Preparing for a Sale – Getting Your Financial House in Order

May 1st, 2008

We have seen it happen; a buyer walks away from a deal because a collection agency’s “financial house” was not in order. Before considering a sale of one of – if not the – most significant assets you have, it’s absolutely critical to take a step back and put yourself in a buyer’s shoes. Regardless of whether you’re one year or five years away from the sale of your company, spending the time and money to get your company’s financials in order now can save you a lot of grief later. Here are a few tips:

Prepare reviewed or audited financial statements – Agencies that have roughly $5M or more in annual revenue (net fees) should consider this. A review or audit done for the past one or two fiscal years would likely suffice, but it is important for a buyer to see that you are committed to having that level of financial evaluation for current and future fiscal years too. This level of financial examination will save the buyers time in their review of the agency prior to and during due diligence, providing a degree of comfort that the figures that you are showing them are accurate.

Hire a chief financial officer or controller – Agencies that have $5M or more in annual revenue should consider having a full-time person responsible for day-to-day financial management of the business. It demonstrates to a buyer that direct financial oversight exists, which provides comfort with overall reporting and quality assurance. Not having someone in this role may raise a red flag to a buyer. This new hire does not need to have direct ARM industry experience, but you should allow enough time before a sale for the person to become acclimated to the nuances of the industry. An added plus is having an individual who has previous experience going through a sale of a company – even better if it was with a collection agency.

Create an internal month by month budget and forecast model – Being able to predict placement volumes and net fees by client from typical performance-based 30 day contingency contracts poses many challenges. However, buyers still like to be able to see that management has the ability to create a month to month budget based on historical placement volumes, liquidation, net fees and sales pipeline for the current fiscal year, and a detailed (bottom’s up) forecast with defined assumptions for at least the next fiscal year.

Track profitability by client – Many agencies as they grow and scale develop significant client concentration, where a few clients may make up a good portion of revenue and profit. This is especially apparent within the financial services and telecom sectors. Aside from being able to budget revenue by client (see above), it is important to understand how profitable your key clients or streams of business are, so buyers can see which clients drive your profit margin. This will be one of the primary drivers to determining the multiple applied to adjusted EBITDA, the proposed cash at closing, and deal structure (if any). One way to look at your key clients or streams of business is by determining a contribution margin by client. This is a cost accounting concept that allows a company to determine the profitability by individual clients. A simple calculation is as follows:

Client Net Fees – Direct Collection Costs
Client Net Fees

 

Comments are closed.

LATEST BLOGS

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


RECENT ANNOUNCEMENTS

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