ASK THE EXPERTS: Are M&A Deals Still Happening in Collections?

Ask the Experts is an interactive section for insideARM.com readers to ask direct questions to the experts at Kaulkin Ginsberg.

Question: Despite the current economic conditions, how is M&A activity fairing in the accounts receivable management (ARM) industry?

Answer: From Michael Lamm, Associate at Kaulkin Ginsberg

The short answer is “still active.” Despite the ups and downs in the market, M&A in the ARM industry is still happening. However, the kind of deals getting done and the buyer types have changed.

In the first quarter of 2009, there were 11 transactions that totaled roughly $87 million in deal value. The volume of deals was consistent to Q1 of ‘08, which produced a total of 10 transactions, but the total deal value was down substantially. The first quarter of last year produced $150 million in deal value — almost twice the value of transactions in first quarter this year.

Who is Buying?

All 11 transactions in Q1 of 2009 were completed by industry buyers, which we define as either larger ARM companies buying smaller ones, or former owners and executives of ARM companies buying their way back into the industry. Nine of the 11 transactions involved collection agencies, two involved debt buyers. Eight of the deals were done in the U.S. and three were done internationally.

We expect this trend to continue as we are aware of a number of collection agency deals slated to close in Q2 and Q3 of 2009 by industry buyers.  So far, in Q2, there have been 6 transactions (4 of them were completed by industry buyers) totaling $10M in deal value.

Who is Selling?

We continue to see small and mid-sized distressed agencies, specifically in the bankcard/credit card market, looking to sell or merge with larger agencies.  Distressed transactions tend to be heavily structured with little to no cash at closing.  The buyer will likely create an earn-out structure around the existing and future revenue stream (“the book of the business”).  If the existing shareholders continue with the business, it will typically be in a sales capacity.  As a part of the transaction, a buyer may assume certain liabilities, such as facility and equipment leases, payroll before closing, settle legal issues, and even fund clients that are out of trust.

We also see transactions involving well-managed and profitable small and mid-sized agencies selling to larger agencies. These deals continue to be valued on a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) adjusted for non-recurring and owner expenses that will not exist post-transaction. The multiple of adjusted EBITDA is currently ranging between 3 and 6 times depending on the size and pereformance of the selling company.

What about The Rest of ’09?

Industry buyers will continue to drive M&A activity for the remainder of the year, but overall deal value for 2009 will be down significantly from prior years. 

If the lending markets begin to loosen up, we may start to see increased M&A activity from financial buyers who remain interested in entering the space; however in the interim, we expect that some of these buyers will look for attractive investment opportunities with underperforming ARM companies, particularly if there is a veterean CEO who can be parachuted in to facilitate financial improvements in a short period of time.  

As for strategic buyers such as business process outsourcing (BPO), customer relationship management (CRM) companies, and international buyers, they will continue to express interest in performing companies that have immediate cross-sell opportunities , or are facing distressed situations where the buyer can pay a lower multiple on a heavily-structured (less cash up front, more earn-out) basis. 

Michael 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.