Where ARM M&A and Compliance Intersect

Michael Lamm

M&A activity continues to chug along in the ARM industry despite all of the regulatory and compliance concerns at the state and federal level.  (for more information, Kaulkin Ginsberg’s Q1 13 M&A Report is now available.)

With the media continuing to shine a spotlight on the ARM industry and the ramp up of the CFPB supervisory activities, buyers that are either acquiring or investing into an ARM company are spending much more time evaluating the strength of an organization’s compliance management system (CMS).

Buyers have never been more concerned with “headline risk” when considering an investment or acquisition in our industry. Prior to the market crash in 2008, regulatory and compliance due diligence of an ARM company was, of course, focused on but to a much lesser degree.  A buyer would tend to spend a lot of time evaluating whether any legal exposure existed with any of the routine FDCPA lawsuits or whether there was any on-going state or federal investigations or fines that were levied on the company.

Fast forward to 2013, buyers are still focused on those items but they are now evaluating whether the company’s CMS is up to standards (using the CFPB examination manual as a proxy) and those who oversee it i.e. the Chief Compliance Officer.  The key area the buyer is evaluating is whether the CMS needs to be revamped (require additional technological investment or compliance manpower) post-acquisition/investment.

As a result of the oversight of the CFPB, our industry will be forced to evolve and a divide is in the process of being created between those who are willing to adapt to the new oversight with speed and an openness to change versus those who decide to keep to business as usual.

The ARM service providers who position themselves as leaders in running the most compliant and forward-thinking organizations in the industry will benefit not only from more client opportunities but will also be better positioned to attract an investor/buyer.

Investors/buyers will ultimately flock to those entities that have distinguished themselves from the pack as a compliance leader in this industry and can prove during a due diligence process that it is not just “window dressing.”  Like anything else, there is a short-term cost to “getting your compliance house in order” to gain the long-term and lasting impacts on the tangible and intangible increased value of your organization and the competitive differentiation you will create for yourself in the market.

Adapting to change is never easy, especially when a cultural shift may need to take place inside your organization to enhance or re-write your CMS, not just on paper but really change the way your staff operates and interacts with consumers day to day.  We can complain, be frustrated and overwhelmed by the increased regulatory oversight or we can embrace it, evolve, re-invest into our organizations and stand out from the pack to not only be able to obtain new business, attract great talent but be able to have the option to sell your organization for real value in the future.

As always, comments/feedback are always welcome!

Michael D. Lamm advises owners on their growth and exit strategies for Kaulkin Ginsberg’s M&A, valuation and 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.