Ask the Experts: Due Diligence Tips when Acquiring a Debt Collection Agency

Question: I am in the process of buying a consumer collection agency with 30 full-time employees. I plan to merge in  the entity into my operation within 3-6 months. We are close to signing a letter of intent (LOI) and I expect to have 30-45 days to complete my due diligence, execute a purchase agreement, and close/fund the transaction. I would appreciate any due diligence tips you can offer.

Answer: (From Michael Lamm, Associate at Kaulkin Ginsberg)

Congratulations, here are a few tips to make due diligence a smoother process:

1. Make a Due Diligence List Set expectations with the seller by outlining the data you need to gather during due diligence. Divide up your list to include key financial, operational, and legal information you need from the seller. Prioritize the list from most to least important. Since you are merging the entity into your existing platform, your due diligence should center on the book of business. Focus on client performance data and confirm the critical staff members within the organization who are essential to retaining the clients you want.

2. Set a Timeline Work with the seller to develop a timeline of when you can expect responses to your due diligence list and set dates of when you will need to be on-site. Do this at at the outset of due diligence so everyone is bought into the process and knows the deadlines that need to be met.

3. Meet the Clients Determine with the seller when it will be appropriate for you to communicate with the key clients. It typically occurs toward the end of due diligence, when you are close to closing/funding the deal.

4. Determine Pending Legal Issues Ask the seller to put together a list of outstanding legal issues and the corresponding amount of financial exposure that exists. For any litigation matter employee or collection related request case documentation so your attorney can review it and share his or her own perspective on your exposure. Be sure your counsel incorporates language into the purchase agreement that protects you from any of the legal issues that were under the sellers watch that may come back to haunt you.

5. Review Facility Leases Since you will be merging in the entity, determine how you will deal with any lease obligations. Sublease options or a buy-out of the lease may exist and should be addressed and dealt with early in due diligence.

6. Keep Key Employees and Collection Staff Interview the key employees whom you want to remain post-transaction. Work with the seller to determine whether you need to offer a retention bonus to the key staff or collectors to keep them motivated to perform during the transition.

7. Monitor Collection Licensing – Since you are going to continue to operate the entity for 3-6 months post-closing, you will need to assure your clients that you are appropriately licensed during the transition. Consult with your attorney or a specialist who deals with licensing to make sure that during the transition, your licenses are active in the appropriate states.

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. You can also read his blogs, follow him on Twitter, or network with Michael from his social media page on insideARM.com (link to http://www.insidearm.com/go/personalities/lamm).