So You Want To Sell Your Collection Agency? Prepare Today

Do you wake up some days and wish you didn’t have all the headaches a debt collection agency owner has to deal with: whether it’s a pro-consumer attorney who keeps attacking you for more money or that you have to hire a consultant or accounting firm to obtain a SAS70 audit just to fill out an RFP?   Or maybe you’re fed up dealing with the chronic issues that arise almost on a daily basis.  Or maybe you have taken the business as far as you could and don’t have the deep pockets to take the business to the next level.

Maybe it’s time to sell your agency but before you start down this path, here are a few things you may want to consider.

Get an Objective View on Value

How much is your agency worth? Think about getting a formal valuation completed. Typically, a valuation for an agency takes approximately 4-6 weeks after a strategic advisory or M&A firm receives all of the information required to assess your business.  The valuation report can be produced in various formats that typically contain some, if not all, of the following: valuation methodologies utilized, a financial, operational and client summary, industry macro level data, and M&A comparables to support the valuation approach.   The key component of the valuation is the construction of an Adjusted Income Statement that shows what the agency would look like on a normalized basis over the past 3-5 years, as well as YTD and on a forecasted basis.   To normalize an agency’s profit, we would consider adding back the following: compensation and benefits for shareholders who would not exist post-transaction, a reverse adjustment to normalize compensation for any shareholders continuing with the business if above/below market, and one-time expenses (not the licensing fees that you pay each year or start-up expenses for a client that will happen again with the next client).  If the buyers see that you are adding back “the house,” to show a higher profit to multiply against, the buyer will obviously be concerned.

Discuss the Tax Impact with your Accountant

After you have an understanding of value the fun really begins: figuring out what you may net from a transaction to determine whether a sale would make sense to achieve your retirement objectives.   Every owner has a different perspective on what he wants from his life after a sale. Some sellers want to put enough money in the bank so they don’t have to work again; others might aim to make sure that their kids don’t have to worry about paying for college.  Whatever the reason, the tax impact will determine how a deal should be approached to ensure that you net the most proceeds post-close. As you assess the tax implications of a deal, it is very likely that the Federal Capital Gains tax will increase from 15% to as high as 20% in 2011.

View Your Agency Through a Buyer’s Eyes

Take a step back and pretend you are buying your own business.  What is going to add or detract from value?  Has your business been growing year over year or has it been flat or declining—and why? Who is running the business and is that person or team committed to continuing post-transaction? Do you have a one or two clients making up a bulk of your revenue?  Even if your top clients have been placing business with you for 10 years, there always the risk of some potential client attrition post-transaction.  These are the types of questions you need to ask yourself as you look to determine the timing of a sale.

Take your Time

Your business is the blood line that provides income to you, your family, and your employees.   It takes a lot of effort to build a company to the point where one might even contemplate a sale.  You are entitled—and wise—to  take your time and understand the full picture of how your agency will be valued in the marketplace, what the tax impact of a sale may be, and to be able to fully recognize all value drivers/detractors before you start spending your time and money on your way to an eventual sale.

If you are starting to think about the concept of selling your agency, I would be happy to send you a free whitepaper that we put together on the “Major Steps to Selling your Agency.” Feel free to email/call me and I will send it to you.

Comments to my blog are always welcome.

Michael D. Lamm advises owners on their growth and exit strategies for Kaulkin Ginsberg‘s Strategic Advisory team. Michael can be reached directly at 240-499-3808 or by email. You can also read his blogs, follow him on Twitter, or network with Michael from his social media page on insideARM.com.