Welcome to a new feature on AccountsRecovery.net, which will share insights into the areas of succession planning and merger & acquisition activity in the ARM industry. Every month, Michael Lamm from Corporate Advisory Solutions will answer a few questions about the state of the ARM industry as he sees it.
This month, Lamm shares a lot of good news with the industry, regarding interest from buyers looking to acquire collection agencies, and the price that they are paying.
Q. What are the most common questions/inquiries you are receiving from companies in the ARM sector right now?
A. We continue to receive an increasing amount of questions regarding the regulatory environment. Business owners in the ARM industry are always seeking guidance on how any regulatory changes will affect the valuation of their business, strategic decision planning and the timing of a transition plan. Since the beginning of the year, we have received a significant number of calls regarding our perspective on how leadership changes for the various governing entities will affect regulations regarding the auto-dialers, the use of technology (such as A.I.) and how their business should handle charging convenience fees.
Q. What are the most common sticking points to deals being completed?
A. Most transactions are not able to be completed with cash off the buyer’s balance sheet alone. The ability for a buyer to secure financing for a transaction has become crucially important. A buyer’s wherewithal to finance a transaction is as crucial, if not more important than a buyer’s interest level in pursuing a transaction. Securing a lender for a transaction is an involved process that requires a significant amount of due diligence and documentation, above and beyond the operational due diligence a buyer would typically conduct before purchasing a company. The ARM industry is not a segment of the market that most lenders are playing in today, creating added challenges.
The client base of company being acquired is typically the major selling point for a transaction. A buyer will not be fully comfortable with a transaction until they have reassurance that the seller’s client base will continue placements post-transaction. It is not uncommon for client contracts to contain language requiring the consent of the creditor before the contract can be assigned over to the buyer. Sellers, for obvious reasons, are typically wary to have this type of communication with their clients until the transaction is assured to close. This creates an interesting dynamic for both buyers and sellers.
Another overarching rationale for pursuing an acquisition is the ability to achieve synergies of scale. If a buyer is unable to conclude that they will achieve synergies through the integration of the sellers business, it is difficult to arrive at a meeting of the minds on valuation. Significant synergies can typically bridge a valuation gap and can be responsible for a material portion of meeting or achieving their internal return model.
Q. From what kind(s) of company/companies is the greatest interest in purchasing ARM companies coming from?
A. Healthcare, student loans, and automotive-focused ARM companies are receiving the most interest. Rising debt levels within these asset classes have been the main driver for interest in these markets. It continues to be easier to enter a market inorganically via a company with an existing reputation in the space rather than a prolonged process of developing a footprint for a new market segment in-house. Over time ARM companies through growth within their client base will typically become heavily concentrated with a small number of clients, creating a need to diversify their revenue stream and expand their service offerings.
Q. Are the number of inquiries/deals in the pipeline higher or lower than last month/the same month last year?
A. The number is higher than last year. CAS has witnessed 40 deals close in 2017, which is a 37% increase over the 29 deals we witnessed in the year prior. We have seen a lot more owners beginning to look at different options for an exit as the ARM market continues to get more interest from the market.
Q. How are valuations trending?
A. Valuations are trending higher, especially larger transactions due to increased competition in the marketplace. ARM businesses have been receiving a lot more inbound interest from financial buyers looking for platforms/add-on acquisitions which is helping drive higher valuations. Additionally, with the potential for decrease in regulations due to leadership changes in regulatory entities, financial buyers that were not interested in the ARM industry are now beginning revaluate the space. We are also seeing increased interest from strategic ARM business, creating an attractive environment for a selling company.