The State of Mergers and Acquisitions in the ARM Industry

December 7th, 2017

As we put a bow on 2017, and look ahead to a prosperous New Year, we want to share our insights and predictions on the mergers and acquisitions (M&A) front in the U.S. accounts receivable management (ARM) industry. We addressed this important topic in more detail in a recently recorded podcast available exclusively to KG Prime members. This podcast concludes a four part series that we recorded on the state of the ARM industry, which includes critical viewpoints from subject matter experts on compliance, economic indicators, and technology advancement. Register to KG Prime for free to access this information.

M&A Transaction Pricing

First, an appropriate disclaimer – Pricing is a very difficult topic for valuation experts to address in the aggregate. ARM companies are vastly different from each other. Buyers value these differences more or less depending upon their needs.

With ARM companies ranging from those generating less than $2 million in annual revenues, to “platform” companies generating many tens of millions of dollars a year in revenue, pricing is still derived by buyers. This is predominately based upon a multiple of the selling company’s earnings before interest, taxes, depreciation, and amortization (EBITDA), normalized to account for any excess or one time operating expenses.

For small-sized ARM companies with annual revenues or fees under $5 million, the multiple is still in the 2-4 range. We are seeing buyers apply a lot of structure to these size transactions, instead of paying cash, because of the overarching concern about losing key clients post-closing since the owner is typically integral to client retention in these size transactions.

For mid-sized companies, ranging from $5-20 million, we’ve experienced a slight increase in the higher end of the range, from 3-5 times to 3-6 times. This is because many mid-sized ARM companies are demonstrating sustainable revenue growth and relatively high levels of profitability after years of setbacks due to the impact of the Great Recession.

For larger ARM companies, with revenues north of $20 million, pricing conversations start at 5 times, and could go as high as 8-12 times, for large and profitable specialists and those ARM companies that buyers perceive as “platform” acquisitions.

There are always outliers based upon the seller’s performance or the buyer’s specific needs.

Noteworthy Factors That Will Influence Buy and Sell Decisions in 2018

The market segments that an ARM company services will continue to be key value drivers that influence buy decisions.

  1. Consider the financial services sector, which hasn’t fully recovered from the great recession. Although some buyers have returned to that market segment, their approach to pricing and structure still reflects depressed conditions.
  2. In the telecommunications sector, a market suffering from severe client concentration already, is experiencing even more consolidation at the top. Consider the effect on the ARM industry if T-Mobile combines with Sprint or AT&T with Time Warner. Buyers will be overly concerned about concentration issues and will look to structure transactions around client retention.
  3. In student loans, the lengthy procurement process for the U.S. Department of Education’s (ED) unrestricted contract has halted M&A transactions in this space.
  4. Within healthcare, buyers were fixated on acquiring companies that provide early-stage extended business office (EBO) and other revenue cycle management services to large hospital systems. More recently, acquirers looked to acquire traditional collection agencies focused on the expanding self-pay component of recoveries. We think buyer interest in the healthcare sector will continue as the Trump administration again tries to overhaul or repeal Obamacare.
  5. Within the state & local government segment, buyers continue to seek platform and add-on acquisitions with a proven track record, and well-defined RFP process. With the exception of a few focused players, most companies are not market specialists within this sector. This makes the availability of desirable acquisition targets a lot less than other market segments such as healthcare.

The rise in the overall number of lawsuits filed against ARM companies, and the frequency and the size of the claim, will continue to influence M&A transactions. Regulation is still far behind technology advancement when you consider, for example, how many collection agencies still use expensive mail instead of email and text message communications. Claims against ARM companies, and the concern for additional litigation, are risk factors that buyers can’t ignore when it comes to transaction decisions.

The new tax bill is calling for a reduction in the federal capital gains rate from 35 to 20%. This may encourage some owners to sell their company due to the increase in after-tax proceeds.

The Outlook for M&A in 2018, and Beyond, is Positive

We forecast an uptick in the number of M&A transactions completed in the ARM industry starting in the second half of 2018.  We cite the following reasons for this optimism:

  1. As we stated earlier in this blog, many mid-sized ARM companies are demonstrating sustainable revenue growth and relatively high levels of profitability after years of setbacks due to the impact of the Great Recession. We believe there will be an increase in the number of desirable ARM companies for sale starting in the second half of 2018.
  2. Although it didn’t happen in the first year of the Trump administration as originally anticipated, we anticipate significant changes to Dodd–Frank, and, specifically, the CFPB. With Richard Cordray now out, this opens the door to changes early in 2018 which would have a positive impact on M&A transactions in the ARM industry.
  3. We feel that federal government contracts, including the Department of the Treasury and ED will become one of the largest sources, if not the largest source, of new business to third-party agencies starting in 2019 and continuing for the next decade. This will drive a lot of interest from financial and strategic buyers alike. The good news is the impact will be felt by all size agencies because of the government’s requirement for small business participation as we have seen with ED subcontractors.

Everyone at Kaulkin Ginsberg wishes you a healthy holiday season and a prosperous New Year. Please let us know if we can be of service by calling Mike Ginsberg directly at (240) 499-3800 or confidentially emailing him at

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