ARM Buyers are Looking Beyond Profits when Establishing Pricing

Mike Ginsberg

Experienced business buyers fixate upon a selling company’s profitability when establishing purchase price. Throughout their diligence process, they would seek answers to critical questions about the seller’s profitability, including:

1. Is the selling company’s current level of profitability sustainable?
2. Are adjustments needed to determine the seller’s normalized EBITDA?
3. Are profits derived from one client or from a diverse base of established clients?
4. Are significant capital expenditures needed to sustain current profit levels?

The list goes on, but the purchase price that a buyer sets for a selling business typically centers upon the seller’s profitability level, and a multiple of the normalized profitability level. For strategic buyers, the multiple typically increases or decrease based upon the fit. On the other hand, financial buyers tend to be less focused on fit and more fixated on financial performance.

For ARM companies, most skilled buyers arrive at pricing the same way. The buyer analyzes aspects of a seller’s financial and operational performance during due diligence. However, when it comes to pricing a particular deal, provided the selling company operates profitably and the buyer is made comfortable that the profitability level is sustainable after a change of ownership occurs, they would proceed toward closing the transaction at that set price.

Today, experienced buyers of ARM companies are looking beyond the profitability levels of selling companies before establishing their pricing level. This is most prevalent in the financial services sector, although we are starting to see this trend develop in other asset classes as well. Two areas that are being scrutinized for ARM companies before price is being established are gross collections and placement levels.

Gross Collections. Experienced buyers are looking closely at the consistency of client fee rates to determine variances from year to year and month to month. When client concentration levels exceed a buyer’s comfort zone, sellers should expect that some buyers may want to accelerate their diligence process by conferring with larger clients earlier in their diligence process to determine if rate cuts may be administered. Although there are no hard-set rules that pertain to all buyers, Twenty percent concentration is a good rule-of-thumb.

In addition to client fee rates, buyers will also attempt to gauge liquidation performance to try to determine how consumer payment patterns have impacted gross collections. While unemployment levels and consumer confidence are slowly improving, the U.S. is still recovering from the most severe economic downturn in the history of the collection industry and buyers want to feel confident in the seller’s ability to perform.

Number of Accounts Placed. Buyers are also scrutinizing the sources of new business earlier in their diligence process to gain comfort around the sustainability of placement volumes. They are trying to determine if more accounts are being warehoused, sold to debt buyers or placed with collection attorneys for suit and how these trends might impact placement levels. Additionally, they are looking more closely at average account balances to determine how this has changed over recent time periods. Again, these developments are most prevalent within financial services but we’re also seeing this in other asset classes.

Owners should be aware of these developments before entering into discussions with buyers about selling their business.

I will be covering pricing trends during the third installment of our webinar for ARM professionals scheduled for Wednesday, September 24, 2014 2:00-3:30 P.M. Eastern Daylight Time. Please be sure to register for free today and spread the word to your colleagues.