ARM M&A Outlook: 2011 is Shaping Up to be a Busy Year

The Kaulkin Ginsberg team recently released 2010 M&A results for the ARM industry (click here for our M&A recap). Deal volume has been flat in the ARM industry for the past three years. We expect 2011 to be an active year for M&A in the debt collection industry driven by the following:

Successful collection agencies will attract attention – Agencies who check all the right “value enhancer” boxes will generate interest from buyers.  Here is a short list of “value enhancers”:

• Sustainable year over year financial performance
• Limited client concentration
• Long tenure with key clients
• Strong management team in place willing to continue post-transaction
• Capital investments (technology and facilities) have been made to position the company for growth
• Growth potential in the markets you service
• Financial house is in order

Private equity backed collection agencies will look to make more acquisitions – A number of private equity firms have acquired agencies within financial and healthcare services and, as a part of their growth strategy, add-on acquisitions will be incorporated into their “playbooks” to increase revenue and expand service offerings, diversify, and obtain lower labor cost facilities. These types of transactions will typically be geared toward merging in the acquired agency and gaining cost savings.

Distressed “agency” situations – In 2010 we started to see a slowdown in the number of distressed situations but expect that some agencies with excess capacity (due to placement volume reductions) will run into difficulty (post tax season) and may need to consider a partial or total sale.  As a result, well-capitalized industry players will have an opportunity to merge in the distressed agency’s client business and consolidate the existing cost structure. These transactions typically do not trade on a multiple of adjusted EBITDA but rather on some combination of the following: minimal cash at closing, a performance based earn-out, and the potential assumption of certain liabilities.  Personnel that maintain the key client relationships will be important to the buyer and there compensation will be factored into the deal structure.

Unemployment rate – This is a major barometer to our industry and buyers focus on it to consider the timing of an investment into our industry.  If you believe what you read, the unemployment rate dropped to 9.4% but the pace of hiring is still too slow to support sustainable job growth.  If we see a “real” drop in unemployment in Q1-Q2 2011, liquidations results will improve overall agency profitability.

Lender financing – Asset light lending is slowly coming back to the market but most lenders are still very conservative, requiring extensive due diligence to get comfortable with financing a transaction.  The key factors that lender focus on include understanding the sustainability of the agency’s financial performance, client concentration risk and the integration plan if one agency is buying another.

I can guarantee that M&A in our industry will be another roller coaster ride in 2011.  I expect that buyers will be out in force this year trying to get deals done in our industry, whether it is private equity looking for a platform investment or an industry player or a strategic buyer looking to acquire an agency.

I welcome your thoughts on my blog, feel free to call or email me.

Michael D. Lamm advises owners on their growth and exit strategies for Kaulkin Ginsberg’s Strategic Advisory team. Michael can be reached directly from Kaulkin Ginsberg’s Philadelphia, PA office at 240-499-3808 or by email. You can also read his blogs, follow him on Twitter, or network with Michael on LinkedIn.