Pricing is arguably the most critical element of any transaction, including collection agency M&A transactions. In most cases for middle-market service businesses, the price falls in the broad range of three to eight times EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) which the buyer will adjust either up or down to reflect the true economic benefit of ownership to them.
Typically, a buyer will add back any excess or one-time operating expenses that will not continue under their ownership post-closing, such as a high level of owner compensation or the costs of a lawsuit settlement, into their pricing model. Any such non-recurring or non-operational expenses are added back to EBITDA, thus increasing the base for the purchase price calculation. The buyer may also subtract any replacement costs needed to operate the business under their ownership. Many times, what appears to be a marginally profitable company can, after appropriate adjustments, be a very profitable one on that basis.
Beauty Is in The Eye Of The Beholder
All buyers, regardless of type, will evaluate key attributes of the selling company differently when pricing a transaction. They will closely scrutinize the selling company’s industry dynamics, its historical financial performance, its client base, growth potential, management team, and the overall size of their investment. How these elements impact pricing will depend upon the type of buyer that you are dealing with.
There are no hard-and-fast rules about whether you’ll get a better price from a financial, industry, or strategic buyer. For clarity, this blog defines strategic buyers as operating companies from other, typically related, industries that acquire businesses to expand its services and/or client base. Financial buyers, also known as buyout firms, typically acquire majority control of businesses in industries they are not currently invested in with the goal of increasing shareholder value and reselling their stake at some point in the future. Industry buyers are companies that acquire other businesses from the same industry, typically for expansion purposes.
Regarding collection agency M&A, a financial buyer may be prepared to pay a higher price because they incorporate the seller’s total enterprise when arriving at their pricing level. Remember, financial buyers, by definition, do not have an investment to leverage in that particular industry so they have to approach the acquisition on a stand-alone basis. A competitor, by contrast, may be only interested in one aspect of the selling company, such as its customer base. If so, the competitor will pay according to that aspect’s value to him, ignoring the business’s overall worth.
Availability of financing may also play a critical role in determining the pricing of an acquisition. Pricing tends to be higher overall in markets where financing is readily available and interest rates are low, compared to markets where lenders are more conservative. Availability of financing is relatively more impactful upon financial buyers’ pricing capability, compared to that of industry or strategic buyers.
The role you play with the company post-sale may also impact pricing. If you leave the company upon its sale or after a short transition period, a buyer may be more inclined to cash you out. However, if you continue to run the business after it’s sold, you may have a chance to take a “second bite of the apple” if the company is later resold. Generally, the original owner sells his remaining interest when the buyer cashes out. This is most common among financial buyers; however, it also occurs among industry and strategic buyers that are positioning for a sale of their own at some point down the road.
Even beyond what is discussed in this blog, there are many factors that influence pricing during the transaction process. 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.