M&A Activity in ARM is High, Pricing Very Important Right Now

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Mike Ginsberg

Mike Ginsberg

Buyers of accounts receivable management (ARM) firms are continuing their acquisitive ways, completing more transactions in a one-year time period in 2014 than at any point since the start of the Great Recession.

Looking ahead, Kaulkin Ginsberg expects this trend will continue at an accelerated pace.  Arguably the most critical components of any transaction, whether you’re contemplating making an acquisition or selling your company, are establishing purchase price and deal terms.

With that in mind, we developed this current snapshot of valuation multiples for service providers in the ARM industry:

Size of Acquired Company ($ Annual Revenues or Net Fees)

2014

Multiples/Structure

Small

(<$5M)

Mid-Sized

($5-25M)

Large

($25-100M)

Platform

($100M+)

Multiples

2-5 X SDE

3-6.5 X Adj. EBITDA

5-8 X Adj. EBITDA

6-12 X Adj. EBITDA

Structure

0%-100% cash

0%-100% cash

40%-100% cash

60%-100% cash

SDE = Seller’s Discretionary Earnings (Seller excess compensation + personal expenses combined with EBITDA)

Adj. EBITDA = Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation + Amortization adjusted for non-recurring and excess operating expenses that would not exist post-transaction)

Disclaimer:  No hard set “rules of thumb” exist when it comes to valuing any ARM company and vast differences arise when technology companies and debt buyers are valued. Value is determined on an individualized basis contingent on numerous converging factors, including a seller’s historical, current and projected financial performance, a buyer’s ability to secure financing and overall market conditions, to name just a few. There are always outliers, but these ranges should provide some guidance on current approaches to valuation based on specific size categories.

Consider the following important points as you try to determine how this pricing matrix might apply to your own business or an acquisition that you might be contemplating:

  1. Transactions that include little or no cash at closing are typically mergers among industry players and generally do not apply to outright sales or purchases unless the seller is not profitable or has severe performance issues.
  2. Most small ARM companies have owner(s) who have major client relationships that are involved in all facets of the business and are therefore tied into most transactions through structure and payment terms.  Mid-size businesses start to develop a team concept, which adds significantly to its transferability with less reliance on terms or structure.
  3. On average, higher levels of cash tend to drive lower multiples for smaller-sized transactions or underperforming companies, but not typically for the larger-sized transactions or performing companies.
  4. Healthcare and government (non ED) services are currently generating higher prices and more favorable deal terms than financial services and telecommunications market segments.
  5. In those instances when severe client concentration exists, less cash is typically paid at time-of-closing, and more is paid out over time based on retention of key client(s). Exceptions take place when that client is difficult to penetrate and/or when that client is locked into a long-term contract.

Please join Rozanne Andersen and me for our webinar, ARM Quarterly Review, What’s Next for 2015, this Thursday, April 2 at 2pm EST.  We will address this and other important topics including the U.S. Department of Education, major regulatory news and the end of an era in the U.S. ARM industry.  Registration is free so invite other members of your leadership team to participate.

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Posted in ARM in Focus, Debt Collection, Opinion .

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