Smaller ARM Companies Selling Successfully

January 10th, 2007

Anyone who follows the ARM industry has read recently about mergers and acquisitions involving some of the largest companies in the industry, including NCO Group and West Corp.

While these large transactions are impressive and certainly noteworthy, they only tell part of the story. What about the deals involving smaller companies?

We estimate that over 95 percent of the companies within this industry generate less than $8 million in annual revenues. Buyers seeking opportunities in this space are interested in these companies and do not limit their interest to the very largest of potential acquisitions.

Kaulkin Ginsberg has been tracking M&A deal activity within the ARM industry since 1991. Throughout this history, we’ve come to understand that the distribution of transactions within the ARM industry is much like the distribution of ARM companies themselves.

The value of ARM transactions in 2006 is approximately $3.1 billion, the bulk of which was generated by transactions involving NCO Group, West, and other large ARM companies. However, the majority of the deal volume was generated by companies much smaller in size.

In 2006, Kaulkin Ginsberg confirmed that 68 transactions took place within the ARM industry. Of this amount, only five (7%) had purchase prices greater than $100 million and only three (5%) had purchase prices between $50 million and $100 million. Of the remaining 60 transactions, 15 (22%) sold for between $10 and $50 million, and 45 (66%) for less than $10 million.

This of course does not necessarily mean that owners of larger ARM companies are receiving poor prices for their companies. Quite the contrary, companies of all sizes have sold for attractive market multiples. How are these companies being valued?

Buyers typically apply a multiple to adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) to value receivables management companies. The EBITDA value is typically adjusted for certain excess and/or non-recurring expenses that will not exist post-transaction, such as expenses for shareholders that are not active in the company.

Over the past 18-24 months, market multiples for ARM companies have risen above historical norms. Previously, ARM companies generating less than $10 million in revenues normally sold within a range of 3 to 5 times adjusted EBITDA. ARM companies generating north of $10 million in revenues would typically sell for 4 to 6 times adjusted EBITDA or more, depending on the amount of deal structure (earn outs, seller’s note, retained equity, etc.) incorporated into the transaction.

Over the past 18-24 months, multiples for ARM companies generating less than $10 million in revenues have increased to a range of 4 to 6 times adjusted EBITDA, and companies generating $10 million or more in revenues are receiving 5 to 7 times adjusted EBITDA, and exceeding 7 times in exceptional instances.

So while there is some discount for smaller companies pursuing exit opportunities relative to the largest sellers, prices paid for these companies have increased relative to historical norms. For example, a company that has annual revenues of $8 million and an adjusted EBITDA of $1.5 million might reasonably expect to sell for an enterprise value of $6 million to $9 million. Where the price falls within this range will depend in large part on the particulars of the selling business, including how well it fits with the buyer’s needs.

Whatever the size of a company being sold, mergers and acquisitions in the ARM industry reflect its vibrancy. These transactions afford owners the opportunity to liquidate their accumulated equity in a business and give new owners the opportunity to take a company to the next level. This activity is taking place frequently throughout the ARM industry, and not only among its largest competitors.

For more information, contact us at hq@kaulkin.com.

 

Comments are closed.

LATEST BLOGS

New York State Now Offers Free College Tuition: The Potential Beginning of a Major Nationwide Trend

April 27, 2017

The Department of Education contract for debt collection services is one of the most lucrative and sought after contracts today by ARM companies. However, state-level legislation like The Excelsior Scholarship could have profound effects on the student loan market.....

» see this post    » all posts


Non-Employment Index: An Alternative Employment Stat

April 26, 2017

The U.S. unemployment rate is a popular measure for looking at the health of the U.S. economy, but alternative measures like the non-employment index may provide even greater insight. In this blog, Kaulkin Ginsberg's analysts examine the strength of the U.S. economy using this alternative measure and its relation to the ARM industry.....

» see this post    » all posts


Healthcare: The Ever-Growing Industry

April 25, 2017

The healthcare industry is one of the most widely analyzed industries in the US due to its seemingly never ending growth. As such, it's no surprise the ARM industry is so focused on the potential impact of a repeal and replace bill for the ACA. ....

» see this post    » all posts


RECENT ANNOUNCEMENTS

ACA of Texas Publishes "Three Critical Healthcare Industry Trends for Outsourced Business Services" in its Winter 2017 Magazine

March 16, 2017

The ACA of Texas Publishes "Three Critical Healthcare Industry Trends for Outsourced Business Services" by Kaulkin Ginsberg in its Winter 2017 Magazine. Kaulkin Ginsberg details its belief that the growth in patient lending and financing programs, clinical integration networks, and physician quality reporting systems for the Centers for Medicare and Medicaid Services (CMS) could have profound effects on companies focused on servicing healthcare providers in 2017 and beyond.....

» see more




ACA of Texas Publishes "M&A Trends in the U.S. ARM Industry" in its Winter 2017 Magazine

March 15, 2017

The ACA of Texas Publishe "M&A Trends in the U.S. ARM Industry" an article by Kaulkin Ginsberg in its Winter 2017 Magazine. This article examines the key trends and developments driving M&A activity in the U.S. ARM industry by market segment.....

» see more




Mike Ginsberg Leading Panel Discussion at DBA International 20th Anniversary Conference

February 1, 2017

Mike Ginsberg, President and CEO of Kaulkin Ginsberg, will be speaking in a panel discussion on Trends in Debt Buying on Wednesday, February 8th at the DBA International 20th Anniversary Conference in Las Vegas, Nevada....

» see more