This is a list of critical value detractors that will drive pricing down for a typical ARM company:
- Declining revenues due to client losses. Buyers will carefully evaluate the selling company’s client commitments. Buyers will pay a lower multiple if the seller has lost clients due to competitive market conditions or rate reductions. If revenue declines can be attributed to lower recoveries and not client losses, some buyers may incorporate an earnout component to share risk.
- Low level of profitability. If the seller is experiencing lower levels of profitability compared to prior years, buyers will apply a lower multiple. Buyers are typically looking for profitable companies to purchase. Buyers will also consider acquiring companies when they identify cost savings due to consolidating back office functions or eliminating other redundancies, but they won’t pay a high multiple for these acquisitions.
- High levels of client concentration. In the past, buyers tolerated high levels of client concentration when that client demonstrated consistent levels of high profitability. Good examples include the U.S. Department of Education and large bank clients. Today, most buyers will either pay a lower multiple or decline to make an offer for selling companies with high levels concentration risk. Multiple clients generating 20% or more of the seller’s revenues will raise red flags.
- Market segments not perceived to be appealing to the buyer. Buyers will either lower pricing or avoid certain market segments that are believed to have less favorable operating conditions or high levels of regulatory scrutiny. For example, buyers will not pay high multiples for companies servicing the student loan sector pr payday lenders.
- Large amounts of adjustments to net operating income. Most buyers understand that some adjustments may need to be made to operating income to illustrate a selling company’s true profitability. Companies with disproportionately higher percentages of adjustments will raise concerns among most experienced buyers. To avoid this, owners should try to set market rates for compensation and rent before engaging in discussions with buyers.
- The seller did not consistently reinvestment into the business. Capital expenditures are critical to improving operations, increasing profitability, and maintaining competitive advantages. Owners who are not reinvesting back into their business should expect lower multiples for their business.
- No experienced leadership team that will remain post sale. Buyers will avoid business when the key executives intend to leave at closing. Some owners will reward their executives when a sale is consummated by sharing some of the proceeds with them. While this is generous and well received by the selling company’s leadership team who receives the compensation, this is not viewed favorably by most buyers because large sums of money may incent some executives to leave the business or work less.
- Long-term facility lease obligations. In today’s marketplace, most buyers want to consolidate operations post-closing, preferring to acquire businesses without long-term leases. Owners who are contemplating a sale should attempt to renegotiate lease obligations in advance of a sale.
- Significant lawsuits or CFPB investigations in recent history. Buyers understand that frivolous lawsuits may exist, but they will steer away from sellers with large pending lawsuits or CFPB investigations currently underway. Our recommendation is to resolve all outstanding legal matters in advance of a sale.
With more than 3 decades providing M&A advisory and valuation services to ARM companies, Kaulkin Ginsberg has addressed all of value detractors detailed above. We have worked with both buyers and sellers to develop effective ways to address all of these concerns. Please email is at email@example.com to schedule a time to confidentially discuss your needs.
About Kaulkin Ginsberg Company
Since 1991, Kaulkin Ginsberg Company has provided critical strategic advice to the ARM industry. Our client-centric approach covers almost every stage of a company’s life cycle and enables us to maintain longstanding relationships as trusted advisors. We provide mergers and acquisition advisory, strategic consulting, and valuation services.