ARM Deals Still Getting Done in Tough Times

In the midst of the sharpest financial crisis in modern times, a recent handful of announcements of closed merger and acquisition deals in the accounts receivable management industry point to a market that is still seen as worthy of investment.

One of the more palpable consequences of the ongoing economic downturn has been the so-called credit crunch – an inability, or unwillingness, for capital holders to lend to consumers, businesses, and even each other, especially for activity now deemed as non-essential as M&A. This has decimated middle- and small-market M&A, categories that the vast majority of collection agencies fall into.

But in the past 60 days, Kaulkin Ginsberg Company (KGC) — an advisory firm that offers M&A services to the ARM industry — has closed five deals involving collection agencies.

“This is actually an attractive time to buy, if you have financing,” said Mark Russell, a director at KGC.

The circumstances must fit, as always, noted Russell. The largest deal closed by KGC was United Recovery Systems being acquired by a private equity firm, announced in late December (“United Recovery Systems Acquired by Private Equity Group,” Dec. 24, 2008). In that deal, URS – a large collection agency based in Houston – provided an attractive platform for private equity firm Audax’s entry into the ARM market.

But the other deals have been significantly smaller. In a deal announced Tuesday, KGC served as the advisor for Georgia-based National Credit Systems’ purchase of Rapid Collection Systems, based in Arizona. Both companies specialize in apartment and rental collections.

There have also been deals that were driven by former collection executives looking to get back into the business or current executives striking out on their own.

“In this down market, veteran industry players are stepping in,” said KGC Associate Michael Lamm.

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Late last year, KGC helped close a deal which saw ARM industry veteran Dennis Cunningham acquire Marietta, Ga.-based Fidelis Recovery Solutions, Inc. Cunningham has over 30 years of senior management experience in the industry, having most recently served as CEO of Risk Management Alternatives (RMA).

In a deal announced Monday, former Account Solutions Group founder Tony Frisicaro bought the assets of Elite Recovery Services, a debt collection firm in Buffalo, N.Y. that ceased operations late last year (“Buffalo Debt Collector Shuts Down in Difficult Economy,” Dec. 15, 2008).

“Tony is still passionate about the industry and his experience will be a competitive advantage for his company,” noted Lamm. Friscaro also recognized the trying times, but sees an opportunity.

“I recognize that these are unprecedented economic times, but I’ve worked through trying times before and we ended up on the right side,” said Frisicaro.

Russell noted that many executives looking to re-enter the ARM market after selling a few years ago are emboldened by lower pricing and non-compete agreements expiring. And in this economy, experience will save many firms.

“Because of the difficult times, the deals are going to require veteran ARM people to run the companies afterward,” said Russell.

Such is the case with a deal announced today. Longtime ARM industry professionals Kyle Shanahan and Larry Goldman acquired Eastern Revenue, Inc., a third-party collection agency based in Audubon, Pa. Although both have enjoyed long careers in the industry, it will be the first entrepreneurial endeavor for both.

Russell said that this deal was special because of the financing involved.

“This transaction involved an SBA loan, which is particularly exciting because it has been a challenge to close small deals in this economy – especially with SBA loans,” said Russell. “However, the good news is that smaller deals are still being financed when it is the right opportunity.”

The deal team at Kaulkin Ginsberg anticipates that more transactions will be completed by small to midsize collection agencies as well as current and former experienced accounts receivable management professionals in 2009 as buyers look for opportunities. Private equity firms will also continue to be on the lookout for attractive deals over the course of the year.

Editor’s Note: Kaulkin Ginsberg is the parent company of insideARM.com.