Purchase Price and Deal Terms: Five Factors to Consider

Most accounts receivable management (ARM) companies are classified as small or midsize businesses. Their needs are vastly different than large, publicly traded companies or divisions of multi-billion dollar conglomerates – so are the key drivers of value in the event of a corporate sale. If you’re an owner who is privately contemplating a sale of your ARM company now or anytime in the future, it is crucial to understand that the purchase price and deal terms will directly correlate to the following five factors:

  1. Sustainable top line and bottom line performance. Buyers will value a business that has consistently demonstrated revenue and earnings before interest, tax, depreciation, and amortization (EBITDA) growth more aggressively than a business that has achieved significant growth for one year, after years of flat performance.
  2. Strong position in a desirable market. In today’s ARM industry, buyers are placing a higher value on companies with a defined position in healthcare, government, and commercial market segments. Ten years ago, it was financial services. Establishing and maintaining a dominant position in the marketplace that your company services is critical for achieving maximum valuation.
  3. Barriers-to-entry. Until 2011, the U.S. ARM industry existed without any definable barriers-to-entry. That all changed after the Great Recession and because of the formation of the Consumer Financial Protection Bureau (CFPB) – now BCFP – when operating cost and client demands started to increase. Today, barriers-to-entry have been formed preventing newcomers from rapidly entering the market organically, directly impacting the value placed on established ARM companies.
  4. Proven leadership team. Regardless of whether your business is purchased as an add-on or a platform, having a strong team in place to maintain financial performance and retain clients will give the buyer confidence needed to pay top dollar for your business.
  5. Client concentration. We all witnessed what happens when significant client concentration exists when the U.S. Department of Education (ED) decided not to continue contracting with large (unrestricted) ARM companies. We also witnessed significant revenue loss due to the impact of the financial crisis on large banks a decade ago. Less is more when it comes to concentration risk.

Achieving the highest possible purchase price with the most desirable transaction terms for your business won’t happen unless these factors are maximized. Kaulkin Ginsberg Company, in conjunction with its sister company, Topline Valuation Group, provides ARM owners and executives with an in-depth assessment of their company’s strategic opportunities and enterprise value with our 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. Email hq@kaulkin.com for more details.

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