Collection Agency Values to Increase, More M&A Activity Expected

The shifting political landscape will likely have a positive effect on the valuation of collection agencies, hopefully easing the burden that has increased expenses and making smaller agencies less interested in getting out of the business, said Michael Lamm, the managing partner of Corporate Advisory Solutions, during a webinar held earlier this month.

The webinar aimed to help executives better understand the economic, political, and regulatory undercurrents that will affect the valuation of collection agencies. The barriers to entry to starting a new collection agency continue to increase, making it less likely that new companies will come into the market, Lamm said. The best opportunity to get into the collection space is by purchasing an existing business.

Lamm pegged the cost of starting a new collection agency from scratch at $1 million, minimum, before “earning even a dime of revenue,” he said. Starting up a collection agency from scratch is possible, but will require a “large investment” to be successful, he said.

“The number of agencies is not growing, it’s shrinking,” Lamm said during the webinar, hosted by “All segments are ripe for deals to be done.”

Among the growth areas of the industry that Lamm cited during the webinar are:

  • Healthcare
  • Student Loans
  • Auto
  • Commercial Loans

The new presidential administration, and the changes that are expected to occur under President Trump, should also make the industry more appealing to investors, Lamm said. For the past two-to-three years, most investment has come from inside the industry, meaning smaller agencies selling out to larger agencies that were looking to expand and because smaller agencies were unable to handle the costs associated with an increased regulatory burden.

“Activity has been driven by consolidation and not private equity investment,” Lamm said. “Things are happening now that are finally starting to change the view of the industry.”

One key area that Lamm expects some regulatory unburdening to be especially helpful is any changes to the Telephone Consumer Protection Act which makes it easier for agencies to use autodialers and contact individuals on their mobile phones.

Another important aspect to helping more deals come to fruition is the state of an agency’s Compliance Management System, Lamm said. Even if the regulatory burden is eased on collection agencies, it will not go away completely. And the investments that have been made in CMS’s are an incredibly important component in making sure that an agency is operating compliantly.

“You have to make sure you’re not walking into anything,” Lamm said. “Having those controls in place, a deal will be more likely to get done if those controls are in place.”

Expected changes to the Affordable Care Act are also placing more interest in the healthcare sector, especially among companies that specialize in revenue cycle management. Adding a collections component to the list of features offered could make collection agencies that specialize in healthcare collections more appealing.

To download a recording of the webinar, please click here. To request a copy of the presentation, please click here.




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