Outlook for M&A for Small and Mid-Sized Agencies

Despite the economic volatility, M&A activity is alive and well in the accounts receivable management (ARM) industry.  A few weeks back, our M&A team hosted a teleseminar about current M&A and valuation trends in the ARM industry. We will be hosting these on a quarterly basis. 

Michael Lamm covered how small- and mid-size collection agencies are being valued in today’s market and shared his predictions for the remainder of 2008. Here are some of his observations:

Small Collection Agencies – Up to $3M in annual net fees

• Multiples tend to peak at 4 to 5 times adjusted EBITDA. The value of smaller agencies is in this range because they have not reached economies of scale, rely on one individual who is typically the owner, and tend to have a localized client base. Buyers tend to focus on prior year financial performance as the agency most likely hasn’t created a budget or forecast for the current or future fiscal years.

• Deal Structure: We are seeing a combination of cash and structure, which could consist of an earn-out, retained equity, or a seller’s note. Because the owner is typically intimately involved in the business, his involvement post-transaction is usually critical to transition the personnel and clients.

• Buyers for these companies tend to be industry players, for example, a collection agency buying another agency as a geographic add-on to expand itsthe client base. We are also seeing agencies targeted by former owners and executives looking to re-enter the industry after a sale. Often these types of deals involve a seller who may want to retire or has fallen ill and needs to sell.

• Deals: Most of the deals occurring in this revenue range are not publicly announced, but Kaulkin Ginsberg identified 2 of the 9 deals in Q1 fell at or below $2M in revenue.

Mid-Size Collection Agencies – $2M – $20M in annual net fees

• Multiples between 4 to 6 times adjusted EBITDA, sometimes even higher depending upon the fit and terms.

• Deal structure: we are seeing 80% to 100% cash transactions, with the non-cash component in the form of an earn-out, retained equity, or a seller’s note.

• Buyers in this revenue range have been strategic and industry players. Some financial players (very small private equity firms or investment groups) are doing deals in these ranges, but they will likely need to see at least $2 million in adjusted EBITDA to get motivated.

• Deals: In this revenue range, we expect continued interest from private equity backed agencies looking to grow their platforms via acquisition in certain vertical markets to round out their client base and services.

In terms of recent deal activity, this revenue range continues to be very active for both strategic and industry players. We expect a significant amount of deal activity in this revenue range in 2008.  In Q1 2008, 6 out of the 9 completed transactions fell into that range.

Predictions for Q2 – Q4 2008

• Kaulkin Ginsberg anticipates the ARM industry will produce well north of $1 billion in total value in 2008, and may exceed 2007’s deal value total depending on pending transactions in Europe.

• We expect the volume of activity to pick up by the second half, and the total for 2008 should exceed 2007’s results.

• The buyer pool will continue to include strategic and financial players seeking platforms. The largest number will represent sizable ARM industry companies, particularly those that are private equity backed, seeking strategic add-on opportunities in the mid-size revenue range that allow them to enter new geographic markets, expand their service offerings and/or increase their client base.

• We also predict that the strategic buyer pool will start to include Canadian and European ARM companies seeking platform acquisition opportunities within the U.S. market to leverage value from the differential in the currency exchange rates.

For more analysis on Q1 2008 results, you can read our recent Insight article, “Q108 M&A Activity in the ARM Industry Active Despite Slowing U.S. Economy.”

As always, we want to know what you think. Comments and questions are always welcome.