Episode 14 Planning Your Pivot

What you’ll learn about in this episode

You’ve worked hard to build and guide your business throughout its life, you should have a plan that guides it to a conclusion. 

A business exit strategy is a plan for what will happen when you want to leave your business and outlines the form that the transition will take.

"Begin with the end in mind" is important in life and business, because your exit is inevitable. The day will come when it's time to move on. Having a plan in place will help you sleep better, and insure your legacy will move in the direction you have in mind. 

 Marcus Aurelius said "You could leave life right now. Let that determine what you do and say and think.” Having a plan guides you toward your goals and can help guide you as your business evolves.

As you think about your business exit strategy there are many considerations. 

How much is my business worth? 

What information will buyers request?

What steps can I take now to better position my business? 

In this episode we’re going to answer these questions and many more with our Guest Michael Lamm Co-Founder and Managing Partner at Corporate Advisory Solutions, LLC

Guest: Michael Lamm

Michael is a Co-Founder and Managing Partner at Corporate Advisory Solutions (CAS), an independent investment and merchant banking firm that supports a select group of clients with offices in Philadelphia, PA and Washington D.C. Michael has completed more than 125 M&A engagements in Tech-Enabled Outsourced Business Services. Michael leads his deal team on M&A engagements, valuations, and expert witness litigation matters while also charting the firm’s corporate direction and strategic growth plan. Prior to co-founding CAS, Michael served as a Director at Kaulkin Ginsberg, an M&A and strategic advisory firm, for over 10 years. He executed on over 70 M&A transactions in tech-enabled outsourced business services. 

Michael is actively involved in leading industry associations, such as the Association for Corporate Growth and ACA International, and he is a frequent guest speaker, writer, and presenter at industry conferences and events.

Michael has a BA in international studies from the School of International Service at American University. He lives in Gladwyne, PA with his wife and three children.

Resources:

Fair Debt Episode Link

    Website: https://corpadvisorysolutions.com/

    Email: mlamm@corpadvisorysolutions.com

Twitter: https://twitter.com/mlammCAS

   LinkedIn Personal: https://www.linkedin.com/in/michaellamm/

LinkedIn Company: https://www.linkedin.com/company/corporate-advisory-solutions-llc/

Additional Resources:

The ARM Industry Reaches and Inflection Point

CAS 2021 Year end Report

Is it time to sell our business An In Debt Discussion Podcast

Receivables Info Podcast EP 65 with Michael Lamm

Transcript

Lex Patterson: 0:11

kindred force media business exit strategy is a plan for what will happen when you want to leave your business and outlines the form that transition will take. As you think about your business exit strategy and how to pivot into what's next, there are many considerations. How much is my business worth? What information will buyers request? What steps can I take to better position my business? In this episode, we're going to answer these questions and many more with our guests Michael Lam, co founder and managing partner at corporate advisory solutions. Michael has completed more than 125 m&a engagements, and leads his deal team on m&a engagements, valuations and expert witness litigation matters. While also charting the firm's corporate direction and Strategic Growth Plan. Get ready for insight and perspective from another industry thought leader. Here we go. All right. Well, hello, Michael. Welcome to the podcast.

Michael Lamm: 1:22

Yeah, well, thanks for having me. It's great to it's great to do it.

Lex Patterson: 1:26

Yeah, it's good to see you. So what's new in your world? What's been going on?

Unknown: 1:30

Well, x, my, my world is crazy. The fourth quarter of every year is always nuts, because everybody wants to get everything done by December 31. And so every fourth quarter, I tell my wife and kids, you probably won't see a lot of a gearing up for the holidays. My wife usually says, Great. So you're not going to help with any of the holiday planning? And yeah, I'll do the best I can. But it's, it's it's usually is when January hits Lex is when I start thinking about taking some time off and relaxing a little bit.

Lex Patterson: 2:09

Yeah, that thing's winding down. Yeah. Well, I really appreciate you spending some time with me with that busy schedule to to talk about pivoting and next chapters and stuff like that. And I know, Michael, you're very well known in the industry to most of our listeners, but maybe tell us a little bit about the journey. Or maybe maybe the way to go about this is to tell them something they don't know about you that they should.

Unknown: 2:34

Yeah, that's good. I like that. You know, so one thing a lot of people may not know about me is that I before I started doing all of this, m&a valuation work in the debt collection industry. beforehand. My family had run a law firm in the Philadelphia area lacks and they were part of their business was commercial collections. So as a young kid, when I was in high school, middle school, I would work for my family's business. And one of my first jobs was actually being a collector and collecting on on bills. So I actually know a lot about the ins and outs of the Yes. A lot of people are like, Michael is just a finance guy and just knows numbers, but operationally speaking, I actually cut my teeth. Learn how to collect bills, too.

Lex Patterson: 3:40

So Oh, wow. Yeah, that's interesting. Wow, I didn't know that about Yes. So that's a cool way to start this call. Yeah,

Unknown: 3:48

the other cool thing. The other thing I just started just on a more fun note. I, I love playing basketball. And for two years, I have been able to play basketball because of COVID. And three weeks ago, the group of people I play with on Monday nights finally got started because, you know, with vaccines and boosters, and everything else, so finally, I'm back out there on Monday nights playing basketball. So um, that's all I love doing that.

Lex Patterson: 4:16

Yeah. So do you have some history with that? Did you play in college or high school?

Unknown: 4:21

I used to actually play soccer. And then a friend of mine got me into playing basketball with these group of guys years ago. And it's just, I've been hooked. I love it. It's a lot of great workout.

Lex Patterson: 4:35

It is. Yeah, I grew up playing and then coached my kids, all my kids. So yeah, that is fun. Yeah. So let's dive in. And let's talk about the A RM redcycle. market landscape. Let's talk about that for a minute. I mean, what's going on from your perspective right now? This kind of lay of the land? Yeah, so

Unknown: 4:52

right now, technology is certainly having a significant impact on our industry. And a lot of that's just driven By reg F reg F, which was implemented at the end of November, is really kind of jumpstarted. This whole process of email, text, communication, and moving away from just your traditional call and collect models, that's really opened up different business models to come into the industry. So everything from text businesses to companies focusing on just email or payments, all of those areas, including software, have now become a focal point for folks, whether they're just a traditional agency, debt buyer, a law firm, or a hybrid of one or two of those service lines. So you're seeing this whole area of debt collection being modernized, every single month, with new technology platforms coming into it.

Lex Patterson: 5:55

Okay. Yeah. So do you feel like are there sectors or niches that seem to be more impacted than others? You know, have you seen any of that?

Unknown: 6:04

Yeah, I mean, there are certainly areas like credit card collections. In any kind of consumer or FinTech type collections, you've seen much more impact, because those are the areas that tend to move faster. Versus other markets like health care, when you bring up the word, the phrase, Reg F. Most people in health care, like what are you talking about? Tell me I know a lot about HIPAA. But when it comes to reg F, they're less familiar with it. And so there's this whole education that's going on in health care, from the agency side to tell their their clients all about why they need to pay attention to reg F.

Lex Patterson: 6:46

Okay, that is interesting. Yeah, so what what are some of the most common questions or requests, maybe it'd be a better way to word that, that you've been handling in regard to exit strategies like when, you know, it seems like consolidating market a little bit here. As you mentioned, technology, a lot of outward pressure coming on, we've got technology, we got regulation, new regulation, we've got kind of this industry, especially on the third party side, have a lot of, you know, family, multi generational family, businesses, smaller businesses. So I kind of wanted to gear this to the questions that you know, those agencies and those companies may have when it comes to exit strategies. I mean, do you get questions on this? And what would those be?

Unknown: 7:33

Yeah, I mean, the number one question we always get right out of the gate is how is my business going to be valued in today's marketplace? With all the stuff going on all the variables, labor shortage, inflation, just go down the list of capital gains? All the all the things COVID? Going on? Like what does that mean to my business? And that's usually where it starts. Because if they don't understand where their business is valued, it's hard to answer the question of, when am I going to exit or retire from this industry? And once that question gets, you know, some parameters around it, it becomes a heck of a lot easier to advise them on what direction to go. In our business, a lot of times, people will reach out to us, we'll give them more of an education lacks on hey, you know, this is how your business is going to be valued. You may not like what we're telling you. But, you know, it may be they have to wait another three to five years before they're ready to do something. And we start creating that roadmap of what they need to do to get there.

Lex Patterson: 8:41

Yeah, and we'll dive into that here, which is going to be a lot of the heart and soul of this episode, too. But before we do, I read a recent article that you put out, and you do such a great job of sharing a lot of this stuff very generous in what you put out there. The the title of the article, we'll put a link of this in the show notes, by the way to the CRM industry reaches an inflection point. And we could devote actually a whole episode to that article, Michael, but but let's give our listeners a few of the key points of what you're seeing and what you mentioned in that article.

Unknown: 9:15

Yeah, I would say one of the the key themes in that article is around the fact that consolidation is in full swing. And as a result of that, there are a lot of companies that were not looking at this industry previously, that are very, very interested in in the spaces that have never been here before. And they're not just coming from the US. They're coming from Canada, they're coming from Europe, they're coming from Australia. And they're coming because they see an opportunity to automate certain functions. I just was on the phone earlier today with a startup company out of the Middle East that's looking to come into the debt collection. space to automate certain workflows. And as a result of all of these things, that's why, you know, I kind of view the industry as it's at this tipping point that I feel like you're going to see this major shift next year of more tech focused, digital collection companies coming out of the woodwork. And I think that side of it is going to attract investors like private equity, family offices, hedge funds, that are looking at this industry in a tech oriented fashion. And we've not seen that in my 20 years of doing this, huh,

Lex Patterson: 10:41

wow. Yeah. Okay. Interesting. You also mentioned in the article to Facebook jumping in with their invoice that invoice product that they're talking about, which is, I mean, I guess there's certain eligibility requirements on that, and invoices over $1,000 is what I saw. Yeah, that's right. But but still kind of a another signal or something we ought to be thinking about, because of Facebook, seeing the market, there's, you know, that they're trying to grab a piece of at least there's something there. You also mentioned student loans, which, again, we could devote a whole episode to that, but but what's happening in that space? I don't know if there's anything you want to touch on there.

Unknown: 11:23

Yeah, I mean, it's just it's it's a shame how things played out with the student loan, we've been watching this debacle occur politically with student loans. But it's directly affected this industry, about a dozen companies. Earlier this year, were notified that they weren't going to be needed, that they're moving a lot of the work to some other government contractors. And so it really has thrown the student loan collections industry into flux, even more so than before. And I frankly, don't know, Lex, because you've got trillions of dollars of student loans out there. It's a crazy bubble that's there that there's going to need to be a lot of support a lot of help to get those consumers that are now going to have to start repaying their loans again, come February 1 of 2022. And I don't know how that's gonna shake out because I don't think they've got the resources, the manpower, internally at Department of Education, or through their government contractor to really do what they're going to need to do in order to service and collect on those loans. which just leads to more problems in my mind. Yeah. So I think you've got a lot of issues on that side of the house. Yeah,

Lex Patterson: 12:41

looming out there. Yeah. And then another piece that I just want, it's kind of a little Zinger that really hit me, because I'm in the, you know, I've been in the tech industry part of it for so long, but Salesforce, the problems that they're having, as I think the quote was, they're estimating that missing 350,000 workers due to this great resignation and stuff that's going on, will cost their company 223 million by the holiday season. And so even at high pain technology company is experiencing shortages. That just is

Unknown: 13:13

I've spoken to every type of company, I had a funny story, I had a Pina, a guy that was coming over to paint one of my walls the other day. And he gave me a quote, he said, I'll come back, you know, I could do the work in April or May. He said, April, or may we're talking about painting a wall, as well, if you could find me some painters that will get off the couch and want to do some work. I'd I I'd be I'd love to get some referrals from you. Because I can't find anybody to work. Nobody wants to work.

Lex Patterson: 13:45

So crazy. Yeah, yeah. Let's Let's talk for a minute. Are you seeing? You know, for a while there, Michael, we had a lot of startup activity coming into the space. Are you seeing a difference there? startup versus acquisition? I mean, is it?

Unknown: 14:00

It is, you know, you go back 20 plus years ago, starting a debt collection business. You could do it from the basement of your house, you have a phone a computer, you can go off to the races. Now it's now today to do it correctly. You need a couple million dollars plus, in order to even get started before you do anything else from compliance, regulatory licensing, the whole thing, audited financial statements, if you want to go work for a big bank or FinTech, they that is a huge barrier to entry for a startup company. Now, what's happening though, is those that are beginning to start up are taking a completely tech first approach to it versus them thinking that they're going to set up a call center operation in Kentucky and just build up the operation to two to 300 people. They're saying how Do we do this without people or limit the amount of people? So the cost? The upfront costs are really going into the technology? Less so the people?

Lex Patterson: 15:10

Okay, that's a really interesting key point too, right? So it's it's the cost, the very, very much more cost conscious and investing upfront in newer technology. So key points, key points there. Yeah. What about leverage? You know, this is just a question. I've been studying a lot. Dalio, Ray Dalio, his new book and stuff, which has me, you know, looking at debt cycles and all of this stuff bubbles, as you mentioned, and whatnot. And just wondering if the debt ratio has changed over the past few years of the companies and I know a lot a lot of this stuff is confidential that you work with, but just on a general point, are you seeing companies more leveraged or less leverage when you would actually

Unknown: 15:53

let actually less so and the reason is, is because we just went through this period of time where companies received PPP money, eidl loans, and so it also during COVID, especially in 2020, and most of 2021, these companies in our industry had record breaking financial performance. Why? Because people were sitting at home, they didn't have any, they had excess cash, and they were paying down debt. Okay, so as a result of that these companies financial, their balance sheets, surprisingly, look very, very good. Currently, yeah, how long will that last leg still, they're going to need to, you know, start thinking about adding leverage and increasing their leverage, I would say that's gonna change probably in 2022, you're gonna start seeing company's financial performance begin to decline a bit. But also, they're going to need capital in order to sustain their businesses as well.

Lex Patterson: 16:58

Right, right. And, and I don't know if the government's gonna roll out any more PPP or any any, you know, programs to help there. But I was just wondering about that, if that what that landscape looked like from that point. So let's talk let's jump in. We're talking about next pivots, setting yourself up for it, even if you're not ready to sell or buy right now, I wanted to make sure that we provide the listeners options of things to consider to help them prepare for whatever their next move is, right. So what what options or strategies typically, do you feel like? What do they have the pros and cons? Maybe some of those options? What are some of the main key points there that you that you run into? Or any advice you could give them that? Yeah,

Unknown: 17:43

I mean, a lot of time, you know, depending on the size of the company, that person that's owning the business, how involved they are, from a sales and marketing and operational perspective, becomes a very important factor in transitioning the business. Because as an example, if you're a 20 person operation, and you're going in and turning on the lights, and turning off the lights and doing everything, it's going to be hard to convince the buyer, whether it's another agency or another type of player to come in and just let you transition out. And if you don't have a plan in place to do that transition to bring in or elevate somebody internally, to take over more of the functions, it's going to lead to you being in a position where they're gonna want you to stay for a longer period of time, and be more involved, not less involved in in the operations, and the sales and marketing. So I always tell people to start thinking about, if you're a couple years away from an exit, do you have that team of people in place that are going to help you leave and transition out of the business? Because if you don't start getting those people in place now, yeah,

Lex Patterson: 19:00

and that you get calls where like, obviously when they want to buy or sell or they're going or you've got people looking to buy and sell and you've got that whole piece but you ever have anybody reaching out to you with any help for like, let's say they want to they want to roll that into just continuing their legacy on they're gonna give it to a family member or they're gonna

Unknown: 19:20

we do Val Yeah, Lex we do valuations for companies that are in need of we're seeing this a lot with debt collector debt collection law firms, because they don't have, it's not easy to sell a debt collection law firm as an example, because they're going to have to sell it to another law firm typically. And if they don't want to do that, they would potentially want to transition the business to their existing younger associates. And so they've got to create a plan in order to transition their equity downstream. And so a lot of times the first step in that is to figure out the valuation of the business in order to create a structure for them to do that over a multi year period of time.

Lex Patterson: 20:02

Okay. Yeah. And then what about like, employee buyout stuff? Like I know, a while back, you know, ESOP plans, those type of things used to be somewhat attractive in certain areas. But I mean, do you get involved in any of that? And we

Unknown: 20:14

do. Yeah, we do there hit there's only a few. There's probably about a half a dozen ESOP companies in our industry today, right. And the reason is that here's where it becomes challenging for Aesop's. Because in order to finance an ESOP, you need to take on debt or leverage in order to do that. And these companies being some of them are usually highly concentrated, and they're on a contingency basis for their revenues that they're generating. And there's a client attrition clients come clients come in and go. And if you've got high concentration, there's a big chance that you could finance the deal. And then the debt that you've put onto the balance sheet, to fund the ESOP doesn't ever come to fruition because the clients lost or there's a change. And so a lot of owners tend to shy away from them in our industry, because it's too much risk for them eggs.

Lex Patterson: 21:13

Yeah. Interesting. Okay. Good to know. So let's say you're a debt collection agency, can you walk us through guidance options, maybe? How can they position themselves, what what would be some ideas, plans, maybe keys to the market value assessment, any of that kind of stuff that you can share with the listener,

Unknown: 21:34

I would tell you that for agencies, specifically, the most important component for the exit strategy is going to be around that those clients, right. So and having a pipeline of opportunity. So it's great to have an existing client base. But having a pipeline of new potential opportunities will drive value. And I call that might the word I use is runway, the buyer wants to see that there's runway in the business, they don't want to see that the business is flatlined, or declining when they're acquiring it, they want to see that there's opportunities that are coming up that the company could potentially bring on as new clients. So we always look for on Runway two is around the management team. We talked a little bit about this a few minutes ago, but making sure there's a team of people that are there that are running the operation, managing the clients, and the relationships and are be able to take over that transition process. Because the more that that owner can demonstrate that they've got a team of people that can do that, the less involved they need to be post closing. Okay. Number three, is around technology, and making sure that the vendors and the folks that are around them have upgraded their technology, they're in compliance with REG F, they've got all those bells and whistles in place. Because the last thing the buyer wants to do is immediately have to infuse all of those new technologies into the business. Because if it's already got it, it makes it more valuable because it's already plugged in play. If it's not, they'll see less value to them a closer.

Lex Patterson: 23:22

Yeah, that's interesting. So you mentioned management team, and that I'm curious about so, you know, and I know a lot of these companies out there, they all have their own secret sauce to things and a lot of teams. A lot of times I feel like what what I'm hearing any way is some of that secret sauce leads back to, you know, the brand they've built or the culture. How big of an impact does culture play in the process that you've done? And do you? Do you have any stories that you could share that maybe have surprised you there?

Unknown: 23:51

I will tell you, a lot of times, you know, you could a lot of times what buyers will do today is they will literally go online and google the company that they're contemplating acquiring. Why? Because they're trying to get a handle on what kind of brand do they have? Do they have a website? Do they have any do they have literally littered with complaints? Are they you know, they have a a plus view from the Better Business Bureau like what are they all about? And what have employees said about them that have left all of this stuff you'd be surprised is all just sitting there on the internet for them to find and so that in itself, having that kind of clean view is a huge component even before the buyer picks up the phone or does a zoom call with the seller and so that if you're littered with complaints you have a lot of negative views on the in the in the industry and that this industry is litigious so nobody's gonna have a perfect clean bill of health. So I'm not suggesting that right But, but but they've got to have some of these things, some checks and balances in place. And that'll also help a buyer understand what kind of business they're about, and how they view the consumer.

Lex Patterson: 25:13

Yeah. So that's that all goes back to that brand image. Right and everything that's going on there. What about culture? I mean, so, so I'm sure they do walkthroughs. You you bring people on site? They probably I mean, do you have any stories surrounding that?

Unknown: 25:26

Yeah, I mean, I've seen situations, I had one deal a while ago, where we did a walk through between a buyer that came in, and their wires were all over the place, and their, their workstations were a mess. And there was a lot of just there was a, there was one story where I had a collector that was sleeping at his desk walking through the site visit, those are things that give a buyer a view that it's it's not well run, the owner isn't investing into the business or into the future. And they're not looking at their people as as a value add, they're looking at as a commodity. And that usually leads to less value, when they see that kind of culture that they're they're walking through.

Lex Patterson: 26:18

Yeah, and I guess that really keys into engagement. Right? I mean, what are the key? I mean, it's, so I guess it would be engagement, it would be like you mentioned coming through the call centers, busy, they're engaged. There's programs, there's management, I like

Unknown: 26:32

to use that word buzz. But but but lacks, here's what's changing, though, being that so it's becoming more tech enabled the phone, and the interactions on the phone are becoming less it's more about hearing the clicking noise in this center. First, it is about you hearing positive interactions with the the consumer over the phone.

Lex Patterson: 26:57

Yeah, and really understanding I guess that's that's part of it to understanding what how that shifting and what the brand promise is, and, and how that mechanics, which leads me to think, like Michael, what do you think key metrics are that agencies should have locked in at this point? I mean, you know, we used to talk a lot about contact rate and, and those types of things. And I guess that still maybe is in there, but what, what do you feel like are the key metrics that people

Unknown: 27:23

lie? I, the word we we always are trying, you know, in from a financial perspective being that we buy and sell and value businesses, we are always trying to understand profitability by client, and by facility or by site. And the buyers want to know that, and they want to be able to have you pull up in your systems, and come up with those calculations fairly quickly and easily. And there's no exact science for it. And there are some software's that do it better than others. But a lot of times it gets, you know, left, left alone, nobody does anything with it. And I will tell you, that data points specifically for what we do for a living is very important to share with buyers, because it shows how and why particular client is more or less profitable than others. And a lot of it deals with staffing and how you allocate resources to a particular client at a certain fee rate. And that'll help tell a buyer if XYZ client is will be profitable, or could be even more profitable in their existing operation. Okay,

Lex Patterson: 28:45

yeah. That's interesting. And I guess, you know, diversification around that, too, is is important, but having those metrics for each client you're servicing Dan sounds like an important piece, right? I mean, is it or no doubt? Yeah,

Unknown: 29:00

it always is. But a lot of people sometimes say to me, Oh, Michael, I've got a client concentration, where it's a client that's representing our hospital, it's 50% of my, my business, and they say, I can't sell this company. It's absolutely not the case, they can absolutely sell the business. But they've got to be able to have metrics and data around that particular client in order to do in order to sell it and explain why it's going to continue and grow in its current form, with a new with a new group coming into coming to the table.

Lex Patterson: 29:33

Okay. Okay, so is there anything on the on the seller side that I haven't asked you about that you feel like the listeners should really be keyed into at this point, if you're a seller,

Unknown: 29:46

if I'm a seller, a lot of people ask me, Well, when do I disclose this, or when do I disclose that? And it could be everything from you know, I had a CFPB Exam. A few years ago, I had a state regulatory problem. I always tell people, when you're selling a company, we're frankly selling anything, you can be selling something on eBay, you want to be very, you want to be as transparent and open to the potential buyers you possibly can be without hurting yourself. But the, in my mind, being, you know, opening up your kimono, especially in this industry is is critical in getting a deal done. I can't tell you how many deals I've had, I've seen crater over the fact that they lost trust, or they lost the faith, that what they were hearing was really the truth. And if you can't get if you can see that buyer is trustworthy, too. And so as the seller, you usually can get to a transaction that will get completed. If you lose that you lose, you usually don't have a deal.

Lex Patterson: 31:07

Yeah, yeah. Yeah, that's so key trust is so important in all the aspects of any relationship. Yes, level personal level all of it for sure. Okay, well, let's, let's flip the discussion. And now maybe look through the eyes of the buyer. So inventory, EBIT da, or process, you know, what processes are the buyers focusing

Unknown: 31:29

on? Well, the buyers are always evaluating companies to see how quickly they can respond to questions and provide information to them in terms of their queries that they're trying to get their hands around. And what we find is, the slower that process takes, the less accurate or the less the lead there more concerns that will arise lacks from that meaning like, they'll they'll just get concerned that the buyer that the seller doesn't have their hands around the business. And that means it's going to be more of a heavy lift for them to really get comfortable with the financial and operational performance of the company.

Lex Patterson: 32:14

Okay, so just so I understand what you're saying is the process of gathering or getting that information turned around quickly, whatever they ask for. So the typical things again, runway, those those items that you gave above runway, you know, your your management team, your technology, but then the key metrics, too. I mean, are there certain pieces that they ought to be gathering that? Okay, so let's say I'm trying to set myself up for this. What what are the standard request? Yeah,

Unknown: 32:43

and there is a question. Yeah, there's a lot. Yeah. So a lot of times, one of the things that get left behind in a process that come up in due diligence, after you've agreed to terms and you're in place, or client contracts, people forget that, oh, they know, the buyer doesn't need to have the client contracts, because it's a 30 day contingency based contract. Well, they absolutely do, especially in health care, because there's a lot of HIPAA and other requirements that go into it. So we'll always tell a client that we're representing for sale, right out of the gate, to go look and find all their client contracts. Because most of the time, they can't find them, or they have it but it's not executed. Or, or it's from 20 years ago, and they have a paper copy, but they never chose to scan it in. So go get them find them and pull them out. Because you will need them in order to get a transaction completed.

Lex Patterson: 33:45

Yeah, that's Wow, that's a key one right there. Because a lot of these relationships have gone back many years, you know, these as being an issue. Yeah.

Unknown: 33:55

Other examples of things that get law lift out is, you know, facility lease, or you have an employment contract Lex in place with Joe, and you don't know where the employees are, you forget they even had one and there's a requirement in there that you pay Joe, X amount of dollars at closing. But then it comes up later. And you say I forgot about that. I promised Joe, that 10 years ago, I probably need to go resolve that. And it becomes a huge sticking point between the buyer and seller. Yeah, yeah. Okay. Other items that pop up. One other one that we deal with a lot is around working capital accounts receivables, usually a big part of working capital. And so when you're dealing with hospitals, hospitals love to not pay on time and that just goes across the industry. Sometimes they'll pay 90 days 121 ad goes out a long time. But getting your hands around who is paying you and who is not paying you and who's slow paying you becomes an important factor in how a buyer is going to view the amount of costs, the typical costs every month it takes to run your business. And if you've got clients that are paying you very late, that affects the working capital, the business, huh?

Lex Patterson: 35:20

Okay. All right. Anything else? Any other ones that pop in your mind?

Unknown: 35:25

I could go on for days. So I'm gonna, I'm not gonna bore everybody with all the intricate details. But yeah, those are, those are a few

Lex Patterson: 35:33

those are somehow keys. Yeah. Okay. How about? So are there any archetypes of companies that are being targeted in this space? You know, if we look at in other words, I guess the question would be, when it comes to acquisition, is there a typical thing that is being sought after that you're seeing? Or is it kind of just across the map,

Unknown: 35:55

it's across the board. But I'll give you some examples of areas that are coming up by certain buyers that are really interested in certain components to the space. One example is, we always have a plethora of buyers in healthcare, any kind of bad debt first or third party agency, doesn't matter what part of the country it is in, it could be in Alaska, it could be anywhere, they would look at it, there are buyers out there for it. Other markets that get a lot of attention, or is government, local and state government collections or municipal collections, buyers like that, because it's sticky clients, they don't go anywhere. Same in healthcare, you don't see as much as much attrition. But government becomes a very attractive area to a lot of buyers out there looking for state and local government collections. And then being that we do a lot of work on the technology side, you're seeing a lot of groups, a lot of investors looking for collection software, data and analytics, businesses, scoring companies, all the technology, tech stack compliance, all of those things are hot right now for buyers out there in the space.

Lex Patterson: 37:17

Okay, so they're looking for how much technology that particular company might have. Because they're looking to jump into collections in that area. And they guess, that surrounds not having to fund all that, right? They want a machine that's working and,

Unknown: 37:32

of course, but they will go out there investors that are out there and force looking to buy the software business by the analytics company. And then they may at some point, want to own their own agency, and have that a part of the whole, the whole the whole. So they've got the technology, and they've got the services, combine them together. And you've got a you've got a fully functional, hopefully, really profitable technology and debt collection business together.

Lex Patterson: 38:01

Yeah. So I guess, Michael, historically, what you've seen, is this, this boom, in a way? I mean, or have you I guess it's a question, it seems to me like, with the consolidation that appears to be going on that things would be really booming for you. And you mentioned you were really busy through this month. And usually you are I guess, at the end of the year, but what is m&a look like for a CRM in 2022?

Unknown: 38:26

Yeah, I think 2022 is going to be a more the same, but it's going to be a bit different, because the financial performance for these companies is going to start leveling out and going down. And that's going to lead to distress situations, companies that are in turnaround mode, and those that are wanting, they may say see a window to exit, they may not fully want to exit but they know they have to because they can't be competitive. And I think you're going to see a lot more industry and strategic buyers that are going to be looking to acquire small and medium sized players in order to grow their market share. Because even at the highest level, the company, that ad agency that's got 1000 people is going to have the same issues that a 20 person shop is going to have in terms of the financial performance, they're going to see liquidations decline, and the volume hasn't caught up yet. So you're gonna have that dynamic. So in order for them to grow and keep growing at the clip, they're growing, they've got to acquire as well as organically bring in new clients to

Lex Patterson: 39:40

Okay, which is interesting, something that you and I talked about a little bit on the call on our pre call a little bit but the industry built on the small local businesses. Do you think this ecosystem is going to give way to a few large national companies do you think there's going to be co op type situations evolve with this what what does that landscape look like? And I think there

Unknown: 40:03

could be, I think you're gonna see, you're gonna see that a widening gap between the large multinational and the small mom and pop, but that small mom and pop is still going to be there. But that small mom and pop is going to evolve into more of a technology oriented business. Because when you think about it, going to the dental office or going to the local vet or the they're all of these places are still going to be there. But they're going to be wanting to, to interact with their consumers from when there's when they're dealing with a delinquency in a email or text chat oriented fashion, versus calling collect, because they want them to come back there in the community. So their businesses are going to have to shift a bit. But I do think they're going to continue to exist, they're going to be more technology focused, because there'll be tech vendors that are going to support that smaller end of the market in some way to help them.

Lex Patterson: 41:08

Yeah, and I think part of that message really centers around, you know, you're at this moment of truth, if you will, with a lot of agencies, right, as they're trying to make this decision. We've kind of had this focus on reg AF, we're trying to get everybody's come through that they've tried to gear themselves up, get compliant as much as they can to the new regs. Although there's some of them that seem to want to stick their head in the sand and go Well, you know, I don't I don't know that I want to worry about that. Or this is tough again, I don't know. You know, because you've got the technology piece, that's a pressure and then you've got the regulatory piece. It's always been a pressure. But it seems like that that Valve has been turned up a little bit on things. So the question is, and I think the message maybe is, is is and maybe more as a question for you, Michael, you know, what do you think to compete in the future? Like, I guess maybe you're seeing those people just say, You know what, I'm I need to get out of it. Because they've really clearly got to make that decision. Right? If they're going to compete, they've got to jump in the pool here and get there. They've

Unknown: 42:13

got to because this is one of the things we didn't talk about is now that reg F is in place, and we're going to start to see this next year, there's going to be regulatory action. Can the plaintiff's attorneys are going to be out there suing, you know, the ambulance chasing, like for technicalities over? They didn't write the email correctly, they didn't do the right notice, notice requirement, all these little things are going to pile up. And if on that small to midsize agency, and I don't have my ducks in a row. You all you're going to be doing is your your line item on your your income statement for compliance is going to skyrocket. Yeah, it to me, if I'm that person that's gearing up for retirement, you're not going to be able to easily exit the business. If your company or business is littered with compliance and lawsuits. Yeah. Whether they're nuisance or not, people are gonna say, Oh, this company's, you know, damaged goods, they haven't been doing it correctly or following the law, which means that they're, as the buyer can be opened up for exposure. And there's ways to structure around that and deal with it with escrows and insurance. But that if you can avoid it, you wouldn't you do that? What you try to set yourself up for success versus failure right out of the gate? I would say you would you want to make sure you do this. Right.

Lex Patterson: 43:45

Yeah, investment investment for the future? For sure. You know, okay, well, so what about what do you think definitely should be on the radar? In the very near future? So let's talk, you know, maybe no more than six months, if you're, if you're looking at this, maybe we've talked a little bit about that agency that's wanting to sell but that one that's staying in the game, okay. And, and maybe not even long term, maybe let's talk to that person that's saying, you know, yeah, I am looking to sell or I want to have an exit strategy might be the better way. I want to set myself up for the pivot. But what things have to be on their radar, do you think in the near future and, and, and this could be pretty broad to Michael, I mean, what's on your radar? What do you think some of the biggest things that are going to impact things and then in the next six months,

Unknown: 44:34

I will tell you, we're going into people are gearing up now for the first quarter, which is tax season for this industry. It's where most of these companies make their money. And I think a lot of people are hoping that the tax season is gonna be like what it was in 2021, first quarter of this year, and it's just not because the consumer is going to be in a different place. They're gonna start paying back their student loans February 1, they're going to be stretched. We already talked about labor shortages, people need to get back to work to start, you know, paying their bills. And so I think you're going to see a more challenging tax season coming up. And I think you're going to start to see defaults increasing. And if I'm thinking about exiting, in the short term, or this, you know, six to 12 months, I've got to make sure I've got all my ducks in a row with REG F. So I could maximize every dollar I can for a decent tax season, but not what it was the prior year. And know that I've got to make those numbers look as best as I can. Because those numbers, though, that that quarter, is what's going to help drive value for your business, when you go to sell it. And if those numbers are weak or weaker than expected, you've got to you've got to figure out a way to combat that. And the only way I can think to combat it, other than just trying to hire more people is leveraging technology in order to drive inbound, inbound calls into your operation to be from payment. And for settlement.

Lex Patterson: 46:11

Yeah, yeah. So you've got, you've got an interesting time coming up. That's really a key point that you brought up with the the landscape being far different this year, this coming year, then it's going to be than it was last year. You know, I think inflation. You know, I've talked a lot with a couple different people about this debt tsunami, that a friend of mine kind of coined that phrase, but and there is a lot of debt more debt than ever before out there. The question is the recovery part of that? And you got any thoughts on that? I mean, are we You mentioned a couple a

Unknown: 46:42

lot, a lot of a lot of people think that oh, well, this industry always does great when the volume increases, but if there's not, if there's high unemployment, or people aren't paying their bills, it doesn't matter how much volume is coming through to you, it isn't as collectible. So ideally, the that's where that's where the technology comes into play, which is what we didn't have in 2008 with using email and text communication, is to figure out how to score in analyze that those placements that are coming in, to really go after the best accounts that have the highest propensity to pay. And if you could figure out that algorithm, going into tax season, you will figure out a way to sustain your business and hopefully grow next year. But if you think it's gonna be the way it's gonna be, and just go back to the way the call and collect model as the volume picks up. I think you're gonna see a lot of companies having some financial challenges in 2022.

Lex Patterson: 47:52

Wow, well, you know what, I think we're gonna put the exclamation point on that one that what that last little bit was worth the podcast right there. So thank you, Michael. That was awesome. So I appreciate you joining me and I look forward to talking with you again soon.

Unknown: 48:07

Absolutely. Well, thanks again Lex for inviting me on it's, it's great to be a part of it. Thank you.

Lex Patterson: 48:38

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