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By Michael Lamm |
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
On July 16, our strategic advisory group will be conducting a recap of M&A activity in the industry in a live teleseminar, and we plan to talk in more detail about our tips for preparing for a company sale. This is an invitation-only event. If you would like to attend, please contact Anne Strong at 240-499-3816 or email anne@kaulkin.com.
Michael Lamm manages M&A transactions and Valuations for Kaulkin Ginsberg. Michael can be reached at 240-499-3808 or by email.