Mike Ginsberg

Mike Ginsberg

It’s more difficult now than ever before to run an accounts receivable management firm. Whether your business purchases, collects, or sues debt for commercial, consumer, or government clients, all operations are confronted with challenges unlike any that the ARM industry has ever seen. Increased operating costs and client demands are making it nearly impossible for many small and mid-sized players to generate a profit. Regulatory changes and economic conditions are compounding the challenges for every business.

Should you just shut it down? Perhaps you should, but not before you consider your options first.

Many owners still believe that changes in the market are cyclical, meaning if they simply hold on long enough, they’ll get through it. Yes, the economy is improving, albeit at a slower pace than most economists anticipated. Lenders are starting to extend credit again, but they’re doing so on a more conservative basis and, as a result, placement and purchase volumes are unpredictable. The unemployment rate is improving and consumer confidence levels are higher, but many new jobs are coming in the form of part-time or lower-waged positions that don’t allow for sustainable improvements in collection performance.

One option is to continue to operate alone, cutting staff levels even more or deferring major capital expenditures as long as possible. But you’ve been doing this for years already and have to be asking yourself, “How much longer will this strategy work?” Maybe a year to two longer, but it’s hard to run a business on a hope and a prayer. Realistically, it might be time to consider an alternative strategy.

You could merge your operation with a firm of comparable size. This option is ideally suited for an owner who wants to continue to work and isn’t looking to retire or cash out. A merger simply means that two operations will be combined into one. Operating expenses will be closely scrutinized and duplicated costs will be eliminated. Multiple leases may be combined into one, back office functions and payroll functions will be consolidated, the list goes on. By combining forces, you could gain efficiency and create a path toward increased profitability even if you don’t grow.

But what if you do grow? What if you can cross-sell your services to your merger partner’s client base and vice versa? What if you’re now able to go back to your clients and tell them you just added three new states to your collection law firm? Significant cross-sell and cost-saving opportunities should be identified before the merger is completed.

The merger option is viable only if the owners of both companies are compatible and plan to actively participate. If you can’t stomach having a new partner, or if you prefer to leave the business after a short transitional period, selling out to a larger company may be a better choice.

The biggest problem with a sale is that most owners have unrealistic expectations. If your company is performing well and you want to sell out, you should try to find a  buyer who will pay you top price and cash at closing. But what if your business is losing clients, not generating profits, and performing poorly?

Know there are plenty of buyers for underperforming businesses. They will look to pay you out based upon performance over some negotiated time period, with very little or no cash at closing. They may buy assets and leave you to deal with long-term leases and vendor obligations, and they may assume debt and long-term obligations. They may even offer you equity in their company in lieu of cash to incentivize you to come work and perform. Just remember that your company is not performing well, so don’t expect a buyer to pay you in cash at closing.

Perhaps it might be best to shut it down, but that comes at a cost too. After years of owning a profitable business, letting a loyal staff go and getting rid of good clients might not be the best route. Before you shut it down, know that you have alternatives to keep the business going.

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Tags: Opinion