ARM Companies in Trouble Should Weigh Their Options Now

Wall Street is not the only place where distressed situations are happening; the ARM industry is experiencing them too.

Over the past several months, we have begun to see more ARM companies fall into financial trouble – companies servicing a range of industry sectors from financial services to commercial collections. Some are working placements that are not profitable and experiencing downward rate pressure from clients. Many are pummeled with too much inventory and they cannot effectively manage it with current resources.  Some owners have been forced to dip into their personal savings to keep their businesses afloat. We have also seen situations where agencies have broken loan covenants with the bank and they are either looking for an investor or a buyer to quickly acquire the company as a going concern, or as a last resort, the bank is forcing the shareholders to liquidate assets (desks, chairs, workstations, IT equipment) through an auction process to repay the loan.

Despite how dire the situation may be, the following three options may exist:

• A well-capitalized regional or national agency could have an interest in merging in your operation to obtain:

• Attractive clients
• Facilities that offer additional time zones or capacity
• Experienced management and collectors 
• Access to your technological capabilities

• If you have multiple turn-key sites with excess capacity which is hampering your cash flows, some agencies may have an interest in acquiring them.  Typically, the buyer will assume or renegotiate facility lease(s), take over payroll, and pay a heavily-discounted cash value for the assets (desks, chairs, workstations, technology, etc.).

• A high net worth individual, a former industry executive whose non-compete has come up, or an investor group that has an affinity toward the industry may look at the situation as an opportunity to invest into an established platform and turn it around.

These options tend to result in heavily structured transactions with limited amounts of cash (if any at all) at closing for the seller. The due diligence process to close and fund a distressed transaction is typically accelerated by the seller who may be required to pay off defaulted debt obligations within a short period of time with proceeds from the sale. 

Knowing your options may help you avoid putting additional capital into the business, being personally liable for outstanding debt, or going through a bankruptcy process.

Michael Lamm manages M&A transactions for Kaulkin Ginsberg’s Strategic Advisory Group. Michael can be reached at 240-499-3808 or by email.