, and is on course to grow 34% this year. A buyer will have a difficult time arriving at a baseline growth rate that they can utilize when determining pricing of this erratically performing business. A financial buyer may apply a lower multiple to determine their purchase price for such unpredictable performance and/or they might utilize an earn-out component to share the risk with the seller.
What if the business has flat-lined and hasn’t grown in recent years, or worse, is forecasting a downturn? Most financial buyers won’t pursue that transaction unless the selling business is viewed as an add-on to an existing platform business they already own, or has an exceptional growth story that the buyer can “buy” into. Industry buyers might still be interested if the selling company provides them with an attractive client base, complementary services, or other attributes such as technological advancement or geographic coverage they perceive as valuable to their existing operation.
What Growth Attributes Will the Buyer Bring to the Table?
In addition to the performance of the selling company, what contributions will the buyer make toward the company’s performance when the dust settles after the transaction closes? If the selling company is a growth business, perhaps the best course of action is to let it operate on a stand-alone basis. A financial buyer might be the best buyer type in this scenario if they buy into the existing management team’s business plan. But what if the selling business is not performing well and could use financial or operational support?
An industry buyer may be able to value non-recurring or duplicative expenses more aggressively than a financial buyer because they already have an existing platform to leverage. A strategic buyer may have an existing platform plus access to a different client base that can utilize the seller’s service offerings. A strategic buyer may also have more extensive technological capabilities, international reach, or complementary service offerings to leverage, for example. Sometimes these buyers will value the seller on a stand-alone basis while other times they may incorporate these attributes into their valuation and be able to justify a higher price than a financial or industry buyer.
Case Study
A few years back, Kaulkin Ginsberg advised the owners of a large, multi-national business in a sale. The company was perceived as a market leader in its industry for years. During the sale process, the selling company lost its largest client. Most buyers ran for the hills, but one industry buyer was not placing value on retaining that client and was able to complete the transaction at the original pricing level that it placed on the business prior to the client loss.
There are many factors beyond growth prospects that impact the final price of your business. 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 here or at hq@kaulkin.com.