Know Your Buyer

Buyers are out in force, scouring the ARM industry looking for collection platforms and add-ons.  If you are like most debt collection agency owners, you probably field multiple calls a week or receive “We Have a Buyer” letters from private equity firms, investors, M&A advisors (folks like me), business brokers, other collection agencies and India-based call centers or BPO companies. I would be surprised if you didn’t!

I would love to say that all agency owners will call me or our firm before responding to an inquiry but, believe it or not, that doesn’t always happen!

Here are a few tips before spending too much time with an unsolicited buyer prospect:

• Utilize Google – This sounds obvious but spend 5-10 minutes and type in the buyer or the principal’s name into Google and see what comes up.  You may be surprised what you learn.  An agency owner called me last week after receiving an offer from a buyer and then did an Internet search at my suggestion and found out that the buyer had substantial FDCPA and State AG actions against him and also determined that one of the principals had gone bankrupt.  If the owner had done this search before engaging in discussions, he could have saved himself a lot of time and energy.

• Understand Financial Capability – Find out up front if the buyer has the financial resources to complete a transaction.  Determine whether they will need to raise capital or have the cash on hand to complete a deal with you.  It is okay to ask for a statement of net worth or a commitment letter from the buyer’s bank or capital provider during your discussions.  We sometimes hear horror stories where a seller will go down the path with a buyer only to find out later on that they can’t fund the deal.   This is a nightmare that can be avoided very early in the sale process by asking the right questions up front.

• Valuation Approach – Confirm the buyer’s approach to value as early as possible.  A buyer will typically value your business on a multiple of adjusted EBITDA (earnings before interest, taxes, depreciation and amortization normalized for any excess or one-time add-backs) if you are a “going concern.” However, if you know that you are looking for a buyer that will go “beyond the numbers” to calculate enterprise value, no need to waste much time talking if you know they will come up short at the end of the day.

• What are the Buyer’s Intentions? – Try to figure out what the buyer wants to do with your collection agency before getting too far in your discussions. Do they want to use your agency as a platform investment or will you be add-on to another agency? Do they want to move business near-shore/off-shore?  What will happen with management and staff?  If they are going to consolidate the business, change the name, or down-size staff make that determination early in your discussions so you know what you are walking into.

Be selective with who you give your time and confidential information to and, I cannot emphasize enough, do your own due diligence upfront. I assure you that the buyer will shake you from your ankles upside down before funding and closing a transaction.  You have the right to do the same.

Have you ever found out something about a buyer and had to stop discussions and kill a deal? How do you qualify a buyer prospect?    I look forward to your comments. Feel free to call/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 at 240-499-3808 or by email. You can also read his blogs, follow him on Twitter, or network with Michael from his social media page on insideARM.com.