2023 Outlook for the U.S. ARM Industry: Is Disruption a Real Possibility?

Some owners are worried about the future of their industry. Disruption from new competitors or technology advancements is a real threat. Think about how Uber displaced taxis, Amazon changed shopping forever, and what Netflix did to the video rental business. What does the 2023 outlook look like for the U.S. accounts receivable management (ARM) industry? Is disruption a real possibility in industry? Kaulkin Ginsberg looked closely at performance trends and mergers and acquisitions (M&A) developments that owners and investors must pay close attention to.

Market Trends Dramatically Impacting ARM Companies

  • Increased regulatory scrutiny and enforcement caused some collection companies to stop credit reporting in part or entirely, removing a significant enforcement tool for bill collectors to leverage.
  • With US consumer credit card debt skyrocketing at the end of 2022. We expect a sharp increase in delinquencies in Q1 2023.
  • Inflation is likely to remain at an elevated level through Q1 2023. As a result, consumers will continue to devote more of their income and savings to essentials, thereby lowering the amount of money they can use to pay down debt obligations. Inflation also typically causes wages to rise. This coupled with increasing operating expenses and downward rate pressure means that ARM firms face higher expenses.
  • We are anticipating a relatively strong tax collection season starting in mid-February and continuing through Q1 2023.
  • Rising labor costs continue to threaten profit margins, causing more ARM companies to find different ways to reduce their workforce such as downsizing operations, investing in new technologies, and/or developing nearshore or offshore partnerships.
  • The use of digital communications and artificial intelligence will increasingly be utilized by tech-advantaged agencies, creating a distinct competitive advantage over less sophisticated agencies.
  • Maintaining stringent, compliant data security systems has become the norm for ARM compliance.
  • We expect intense Federal oversight and enforcement particularly from the CFPB in 2023 and 2024.
  • Inflation is likely to remain at an elevated level, at least in the short term, resulting in increased costs of capital and decreased discretionary consumer spending.
  • The number of ARM companies in the U.S. will continue to decrease as more agencies sell out, shutdown operations, or merge into larger companies.

M&A Pricing Trends in the U.S. ARM Industry

  • Experienced business buyers still assign a multiple to the selling company’s EBITDA to set pricing.
  • Buyers continue to add back any excess or one-time operating expenses, and subtract out any replacement costs, into their pricing model.
  • Starting in Q3 of 2020, the letter C was added to the end of EBITDA to account for any temporary revenue reductions and one-time (non-recurring) expenses associated with the Coronavirus pandemic.
  • Buyers are demanding that sellers have a highly diversified client base. In today’s market, this percentage has decreased to 10%.
  • Currently, pricing for small size ARM companies (under $5 million in annual revenues or fees) falls in the range of 2-4 times seller’s annual discretionary earnings. Sellers with revenues less than $ 1 million a year are typically priced at the lower end of this range.
  • For midsize ARM companies ($5-20 million), performing companies are being priced in the range of 3-7 times seller’s annual adjusted EBITDA. Structure for midsize sellers may include cash, multi-year earn-outs, seller notes, escrow holdbacks, and possible equity retention.
  • In today’s highly competitive market for larger size performing ARM Companies ($20-100+ million), pricing is falling in a range of 6-8+ times the seller’s annual adjusted EBITDA.
  • Pricing for unprofitable ARM companies is being calculated as a small percentage of the selling company’s operating revenues to be paid over a negotiated, but finite, timeframe. Sellers should expect very little to no cash paid at closing unless the overall purchase price is extremely low. The structure is very similar to a commission that would be paid to a salesperson without any upfront base salary.

What Can We Expect on the M&A front in 2023?

The rate at which M&A transactions are closing in the U.S. ARM industry, compared to previous years, plummeted in the second half of 2022. Kaulkin Ginsberg attributes this reduction directly to the selling company’s volatile financial performance and increasingly more stringent lender requirements. Concerns about specific market segment trends, including medical debts and student loans, are driving some buyers to either sit on the sidelines or more heavily structure transactions to share risk with the sellers. “Vulture” buyers are circling, looking for distressed companies they could purchase for little or no cash.

About Kaulkin Ginsberg Company
Since 1991, Kaulkin Ginsberg Company has provided critical strategic advice to the ARM industry. Our client-centric approach covers almost every stage of a company’s life cycle and enables us to maintain longstanding relationships as trusted advisors. We provide mergers and acquisition advisory, strategic consulting, and valuation services.

To confidentially discuss your interests, please contact us at hq@kaulkin.com.

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