The Impact of Compliance on M&A Activity

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A heightened emphasis on compliance has slowed the due diligence process when buying or selling an Accounts Receivable Management (ARM) company. Buyers and sellers are asking for more assurances and information about how a company manages its policies, procedures, and processes to remain in compliance. The following details how buyers and sellers can better prepare themselves to conduct business in this new environment.

Despite recent changes that have taken place at the Bureau of Consumer Financial Protection (BCPF), formerly known as the CFPB, compliance continues to significantly impact M&A activity in the ARM industry.

Potential buyers refer to the BCFP Supervision and Examination Manual more often as a litmus test to see if the ARM servicer they may purchase has the proper procedures, workflow, and compliance management systems already in place.

Anticipate lengthened due diligence time periods

More regulatory compliance and a strong desire to comply with federal compliance rules today result in a longer due diligence time frame. While sale processes previously averaged 30 – 45 days to complete, at Corporate Advisory Solutions (CAS) we are now seeing the same processes take 60 – 90 days or even longer.

What has been slowing the process down from the seller’s side of the equation is being able to assemble all the information needed in an organized fashion to share with the buyer. This includes everything from how the seller deals with consumer complaints to how they respond to these complaints, which many times are simply disputes.

The structure of a transaction, whether an asset or stock sale, will lead to differing implications for assumed liabilities for the buyer post-transaction and will impact the level of diligence required. The most tax-advantageous structure to the seller will likely be a structure that leads to greater legal exposure for the buyer, requiring more extensive diligence efforts.

Experienced legal counsel can speed up the due diligence process 

Having legal counsel retained who is knowledgeable in this area – internal or outsourced – who can answer questions around any recent lawsuits or legal actions against the company can accelerate the due diligence process. At CAS we have experienced first hand how an experienced attorney who understands the ARM industry can help to accelerate the due diligence and legal documentation process.

Is the seller in compliance with the Telephone Consumer Protection Act?

Given ongoing rulings at the state and federal levels related to the Telephone Consumer Protection Act (TCPA), there is enhanced awareness around sellers having compliant policies and procedures in place. We are witnessing additional diligence requests related to the four-year look back on TCPA related claims.

Buyers will want to know if the company is complying with federal and state regulations and if there are recent class-action lawsuits that have not been settled. If a company has a TCPA issue, we will see that move ‘front and center’ when a buyer is conducting due diligence on a company. In most cases this negatively impacts valuation, should a buyer not establish a comfort level with how the seller is handling the lawsuit and mitigating potential exposure.

Have your compliance materials ready when the sale process starts

Any ARM servicer thinking of putting itself upon the market or is already in the market should take time to prepare compliance materials and have as much available right from the beginning to avoid issues that come up later. The more prep work that can be done on the compliance side will help to shave off time in the due diligence process.

Sellers of Account Receivables Management servicers should always disclose, disclose, disclose before entering into any mergers and acquisitions activity.

There is no point in hoping a buyer will not find out or that it is not relevant/applicable diligence. A seller is much better off putting it all out on the table, explaining what, if anything, happened in the past. By doing so the seller can anticipate the possibility the buyer could come back later to claim you didn’t share information or file a lawsuit against you post-transaction.

About CAS

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.

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