Purchasing TPA Firms

[Guest Thornton]

We have been approached by another TPA firm about our interest in purchasing it. We are not in an acquisition mode and might not be again, but at first glance this one seems to fit. Does anyone have a resource for us to find out due diligence procedures, reasonable price, etc. Are multiples of core revenue or the like used to determine price? Any assistance will be appreciated.

[david rigby]

If experience is valid, it is worth only about 60%-75% of what the seller thinks it is.

[mming]

From what I have seen in large metropolitan areas, a multiple of revenue is the main determinant of sales price. At the height of the economy, 3x revenue was possible; at the lowest point, you were lucky if you could get 1x. Informally guestimating current conditions, 1.5x may be possible. I suppose the range may be narrower in smaller communities. I, too, would be curious to hear about what others have experienced.

[david rigby]

1.5! Wow. My experience is in the 1.0 range, and that was overpriced.

[mming]

Pax, was that recently?

[Larry M]

a. Price

whatever multiple you use (and I am close to pax in my estimates), consider paying for theh acquisition over a period of years. For example, if 100% of gross is the value to which both sides agree; pay for it at the rate of 10% of the receipts from tose accounts you actually receive over each of the next ten years.

Effectively, this gives a price which is less than 100% of current revenues unless your increase in fees more than offsets the combination of plan termination and present value of money.

b. Due diligence

get thee to an attorney and pay him to help you set up the ability to review the prospect's work and make sure he reviews and okays all agreements BEFORE you sign anything; the first, most likely, will be a confidentiality agreement.

[david rigby]

Pax, was that recently?

Sorry, no further details are available.

Or, in the words of Harlan Weller, "I couldn't say."

[Guest FLMaster]

We are interested in acquiring TPA frims if the TPA has defined benfit plans. Purchase price 1.0-2.0 of gross depending on terms. Hope this is helpful.