Just two years ago, Kaulkin Ginsberg stated that mergers and acquisitions was the major topic of discussion in boardrooms across the country for the accounts receivable management (“ARM”) industry. In fact, we went as far to declare that the ARM industry was on the verge of rapid consolidation due to the increased costs associated with compliance, changes in client demands, reductions in account placements, and volatile economic conditions. We believed these factors, among others, would cause more owners to sell or merge their businesses in order to remain profitable. As it turns out, we were right that consolidation among ARM companies is taking place. However, we were wrong about the pace of consolidation. As you can see in the chart below, the number of ARM industry firms has been declining more gradually and consistent than we expected, and the aforementioned factors appear to have had very little impact on industry consolidation.
Today, while owners and executives are still discussing strategic acquisition-based growth endeavors, boardroom conversations are more focused on organic growth opportunities with existing and prospective clients – it’s as though a heavy feeling of pessimism has been lifted away from the industry. Additionally, many of the owners we’ve met or worked with in the past appear more willing than ever to make essential capital investments in their businesses to remain competitive as stand-alone entities.
So what gives? Traditional business and economic theory suggests that as costs for an industry increase, so too should the rate of consolidation among remaining companies in order to achieve economies of scale, if revenue more or less remains constant. As you can see in the chart above, revenue for the ARM industry remained relatively flat from 2007 – 2014.
After careful review of the data and numerous discussions with ARM industry veterans, we believe two key factors prevented the ARM industry from abiding by the traditional rules of business and economic theory:
- First, credit grantors (e.g., hospitals and banks) embrace a third-party common agency theory model. Essentially, under this model credit grantors must preserve a competitive balance in the collection agencies they use to ensure optimal performance outcomes. Without a diverse group of collection agencies, borrowers would begin to associate specific agencies with the credit grantor that might lead to lower satisfaction or usage, which would force less stringent collection actions.
- Second, and far less analytical in nature, these theories fail to take into account an individual’s desire to continue running a business, even in the face of poor operating conditions. While some businesses took a major hit to their profitability, their owners may have refused to sell their businesses under the current market conditions. Simply put, regardless of value justifications, if an owner couldn’t get enough money for his or her business, then he or she wouldn’t sell the business as long as it wasn’t hemorrhaging money. With nearly 80% of ARM companies being small businesses with fewer than 20 employees, the high level of resiliency among this group seems all the more plausible.
We are happy to report that the U.S. ARM industry withstood the greatest global financial disaster seen by the modern world, and is now poised for even greater levels of growth over the next five years.
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