Sunday, March 15th, 2015
By: Michael D. Lamm, Managing Partner, Corporate Advisory Solutions
M&A activity in the accounts receivable management (ARM) industry continues to be alive and well. We just came off another robust year for deal activity; however, with the CFPB ramping up its oversight of the ARM industry over the past 12 months, buyers have placed more of an emphasis on the term “compliance” unlike previous years. Whether it is a mid-size agency considering an acquisition of a 5-10 person collection operation or a private equity firm who is considering a platform investment and entering the industry for the first time; it is clearly apparent that buyers are bringing compliance to the forefront. It has become a key area of due diligence and as a result the process has become more extensive. In some cases we are seeing transactions go beyond a typical 30 to 60 day timeframe to close and fund. The additional time during due diligence is being used by the buyer to evaluate the overall effectiveness and functionality of an organization’s compliance management system (CMS). Some specific areas of the CMS a buyer will take a look at could be:
1.The process to handle, evaluate, and remediate complaints
2.Prior and pending legal action against the company
3.Policies surrounding how the organization handles contacting consumers on cell phones
4.Listening to collector calls
5.Agent training and then re-training following violations
6.Documentation of policies and procedures
7.Interviewing the compliance manager to understand the person(s), roles/responsibilities, and interaction with the owner(s) when a compliance issue arises
8.Gap assessment of CMS vs. the CFPB examination manual
Buyers have never been more concerned with “headline risk” when considering an investment or acquisition in our industry. We are also seeing many buyers avoid issuing public press announcements after a transaction closes to avoid becoming a target to consumer attorneys.
Prior to the market crash in 2008, regulatory and compliance due diligence of an ARM company was focused on, but to a much lesser degree. A buyer would tend to spend a lot of time assessing legal exposure surrounding routine FDCPA lawsuits or whether there was any on- going state or federal investigations or fines that were levied against the company.
If we fast forward to the post-CFPB world we are living in, buyers are still laser focused on those items but they are now heavily scrutinizing the company’s CMS and whether it is up to standards (CFPB examination manual has become the buyer due diligence guidebook) and those who oversee it. The buyer is evaluating whether the CMS needs to be revamped (require additional technological investment or compliance manpower) post-acquisition/investment. If you are considering a sale in the near-term, take the time to get your “compliance house in order.”
Compliance is becoming one of the primary focal points when it comes to the sale of an ARM firm and the divide has become apparent between those who are adapting to the “compliance leads” mentality vs. those who are not transitioning to the new era. As the industry continues to consolidate, ARM firms who position themselves as leaders in operating the most compliant and forward-thinking organizations will benefit not only from more client opportunities but will also be better positioned to attract a buyer.
The days when a buyer would put compliance toward the tail end of due diligence and fail to make it a focal point no longer exists. Buyers are looking for companies in our industry that take compliance seriously where it isn’t just “window dressing.” There is also a cost to comply which continues to increase, but once the CMS is in place, the benefits will outweigh the costs in the long-run. An organization which is fully compliant will be able to increase the value of that organization, leave a lasting impact, and create competitive differentiation in the market.
Originally appeared in Cornerstone Support Inc. newsletter.