If the owner of a collections agency doesn’t also own key client relationships, he or she should assume salespeople who own these relationships will be critical to the potential buyer on a going forward basis.
Collections agency owners who are selling their businesses sometimes make the mistake of overlooking the sales channel. In many instances, key client relationships don’t sit with the owner of the business. Instead, they sit with either a W-2 full time employee sales person who has been with the business a long time, or with a 1099 broker who has been bringing key relationships to the business on a commission only basis.
How can an owner best deal with this situation?
The optimal scenario is for the sales person to go along with the sale of the business. Of course, it would be unwise to have premature discussions with the salesperson. You don’t want to prematurely let the cat out of the bag that something is going to happen. But if you know your salesperson is getting close to retirement, consider shadowing the salesperson with a junior person who will take over the relationship. As a result, you can transition the client relationship if the sales person doesn’t want to continue post transaction.
Another way of dealing with this situation is with an employment contract. If you already plan to put an employment contract in place that will include the normal terms of non-compete and non- solicitation, you can facilitate a transition to another buyer by adding a retention/transaction bonus that will pay out at different intervals after the transaction closes. You will then be able to make sure the salesperson does everything he or she can to transition the client to the buyer in an orderly, methodical fashion. Too many owners want to nonchalant this process, and not get into the weeds with the sales person. If you follow this strategy of avoidance, though, this could become a huge issue just when you want to close the deal. The buyer will want to meet with the salesperson to make sure he or she wishes to continue with the business and meets the requirements of the buyer. These requirements will include culture and everything else that goes along with this.
The more transparent you can be regarding client relationship ownership –
from hire through career growth – the better off you will be. It is never too early to have this discussion. The salesperson could hold the deal hostage by not agreeing to go along with the process if you wait until the bitter end. This could delay or even blow up the transaction depending how critical the client relationship and its owner are to the business.
If an owner can tie the client relationship owner into the sale of the collections business in coordination with an earn-out paid during a 1 – 3 year term, this could protect the business, the owner and the sales person. It will also make things easier for the buyer post-transaction.
The challenge with independent brokers
What if the client relationship isn’t owned by a W2 or full time sales person, but instead is owned by an independent commission only broker being paid on a 1099 basis. When selling a business you have to be mindful of situations in which key client relationships are being managed or worked on by an outside party. In these situations there may be a contractual obligation in which the agency has to pay the independent broker a monthly or quarterly fee. This is not always easy to deal with. If the contract does not include language indicating what will happen in the event of the sale of the business, there could be problems with that independent contactor or brokerage group in figuring out how to keep that client after the deal closes. The buyer needs to know he has to continue to pay that commission.
There is often a lot of back and forth on this issue during a sale. What would the independent broker’s fee be post transaction? Is there a buyout of the broker’s fee? What would be the process to move away from the broker? Often the buyer would prefer a clean break. They don’t want to take on future commissions. This can cause a stalemate if the broker doesn’t want to go along with such an arrangement.
As in all things, advance preparation is key. Add language or an addendum into the independent broker’s contract indicating this is what would happen in the event of a sale. The more you can get ahead of this issue in advance of a sale, the less likely it will blow up the deal at the tail end of diligence
Seemingly small things can become huge deal risks for transactions getting done in the collections industry. The sooner you can get ahead of these issues the better off you will be. You are more likely to get a win at the end of the game – a deal.
CAS oversees and executes on M&A engagements, investment opportunities, compliance/regulatory assessments, valuation and expert witness litigation matters for constituents of the Outsourced Business Services (OBS) sector.