Valuing a Collection Agency in a Hot M&A Market

September 1st, 2006

The M&A “perfect storm” of activity in 2006 has been driven by three converging forces: first, the economy is growing and debt levels are increasing; second, there are abundant sources of capital and cheap debt available to fund acquisitions; and third, there are too many financial and strategic buyers chasing too few deals. These forces have created a perfect opportunity for contingency collection agency owners with a compelling story to tell.

The announcements in 2006 by NCO Group (NASDAQ: NCOG), West Corporation (NASDAQ: WSTC), and Encore Capital Group (NASDAQ: ECPG) have prompted many agency owners to call me and ask: How much is my business worth in today’s market? It may be frustrating, but there is no quick answer to that question: typically – it depends on what you are selling. However, I want to share some of the general guidelines used when assessing a company’s value.

How to calculate Adjusted EBITDA?

Here are the fundamentals:
Buyers valuing a collection agency typically first determine the multiple applied to Adjusted EBITDA, which is Earnings Before Interest Expense, Taxes, Depreciation and Amortization. EBITDA is normally “adjusted” to reflect the removal of certain non-recurring income and expenses (e.g. sale of equipment, owner perks and benefits not existing post-transaction, moving expenses, certain consulting fees, etc.), changes in owner and personnel compensation, and any other business-related adjustments that both parties agree to during negotiations.

Buyers tend to focus on historical financial performance and generally evaluate the prior fiscal year, or trailing twelve month Adjusted EBITDA results, to determine fair market value. However, based on the motivation and synergistic fit between the buyer and a seller – as well as a competitive M&A market – a buyer may be willing to apply current year Adjusted EBITDA performance to calculate the purchase price.

I have provided a Fundamentals 101 calculation to illustrate the process of determining Adjusted EBITDA:

Adjusted EBITDA Calculation –
Contingency Collection Agency

Revenues (Net Fees) $5,000,000
Operating Expenses ($4,500,000)
Net Income $500,000
Interest Expense $25,000
Income Taxes $20,000
Depreciation & Amortization $25,000
Other Adjustments:
Excess Salary (Owner) $50,000
Perks (Owner) $15,000
One-Time Expense (Moving) $10,000
Adjusted EBITDA $645,000

What are buyers looking for?

Every buyer is different.
The multiple applied to Adjusted EBITDA is driven by the fit of the agency with the buyer, the current financial market, and the agency’s value drivers such as:

  1. Sustainable Earnings – Typically, well-run agencies produce at least a 15% to 20% EBITDA margin consistently, year-over year.
  2. Consistent Year Over Year Revenue (Net Fees) Growth – A trend of 20% to 25% historical annual growth with no “bumps in the road” is ideal.
  3. Seasoned Management Team – Essential to achieving maximum value – high tenure in industry and with current company, and led by a CEO with a vision of how best to grow the agency; well-versed in managing the operations, sales and marketing, technology and human resources aspects of the company; M&A and international experience are considered a plus.
  4. Clients Served – Existence of blue-chip clients with tenure and minimal revenue concentration – no one client generates 10% or more of annual revenues; if client concentration does exist – which is typical for agencies – it is better to have it with the more attractive, long-term clients
  5. Scalable Infrastructure With Minimal Capital Expenditures Required – Scalability of an existing facility and IT systems for new business and additional staff (collectors) is important.
  6. Growth Opportunities – Options that require minimal capital expenditures to implement are preferred (e.g. entering new markets, obtaining additional clients in existing markets, obtaining additional business from existing clients); however, well capitalized buyers may also see growth opportunities via add-on acquisitions.

What multiple typically applies to an agency
my size

Well, it depends…
Contingency agencies, meeting the criteria just described, are trading on a multiple between 4 to 6 times Adjusted EBITDA, a range that applies to agencies generating roughly $2 million to $20 million in revenue annually. Large agencies that are recognized by buyers as “platforms,” typically above $20 million in revenue, trade for as much as 8 times or more Adjusted EBITDA.

However, no rules of thumb exist and there are always exceptions to the multiple ranges applied to any size agency.

Where is the M&A market headed?

Multiples are peaking, but the market remains strong.
Financial and strategic buyers continue to aggressively seek acquisition opportunities in the ARM industry. Well-run, growing contingency agencies are generating the most interest and the highest values. We anticipate that non-industry buyers will continue to view the contingency collections arena as an attractive investment as long as debt levels rise, businesses outsource or sell receivables, and the lending markets remain favorable.

Now my question to you: Are you ready to sell?

It depends – maybe for the right price.

Comments are closed.


Family Vacations: A Time to Unplug from the Digital World

August 17, 2017

As I approach the half century mark, I find myself appreciating family vacations more than ever before. Last week, we went on an Alaskan cruise in which internet access was not provided unless the passenger paid separately for it. I quickly learned how precious family vacation has become. Were you able to pull yourself away from the internet on your family vacation this year?....

» see this post    » all posts

Large Healthcare Market Participants Continue to Endure

August 15, 2017

As part of our KG Prime market intelligence series, we recently examined and retrieved data from the largest players in the U.S. healthcare market. After doing so, we suggested various takeaways for the ARM and RCM industries based on company-specific and market-wide data. ....

» see this post    » all posts

Earn-outs: A Necessary Evil in Business Transactions or a Valuation Bridge between Buyers and Sellers?

August 10, 2017

Most business owners who are contemplating the sale of their business tell us they are vehemently opposed to a transaction structure that includes an earn-out component. When asked why, the typical answer they give is that earn-outs never materialize. So, why do earn-outs exist?....

» see this post    » all posts


Kaulkin Ginsberg Announces the Acquisition of Remit Corporation by Eastern Revenue

August 17, 2017

Kaulkin Ginsberg Company announced today the acquisition of Remit Corporation, a well-established regional collection agency founded by Harry Strausser III, and based in Bloomsburg, Pennsylvania, by Eastern Revenue, Inc.....

» see more

Mike Ginsberg to Discuss Trending Topics at ARM Events this Fall

August 15, 2017

Join Mike Ginsberg at the Debt Connection Symposium and the Receivables Management Conference this fall as he discusses important issues surrounding the ARM industry.....

» see more

Kaulkin Ginsberg Moves Its Market Intelligence Online

June 8, 2017

Kaulkin Ginsberg is changing the way busy owners, executives, and senior leaders access strategic market intelligence with the launch of KG Prime. KG Prime is a comprehensive and easy to use web-based service that provides users with economic, market segment, and other forms of strategic research.....

» see more