How to Position your ARM business for Maximum Value, Regardless of When you Sell It

Mike Ginsberg

What if I told you that you could sit down at a high-stakes poker table at any time and know what cards will be dealt to you in advance, before the game begins? You would probably like your chances of winning that game of poker. Apply that same concept to the sale of your business.

What if you knew the most critical attributes that a business buyer will fixate upon in advance, before you ever begin discussions regarding the sale of your business with that prospective buyer? Better yet, if you were able to address these areas in advance of any discussions do you think you would improve your chances of maximizing its value when it comes time to sell your business? Of course you would.

Here are the key attributes that a buyer will focus on when considering whether to buy your ARM company and when setting its price and deal terms:

Rock-Solid Client Relationships

Core to the sale of any service business, is having a transferable client base. Buyers will closely evaluate client relationships, especially when concentration levels exceed their level of risk tolerance. A red flag usually gets raised when one client exceeds 20% of a company’s annual revenues which is very typical of consumer collection agencies. Commercial collection agencies tend to have a more diverse client base when compared to a consumer agency.

There are proven ways to address your business’s client relationships in advance of any sale to make sure they are firmly in place. It starts with meeting with key clients on a regular basis and getting a firm handle on their concerns and motivations. A key client is one that is currently generating 20% or more of your business’s annual revenues, or has the potential of growing to those levels. Buyers will try to determine your clients’ retention value and their growth prospects. Focusing on this with your own management team, in advance of a sale, will strengthen your client engagements in the short term and better position you when it comes time to sell.

Key point: If you’re an owner and also the key person with client relationships then it is critical to begin transferring client relationships to other key staff members who will stay with the business post sale.

Steady Financial Performance

The key attribute of a successful real estate transaction has always been location, location, and location. Like real estate investors will gravitate toward the location of the property, ARM business buyers will fixate on the seller’s financial performance when determining price and deal terms. Buyers always prefer to acquire a business that has achieved sustainable year-over-year growth in both revenues and income, and they will be prepared to pay a higher purchase price with more attractive deal terms for those businesses that are capable of demonstrating sustainable financial performance.

Having proper financial controls in place will improve financial performance in the long term and have a positive impact on purchase price and deal terms when it comes time to sell. For example, today’s buyers will want to see your company’s profitability broken down by service offering, by call center and at the client level. They will also request a budget for the current calendar year and if you have a rock-solid basis for your revenue and expense assumptions you will be in a strong negotiating position. Do you have a firm handle on capital expenditures you will incur to remain competitive? Does your management team prepare a forecast beyond the most recent calendar year? With proper planning, these are all financial controls that you can put on your business in the short term and confidently present to a buyer when it comes time to sell your business.

Who’s running your business?

Are you the type of business owner that is involved in all aspects of the business? The answer is yes whether you wear that hat solely or if you have partners that together with you oversee all aspects of your business. Buyers will pick up on this immediately and will push for long-term payouts based upon you making sure that continuity of financial performance remains post-closing. One way to avoid this is to start grooming your leadership team today for life after you’re gone. Put them in a position of authority and support their decision making ability. The more you, as an owner, invest in succession plans up front, the more likely you will be paid out at time of closing

Managing legal or regulatory issues

It is no secret that we are in a litigious society and bill collectors are handling significant volumes of accounts. Therefore, it is commonplace for ARM companies to have pending lawsuits at any time, even when contemplating a sale. Experienced buyers will know this too. They will want to understand your company’s potential exposure and may look to structure a transaction to minimize their risk post-closing. Knowing this up front, owners can manage toward aggressively addressing all legal matters as they arise and staying ahead of regulatory change by attending conferences, actively participating in your associations or joining benchmark groups.

Strategic plans

Does your business have a multi-year strategic plan in place that your team actively follows or are you operating your business based upon gut instinct? Having a strategic plan that is followed and updated on a regular basis will put you in a stronger position to evaluate business trends and growth opportunities in the short term and explain things to a prospective buyer when it comes time to sell. Updates and overhauls should be based upon real market data obtained from your own business as well as outside resources such as trade associations, peer groups, conferences and industry consultants.

Technology advancement

If buyers view your company’s systems as outdated and in need of a major overhaul then the purchase price may be reduced by the expected amount of capital expenditures needed. Another factor related to automation is whether clients are satisfied with the reporting capability, flexibility and response times of your company. All of these things lead to happy clients and happy clients lead to future revenue and stability within the business. They also equate to better terms when it comes time to sell.

Presentation

What impression does your office give when people arrive at the front door, and after they walk through it? Are your managers and employees working hard and in good spirits or do they appear to have a chip on their shoulder? I’m not saying that a business needs to resemble the Ritz Carlton with fine china and turn-down service, but in order to “show” well, it should convey a clean, organized environment with people who like what they do and are good at it. Don’t wait until you are touring a prospective buyer through your business. This is something that you can address today.

Individual buyers will focus on certain attributes more than others. For example, financial buyers will be more fixated on businesses with proven leadership in place than industry buyers because, by definition, a financial buyer will not run the business themselves. Industry buyers may be more focused on particular clients or service offerings that expand their own operation. Knowing the key attributes that business buyers focus upon enable you to position your business to enhance its financial performance. It also positions the business to realize maximum value and desired deal terms when it comes time to sell.