A Paradigm Shift In The Debt Collection Industry-Are You Ready

As we welcome the 2020s, we should rightfully look back and celebrate all the progress we have made as the debt collection industry. This is especially so as the industry has recovered from a period of deleveraging post the Global Financial Crisis. That said, new challenges are coming at us thick and fast, and it is imperative that we reflect on how we can best position ourselves going forward.

Having picked the brains of many top executives and regulatory lawyers in the industry, we believe that a paradigm shift is coming. The main theme we see is that the confluence of several megatrends will cause the industry to be increasingly commoditized and margins will compress rapidly as a result. There are opportunities, but without the right set-up, it will be difficult to leverage them.

For some owners, this may actually be the best time to sell your business. This is because central banks around the world are keeping the liquidity tap on, which means capital markets remain hot and this is one of the best times in years, even decades to get the best valuation for your company that can set you up for the rest of your life. If this is something you have considered, we at Thomas Crown are here to help.

Every executive we have talked to have listed this as the number one challenge they face and which they fear going forward.

Meeting regulations and compliance costs are of course, part and parcel of doing business in the debt collection industry. However, ever since the global financial crisis in 2008 which triggered a massive wave of defaults, regulatory restrictions on lending, collections, disclosures and resolutions have only been getting tighter and meeting them has been increasingly more demanding. Further, new laws surrounding consumer data privacy and the resulting hefty penalties and frivolous lawsuits have kept the industry on its toes. The onslaught never seems to end and more staff have to be hired, and trained to keep up.

For instance, in response to the major litigation cases in 2015 where companies were accused of using unverifiable and inaccurate information for collection, the Consumer Financial Protection Bureau (CFPB) has been moving towards increasing the standard of substantiation. The end result is that the pool of available distressed accounts is likely to decrease and it will also be costlier to access them, a double whammy indeed.

Going forward, we see Medical Debt; Criminal Justice Debt; Court Sponsored Online Dispute Resolution in Collection Lawsuits; State Insight and Input with respect to debt collection as some of the special topics to take note of.

Besides increased compliance costs, the 2020s will likely be the age of automation and AI. The rules of the game will change, and we think that a technology arms race is already here.

The large firms in the industry have been upgrading their technology stack so as to automate and streamline their operations in data warehousing and to create proprietary databases, computerized calling systems, debtor location databases and statistical models (source: IBISWorld, 2019). Combined with the consolidation and acquisition of smaller firms, this will help to increase productivity, improve collection rates, streamline operations and drive down operational costs. It will also help to reduce compliance costs as it makes it easier to be compliant with the increasingly complex web of rules and regulations especially around data security

For small firms however, upgrading and maintaining the technology backbone of the firm is an arduous task. It requires a relatively massive capital outlay, as well as the requisite human capital to be able to evaluate, customize and maintain the best technology solution for the firm. This is a critical move that can be fatal to a firm if executed badly. Even large firms can fall prey to this, such as the British sub-prime lender Provident Financial which has since seen its share price tank ~80% from its peak in 2015 after a technology revamp gone wrong. Further, technology changes fast, and keeping up with the big boys will require a regular reinvestment of capital that will be a strain on cash flows.

Another concern further out into the future is the technological capabilities of lenders. Yes, credit issuing companies do prefer to outsource collection as it is not their core competency and this helps improve their cash flows. However, if these lenders become technologically capable and get more effective at debt collection, the need to outsource collection to third parties can decrease.

This is another key concern that has been brought up very frequently during our discussions. This is understandable as the industry is such a labour intensive one with wages being the greatest cost base by far.

Over the past two years, compensation costs for civilian workers have increased by 2.9% in 2018 and 2.7% in 2019. With an unemployment rate of 3.5% today which is the lowest in over 50 years, the logical expectation is for labour cost to continue to increase, unless businesses automate parts of their operations which brings us back to challenge #2.

To understand the significance of these figures, let’s assume that there is no change in prices of our services to be conservative, and that the industry average net profit margin is 10.7% with wages accounting for 41.6% of revenue (source: IBISWorld, 2019). If there is a 2.5-3.0% increase in total wages like in previous years, this means that our total net profits will decrease by 9.7-11.7%.

The 4^th commonly brought up concern is the uncertain economic and political climate ahead. This is of course not unique to the debt collection industry, but is one of paramount importance.

On the economic front, from a micro perspective, we see falling compensation rates as new entrants have entered the market. This is due to the low barriers of entry which have led to cut-throat competition. From a macro perspective, headline numbers as touted by the media seem to imply that this has been the greatest economy ever. However, who is to know what will happen when the Fed turns the taps of liquidity off? Could it happen after an election year?

As for the political climate, polls seem to suggest that President Trump will win re-election, which may potentially be good news for the industry if there are efforts to de-regulate sectors such as banking, credit unions, payday lenders, collectors, etc. If a democrat candidate wins however, no one knows how the policies of debt forgiveness by some of the leading candidates will come to play.

For business owners, we understand all the headaches and frustrations of the problems you face every day and every year to keep the company going. For some who feel that they have taken the business as far as they can or that they may not have the resources to meet the aforementioned challenges, selling your agency as an exit plan or succession plan can be the most optimal decision.

We do not put this lightly, as we understand that every business owner who have embarked on this path have an indefatigable passion for the business which you have built up over many years of grit and sweat. For many, it is even part of your identity. There are also many other fears which can overwhelm, such as who can I trust to sell the business? How much will it cost? How do I know I am getting a fair price?

Fret not, as we at Thomas Crown are here to help.

The standard mergers and acquisitions process is to first go through a broker/transactional advisory firm. However, as we are the buyer, working with us directly at Thomas Crown means you get to save on broker fees which can work out to anywhere from 3-6% of the value of your business.

A quick and dirty way to translate what this means into numbers is to multiply your company’s annual EBITDA by the enterprise value (EV)/EBITDA multiple in your industry to get the enterprise value of your company. Let’s assume you have an agency that earns an annual EBITDA of $2m. If we were to use a 2-7x EV/EBITDA multiple (a typical range), this means that the enterprise value of your agency will be in the range of $4-14m. 3-6% of that means you get to save anywhere from 120k – 840k which is a very handsome amount! Now, if your EBITDA is 5x that at 10m, imagine what you can do with the amount you save!

Regardless whether you are planning to sell the business to retire, to fund your kids’ education or to reinvest in a new venture, we all know how hard we had to work for every cent and every cent truly counts. This is potentially one of the largest transactions you will make in your life and Thomas Crown is here to help you at every step of the way.

As legal and tax regulations become increasingly complex today, there is a need for a  comprehensive yet customized solution structured for both the investment and administrative requirements of the business owner as well as of the investor.

We have a team that has over 40 years of experience in the debt collection industry and some of whom have worked on deals well over billion dollars in different sectors. They are highly experienced with local and international structuring expertise and so are able to structure the most optimal deal where both parties get what they want and at the same time, meet specific structuring or regulatory requirements.

We are not only willing to put up with any customized structure in order to fulfil your specific needs, we will also guide you through every single step that you need to take to get the most optimal valuation, still retain a stake if you wish, and to minimize any unnecessary cost for you such as tax and legal charges.

After interacting with hundreds of business owners over the years, we found that one of the greatest fears with selling one’s business is the fear that the buyer runs the business into the ground. Not only is this emotionally stressful as the business is as good as your baby, but your reputation may also resultantly be hurt. For some, it may even be a family business that has been around for generations. If it is to end in your generation, one wouldn’t know how to answer to one’s ancestors.

With our team of ex c-suite executives and business builders who have over a combined 280 years of experience, you can rest assured that your company will be in safe hands with us. Further, we aim to leverage our AI, behavioural science and technological capabilities to meet the greatest challenges facing the industry as discussed earlier and to improve the overall efficiency of the businesses we acquire, such as by creating proprietary databases and statistical models to improve collection rates and productivity.

In summary, we believe that the debt collection industry in the 2020s will be marked by the confluence of several megatrends that will cause the industry to be increasingly commoditized and for margins to compress rapidly. There are opportunities but without the right set-up, it will be difficult to leverage them.

For some, selling your business may be the most optimal solution. We at Thomas Crown believe we have the right set-up to acquire and to help both your agency and you thrive. Where it once felt like an impossible dream, you can now call an end to all the pain, all the hardships, and all the wins and setbacks over the years and be set up for the rest of your life. With the money in the bank, you now have options, and can do almost anything you want. Most importantly, you can spend time and enjoy life with your most loved ones, which is what you deserve and what life is really all about at the end of the day.

However, we definitely understand that selling your business is not a decision to be taken lightly and we are more than happy to address any questions you have. If you have ever thought of selling your debt collection agency, BPO Company, accounts receivable management agency, commercial collection agency or debt purchasing Portfolio Company, reach out to us by emailing us at info@thomascrowncorp.com, call us at: 905 218-3525 or visit thomascrowncorp.com and click on “Ready to Sell”. We promise you will walk away with something useful regardless if we end up working together or not.