How Licensing Can Make or Break a Deal | Christy Barger & Michael Lamm

Adam Parks (00:01.538)
Hello everybody, Adam Parks here with another receivables webinar. Today we're going to talk about how debt collection licensing can actually make or break a deal from happening. And so I brought in today Christy Barger and Michael Lamm here to talk with us about the licensing aspects, mergers and acquisitions in the deal. So today we're going to talk about why licensing is such a major focus in due diligence.

But before we kick off, Christy, starting with you, could you tell everyone a little about yourself and how you got to the seat that you're in today?

Christy (00:36.386)
Yeah, absolutely. Thanks for having me here today, Adam. I started with Cornerstone almost twenty-one years ago.

I started in the seat of a specialist, a renewal specialist. So I have had the pleasure of kind of sitting in almost every seat at Cornerstone over these 21 years. Worked in the initial department, the renewal department, managed a couple departments, and then moved into inside sales and now responsible for the chief revenue officer and responsible for the revenue of Cornerstone. So I've had the pleasure of helping grow the company, helping agencies get those licenses in place, and keep them once they get them. And then as with the topic we're here today.

When changes happen, that is a big licensing factor too. So I had the pleasure of working with a lot of folks and kind of planning that out because it's you can't just it's not a last-minute thing. So it takes some planning and scoping out the project. So happy to talk about that here today. And again, thanks for having me. And of course, working with Michael is always a pleasure too.

Adam Parks (01:34.638)
Absolutely. And Michael, could you tell everyone a little about yourself and how you got to the seat that you're in today?

Michael Lamm (01:39.25)
Yeah, absolutely. Adam, thanks for putting this on as usual. And Christy, it's great to have you on too. My business, Corporate Advisory Solutions, is a boutique mergers and acquisitions firm. And we have a deep specialization in the credit and collections area. And I will tell you from just working with Christy, licensing and &A don't always mix well together. And we've got a lot to talk about today, Adam.

Adam Parks (02:07.948)
That we do like how LinkedIn does not always function the way it's supposed to, which is one of my favorites. But while I work on the technical aspect here, guys, you know, as we think about the as we think about collection agencies, starting a collection agency or you own a collection agency, the structure of your corporations is gonna have a direct impact on really your capabilities and how that transaction could take shape over time. So could you guys tell me a little about how to s like how collection agencies should be properly structured and what issues you're seeing out there as it becomes deal time.

Christy (02:54.21)
I'll jump in a little bit. That's one of my favorite things to walk through with new agencies as they're starting out is the structure. It's very important to know what the states care about, not only initially when you're licensing, but when times come to sell your company, that matters greatly of how you're set up. So the states care about direct ownership and they care about indirect ownership. And so what that means is if I own the company as an individual, they're gonna want to know all the background information on me.

But if you have a holding company in place that shields a little bit of the exposure for the owners. It also affects what level of information has to be given. And most of all, it helps whenever you go to do an acquisition or sell your company. Having that direct owner as a holding company gives you so many benefits. Now, the states can't still care when a change occurs, but the level of disclosure is different, the level of work is different. So if you're an individual and you own the company, just you as an individual person, you really aren't selling your licenses because they don't transfer. You're starting from scratch. And so the value of having that holding company in place makes you more

Christy (04:15.958)
It's as if it makes you more marketable. That's probably what, and Michael, you can correct me if I'm wrong here. Whenever somebody's looking to buy a company, that's probably one of the first questions. How's the ownership structure? And so setting that up from the very beginning is huge. and so I love getting to have those conversations. Obviously, for agencies that have been around forever, you know, maybe

Michael Lamm (04:26.613)
That's right.

Christy (04:37.172)
None of us thought about that back then or that really wasn't they never thought they would sell their company. So there are times too when an existing company is owned by individuals, they'll take the steps necessary to put that holding company in place. They may have been licensed for 10-15 years, but as they get ready to do it, maybe I'm going to retire one day and sell it, they'll go ahead and take the steps to make them more attractive to a buyer when it comes to licensing.

Adam Parks (05:05.816)
So Michael, from what I was gonna say from your perspective, does this make a difference for a buyer?

Michael Lamm (05:06.153)
Yeah, Chris, you.

Christy (05:06.68)
So every time it's out of the next difference.

Michael Lamm (05:11.793)
It does because the more you can prepare to, you know, call it one to three years prior to get the hold co set up, we then put everything cleaner when you go to do the transaction. And also when you're at the hold co level and Christy, can correct me if I'm wrong, but the ownership sits there too. So the transition, if you're selling, let's say you have an agency and a debt buyer and you've got the agency side, licensed under the hold co, you can easily split that off and then keep the debt buyer separate. So there's a lot more options. You have options when you have the hold co structure in place. It makes it easier for the transition.

Adam Parks (05:55.161)
So the entire process just becomes easier because that transfer itself is happening as an entity level versus individuals owning that entity. So changing out twenty members versus changing out a single entity, I'm sure, is one piece of that. But actually they say corporate ownership versus non-corporate ownership. Am I understanding that correctly?

Michael Lamm (06:19.221)
That's right. But Adam, the other thing too is there's all this legacy stuff that goes on with the licenses. And so cleaning it up where it's all under a hold co structure at the ownership level too is easier. You also deal with Christy tech, you have to take tests, right? And a couple of the states, so there's those kinds of requirements. like having it there becomes easier for the transition. Maybe you can talk a little bit about that too, because you're in it every day.

Christy (06:48.29)
Yeah, and that's one of the things. When you've got a holding company, you're coming in, you're buying that holding company. So you're not buying an ABC collection agency. and the holding company owns those licenses. And so they've got those in place. There's a handful of states, Michigan and Nevada, that still have a manager test. And so that's gonna be at the license level. But again, buying the holding company.

you're you're getting the value of those licenses through buying the holding company and not having to deal with the individual that potentially too one thing that we see a lot is if the individual if the company is owned by an individual they're probably the collection manager too and so Nevada you have to stop collecting. So if the owner leaves, they stop collecting until they get a new manager in place. And that's not a fast process. I mean there's only a couple exams a year. And goodness, what if somebody doesn't pass it the first time, which unfortunately happens sometimes, because it's a hard test. So you're shut down in Nevada. So again, that's where that holding company is, it's golden.

Adam Parks (07:56.503)
And so you're saying if you have not set yourself up that way from day one, you still have the option of restructuring yourself that way, but better to have a three year window leading into that.

Michael Lamm (08:11.167)
I think so because what ends up happening is you want to have a clean hold co. So you want to have a chance to kind of move from your traditional licensed entity into the hold co. And you've got, you've done all the testing, you've been in compliance with Massachusetts and Connecticut and all the things you have to do. And you've also been able to uncover any other dynamics compliance wise that may have existed in certain states that had licensing requirements that maybe you failed to operate correctly in. So you've got a chance to fix all of those things before the transaction occurs. And the more time you have, the better.

Adam Parks (08:53.848)
Well, as Christy has pointed out, nothing moves quickly with the licensing entities. And so, you know, getting out in front of that sooner rather than later. Is there also a benefit to having operated under that guideline for a period of time? Meaning like operating as that old co for a period of time prior to the sale, or is that really not a factor?

Michael Lamm (09:16.309)
I would say, Christy, I don't know if you want to jump in, but I would tell you that I think it's important to have some history with the Hold Co. in what we've seen in our transactions.

Christy (09:29.954)
Yeah, because that's going to show, you know, that you have to submit financials and different documents through the licensing process. And if you've renewed that a couple of times, it's showing that you're running a solid business, that it's not, you know, you just created this company yesterday and now you're trying to sell it. You've got some history there of showing that you're operating correctly, successfully, and making money. And so that's always a good thing to see when you're going to buy a company.

Adam Parks (10:00.482)
And so as we talked about the kind of the holding company operation there, I know as we as we've talked previously, there's been some discussions around the differences between asset purchases and stock purchases and how those can be treated differently. How does that work within that di within the other dynamic, right? If we're talking about the holding company, it's the acquisition of the entire holding company, or does that become an asset or a stock purchase?

Christy (10:29.646)
So when it comes to licensing, that is a huge decision maker as to what happens with the licenses. So if somebody says it's going to be an asset purchase, you're starting from scratch. You're having to get new certificates of authority, you're having to get new licenses, no matter what the ownership is. So if a purchase can be a stock purchase from a holding company, obviously that's the ideal licensing scenario.

But with an asset purchase, you're starting over. And not only are you starting over getting those registrations, if you're gonna use the name of the licensed entity that you're buying the assets from, you're probably gonna have to withdraw a certificate of authority that's in place already and then refile it with the new company.

In some states like Illinois, if that occurs, you have to wait a hundred and twenty days before you can file a new certificate of authority for that exact same name. And so that just can throw a deal into a whirlwind.

Michael Lamm (11:30.217)
Yeah, so Adam, here's where this gets tricky. If there's an agency buying another agency and they've already got licenses, easier to figure out, right? Because they're already licensed and there's semantics that you would go through there because it's easier because you're already operating as a collection agency. When an investor comes in, that's where even things get harder. That's why stock sales, if you've got a clean hold co and everything's kind of tied out.

it becomes easier to transition the licenses under that scenario than just a straight asset sale when you're basically starting a whole new company to get licensed from scratch.

Adam Parks (12:13.197)
So even bringing in an investor to an existing entity is another licensing consideration. So even if I own an agency and I want to increase my capitalization to invest in technology or whatever, you still have these same licensing considerations and it sounds like there's still a pretty significant advantage to being a or having the holding company structure versus licensing the the owned entity.

Michael Lamm (12:43.251)
In that example, you're bringing over, if you're bringing investors in and there's a change of control, so 51 % or more. And Christy, I don't know if there's a change to the rule where if they own 10 % or 20 % what the disclosure is, but you're doing a change of control and that's gotta get submitted to all the states.

Christy (13:05.304)
Yeah, that's true. Not all states care about indirect ownership. So if you've got if you're bringing in an investor at a holding company level, there's still disclosures that have to be made, but it's much less than if you're buying bringing in a direct owner, meaning they have to be reported to every state. The threshold that has to be reported percentage-wise is a lot lower. and over the last couple of years, it seems, you know, this the form will say, we wanna know any owner of 10% or more. We have a lot of pushback where they'll come back and say, Your own ownership's only coming to 99.9%.

Well you said only you only want to know ten percent or more. But they come back and want to know that point, that one percent or that little point percent. So you know, bringing in people at the intro at the hold co level, so an indirect honor is way easier when it comes to licensing.

Adam Parks (13:59.136)
It's just the way that it's being viewed by those individual licensing states, right? They're following check boxes.

Christy (14:04.513)
Yep. Yep.

Michael Lamm (14:04.649)
Well, and also, Adam, you got big investors, right? These aren't like little tiny firms, right? These are big hedge funds, private equity firms, and they don't always like the concept of disclosure, right? In that way where they're like, I don't want the world to know that I own a significant piece. So there's a lot of different dynamics that we deal with there. A lot of people get surprised when they hear that there's a disclosure needed for the ownership. Kind of part of the product, education ends up becoming a big piece of this.

Adam Parks (14:40.085)
As part of the acquisition process, right? And so how does licensing play into the due diligence for those types of institutions that are looking to deploy capital to the debt collection space?

Michael Lamm (14:55.199)
Those institutions will then bring in their own legal counsel, compliance folks that are going to go into the licensing system to determine if there's been any lapse in the licenses, compliance issues at the state level, you know, all that. All that gets dug through. So the clean, if you're the seller, that's why that, and you're going to do the hold co-structure that Christy referenced.

Doing all of that early before the sale usually makes the transition a lot easier.

Adam Parks (15:31.476)
Interesting. And you know, when we think about the transitional process here, if they're bringing in their own compliance professionals, you know, there's challenges with that too, because there's only so many people that do debt collection licensing. So Christy, is this where organizations start bringing you in to do those types of checks and balances and evaluations from a licensing standpoint. Cause like a yeah, you can have an attorney do it, but if the attorney's got no experience in debt collection licensing, I mean they're just following the check boxes.

Christy (16:05.412)
Right. And the check boxes don't always give you the answers. There's things that you learn along the way that aren't on those checklists that you'll get an application denied if you don't do it. And you know, the earlier the better we get brought in. It is the earlier we get brought in, the better. We're able to look at what licenses are held by the company. A lot of times there's

Christy (16:32.142)
Hey, we did this audit and if they're doing third party debt collection, they don't have licenses in these states or cities and they should. You might want to consider that. Or if they're buying debt, then that's another level of licensing that needs to be looked at, looked at. So not only can we help decide or determine, okay, these are the steps you're gonna have to take for this change, it's often an opportunity for gaps to be identified. And it may be the selling entity, you know, they may not operate in that state. So there may be a reason for a gap. But taking the minute to look at that can really help the new owners as well because as we all know, if you don't get approved with a new license overnight. So you know the earlier you can look at that the better as well.

Adam Parks (17:18.391)
I think that makes a lot of sense. Again it sounds like everything when it comes to the government is the earlier in the process that you can start, right? The better off you're gonna be and the more likely it's actually gonna be done on time.

Christy (17:27.651)
Right.

Michael Lamm (17:29.781)
Adam, what ends up happening in the real life transaction is that the investor hires XYZ law firm, okay, whoever it is. They then determine if they've got a person in the law firm that knows anything about collection licenses. And usually the answer is no, they don't.

They then refer or subcontract the licensing work for compliance purposes to firms like Christy and others to kind of make sure that they're doing everything they're supposed to do. And that's usually the best way of doing it. Whenever we see that the bigger firm is going to take on the project, say, it's not going to give you the buyer, the answer that they want or the feeling that everything's okay. So that's when they usually bring in folks like Christy to help them with it.

Adam Parks (18:28.973)
And so from an investor standpoint, as I'm preparing to deploy capital into an organization and let's say as a hedge fund, how much disclosure is happening, even if I've got the holding company? Is it the owners of the hedge fund? Like how deep down the rabbit hole does the disclosure go in order to secure the licensing post transaction?

Christy (18:57.026)
So if they're coming in at a holding company level, the level of disclosure is gonna be based on their percentage of ownership. Basically ten percent or more are gonna have some level of information they have to provide.

Even the small people are gonna have to give names, social date of birth, those kinds of things. But it gets really intrusive, even if it all depends on the percentage of ownership. It gets very intrusive. There's background checks, there's all the disclosure questions. Have you ever had a bankruptcy foreclosure? Have you been arrested? So they do fingerprint fingerprinting in some of the states, background screenings, credit reporting. And you know, credit reporting, that can be a big roadblock for some of the states.

They'll pull something on a credit report that'll just blog you know log things down for a while. So they get the states get intrusive and you know nobody wants to give that information. So unfortunately it's just part of the process. And so you know one of our things is to give them comfort, you know, we're only going to give information that's asked. We're not going to supply additional information. Here's what the NMLS is a good guided guideline of what the states want. So we often refer to it and share that with people and kind of walk them through it and give them some comfort. I know this is intrusive.

But we gotta do it. And I have had a lot of people.

Michael Lamm (20:19.199)
Yeah, Adam, think about some of these big firms. Individually, they don't want to be named, right? They want to have XYZ. They don't want to be named. They don't. They don't. They have no interest in it. They're like, I don't want to be liable. I don't want to get called by the state of Arizona for something, even though I own this company. It's a real thing. It takes time.

Michael Lamm (20:45.311)
with the right people around the transaction to give them the right advice and guidance on how it's done correctly so they get comfort with it.

Adam Parks (20:55.343)
That's kind of what I was thinking.

Christy (20:55.384)
And we have had people that have come back and said, I'm not gonna do this. We need to circle the wagon again and come up with a new person to put in because I'm not either one, I can't give this information because it'll be an issue, or I don't want to give this information. And so that you have to have time to deal with that too.

Adam Parks (21:16.269)
A hundred percent. And I guess I mean what kind of things can you be doing, Michael, in advance of a transaction to help them understand when they start shopping for a collection agency what's really gonna be required? I mean, are they going through that process or are they not starting until they've identified an agency that they're specifically trying to acquire?

Michael Lamm (21:36.224)
We try to give them a bit of a checklist to help them understand what the compliance and regulatory landscape looks like. So they understand what the disclosure requirements are gonna be and if they're comfortable with that or if there's other alternatives.

As Christy said, some people are gonna be like, I don't wanna be named, but Joe wants to be named. Joe's okay with being named, like figuring those things out inside the fund, these private equity firms or hedge funds is really important. And the earlier you do it, the less friction or issues we're gonna have in getting the deal closed because you can't get through the deal without getting these licensing issues resolved into the structure of the deal.

Adam Parks (22:27.277)
Yeah, and I'm assuming that the licensing stuff and that due diligence process needs to be all ironed out before anybody's cutting a check and signing documents and moving a transaction forward.

Michael Lamm (22:37.353)
Yeah, we tell people once we've come to terms, it's usually one of the first things we're doing as a part of diligence is to say, how are we handling the licensing process? We call folks like Christy, get them engaged if they don't already have their relationship so we can get through that in the first couple of weeks of due diligence.

Adam Parks (23:02.893)
Which makes sense. You wanna get out in front of this as quickly as you can. Are there you know, what are some of the common misconceptions that the buyers come to you with? Just that licensing is minor, or are you s like what kind of what kind of things do they have in their mind as they're walking into this process? Like how are they entering the licensing procedure?

Christy (23:31.236)
Yeah, so they license because they know it's there, but it's just licensing. So they don't think about the time, the prior notices that have to occur. licenses don't transfer. That's something that I usually say pretty early on in these conversations of like what what? So, you know that's a huge piece of it that often kind of just gets swept under. You know, they're more worried, they're worried about due diligence on the company that they're buying. Like what is their financial support like? What does all of their internal compliance look like? And licensing is just a piece of it, it's a checkbox, but it's really not. And Michael and his team do a good job.

Michael Lamm (24:17.013)
Prior notice, yeah, I mean, Adam, the big thing we deal with a lot is the prior notice issue because the seller that's selling the entity is like, wait, I've got to give notice to the states about a transaction that hasn't happened yet. And the buyer is like, I want to do that tomorrow so I don't have any problems with getting this deal closed. So you've got this balance that we're always trying to work through as to the comfort zone around when notices go out to the states about change of control and the that a transaction is gonna happen with a subject entity in the state of Arizona. And we're constantly dealing with that type of dynamic. Sometimes it's very smooth, we kind of work through it. Other times people are like, time out, I gotta, let's really educate, we gotta educate them. And that's why I'm saying if we get ahead of the process well before that, with the investment fund to say,

Look, this is the licensing process you're going to go through. Don't think of it as a checkbox. Think of it as a process that we have to get started on. It usually becomes easier when we get there.

Christy (25:26.946)
A lot of the conversations I have kind of go with the prior notice. You know, if you read statutes and checklists, it says thirty, sixty, ninety days prior.

They don't want to disclose that something's happening because they think it's gonna be public knowledge and everybody in the industry is gonna find that out. It's not. This goes to the states. You can start pretty vague and say, hey, we are anticipating going through some changes in the very near future. It could include ownership change, officer change, management change, you know, attorneys are working on it, we'll be back in touch. That's getting noticed out there that hey, something's coming.

And then it's good to be honest with the states, tell them the truth of what's going on and then they work with you. One of the big things is well, what if this deal falls apart? Because we all know deals fall apart at the closing table. It's a simple thing if you send this a letter to the state that says, Hey, just kidding, we we we aren't gonna be making those changes right now, full speed ahead is with our licenses. So it's a simple release of that notice. And that those conversations are often held multiple times.

times with multiple people being brought in because there's not a comfort level of just telling the states this is happening.

Adam Parks (26:47.115)
I mean, I think that makes sense. People don't want to tell their business in a public way and they assume, you know, it's a small business with a big rumor mill and they don't want that getting out there. But notifying the states, like you said, is a little bit different than, you know, notifying you know somebody else in the industry itself. Do you have any examples of deals that have been delayed or killed because licensing couldn't move forward or or they weren't prepared?

Michael Lamm (27:16.501)
Well, Arizona tends to be very slow and I will tell you I've had different war wounds over that state more than others. like, because Christy, like I'm always in this situation where I'm like, you're, guess Adam, here's the way to think of it. We're not dealing with a bank or somebody that's used to moving a little faster. That's probably a bad example, but like somebody that's used to being a

Adam Parks (27:26.379)
Yeah, you guys kept mentioning Arizona. I had a feeling there was something there.

Christy (27:28.937)
Yeah.

Michael Lamm (27:46.07)
a for-profit entity that knows like, I'm going to get something, I got to do something with it pretty quickly. When he gets to the licensing board of a state, it's on a stack of papers that go well above our desks. And they're like, there's no like, I want to go do this because Christy said I need to get this done. Like no one seems to really care. It's just like, I'm in a nine to five job. Yeah. Just like I'll get to it when I get to it. But for us,

Adam Parks (28:09.398)
There's no extra resource. Yeah.

Michael Lamm (28:15.517)
And for Christy, it matters. Like we want to try to move things forward. So it's not 120 days for the licenses, for the licensing to be approved to go through. We want to do it faster. So I get, I've had a lot of problems in that regard. Just things going very slowly in the process because it wasn't started early enough.

Adam Parks (28:39.712)
And that seems like that's where a lot of that problem is coming up, right? It's not starting early enough to do that. But you know, as you start digging into licensing and due diligence and other things, you know, you start coming across the history of the organization, you know, consent orders and other things that may start coming to the surface. You know, how do you duck and weave as those previously unknown things start to come to light and what kind of an impact that has on the licensing aspect as well as the deal.

Michael Lamm (29:15.487)
I mean, they're all real issues. Licensing is like the tip of the iceberg, right? Like, I've got companies that have had consent orders, FTC, CFPB, state issues. It's more, it's all kind of common for this industry.

It's more about the disclosure, Adam, and making sure that that is disclosed versus it being this massive surprise when you get to due diligence like wait Didn't I tell you about that CFPB examination? I told you that over that beer we had But did you did you really tell him that and and that's also the the things that come up that need to be investigated and dealt with and diligence and Christy I'm sure you've seen all that too when you get to the point where they're filling out the form for the licensing and they're like, you didn't tell us about the bankruptcy that you had three years ago. These are just things that happen, you know, it's just kind of common, common stuff.

Christy (30:19.278)
Yep.

Adam Parks (30:20.896)
I mean it sounds like those are the kinds of things that probably come up in any kind of a deal, but licensing is one of those things that becomes a a sifter to bring things to the surface, right? Which is, I think, part of its intent as well, at least in some of the states. You know, I'd like to think that there's a positive intent there.

Michael Lamm (30:40.885)
I think it's great the states like there's in my view licensing is a good thing right because it kind of sets the bar. I think where it gets really tricky is that a lot of these the licensing boards just again operate very slowly but the application process and getting through it Adam is not something that's easy and quick like we've had international buyers groups that are coming over from Europe, Asia.

Michael Lamm (31:09.013)
That adds a whole level of complexity to getting through the licensing too. And Christy, maybe you could speak to that as we deal with a lot of international groups all the time too.

Christy (31:20.856)
Yeah, the first thing that comes to my mind is the background screening. It's not as easy to get a background screening from an international applicant than it is, you know, one of us here in the states. So it takes more time to do that. And so that's you've just got to factor that in. And what the most important thing to me is, you know, we are honest from the very beginning of this is a requirement. There's no way around it. It's a pain. Let's just do it together. Let me tell you how to get from A to B, but we gotta get there to get that license to get you on the you know the license to to move forward. So it's just communication and assurances of this process. They're not just picking on you because of whatever reason, this is just the process.

Adam Parks (32:10.198)
From an international perspective, does the applicant need to have all of the dots like all the foreign documentation apostled? Meaning like they've got to meet the Hague Convention, they've got to provide all of the I know going through like residency in other countries I have to provide not just like a copy of my driver's license, but like I have to send it to the state, get an apostled copy that's versioned, which I I think took me you know, a month or two just to get my my documents prepared to be accepted internationally. Is that the same kind of challenge when you're dealing can see Michael shaking his head? right? Deal so you're dealing with the same kind of stuff.

Christy (32:43.318)
Absolutely.

Michael Lamm (32:44.319)
That apostle process, Adam, like, they've got AI that. We've got to figure out a better solution. There's another, Adam, that's another business that we should talk about separately because like, just, makes absolutely no sense that they go, in this day and age to go through it that way.

Adam Parks (32:53.45)
Yeah.

Adam Parks (33:05.536)
Yeah. Okay. I did it for my Brazilian driver's license. Like the craziness of what I had to acquire in the United States and the amount of time that it took. I wanna say it was probably thirty, forty-five days of me chasing paper around the US, you know, birth certificate, all the things that you gotta bring together. If you have that same challenge there, then the international aspect sounds like it starts getting rather complex. Maybe it's not more invasive, but it probably feels more invasive for somebody who's going through that additional phase.

Christy (33:43.758)
Yeah, and it's time. I mean, they're running companies, they're trying to buy companies, they're they're trying to, you know, do their due diligence, but hey, I need you to run down the street and pick up this document that, you know, it's gonna take you six months to get to answer your phone. You know, it's it's it's a process.

Adam Parks (34:02.088)
And it all starts stacking on top of each other in terms of complication. No question about that. and we talked a little bit about the regulatory filings, but so we we've talked a lot about all the re you know, all of the things that we have to do to be licensed, to remain compliant. But what are the risks behind all of this? What's the cost of not being compliant? What's the risk of not having of unlicensed operations for a debt collection company?

Christy (34:07.129)
Right.

Michael Lamm (34:33.493)
Well, I'll jump in. Yeah, Christy, I mean, this is the fear that the buyer has, right? They buy the business and they're not operating with the license in the state, whatever state it is, because they're concerned about being fined on an account by account basis in that state for collecting unlawfully in the state. And there hasn't been a lot of case law about this, Christy. I don't know, but I think that's the biggest fear that we see from buyers where they're like, I'm not collecting in Michigan if I don't have that license or wherever it is.

Christy (35:12.898)
Yeah, agreed. You know, that's the worry of when you go submit an application, have you done unlicensed activity? And you answer yes, then they're gonna be like, Okay, well now here's the eighteen things I wanna see before we approve your application. That's gonna add three more months to the processing time. So it's just it's something that comes up all the time.

Adam Parks (35:34.55)
But what's the punishment for just being unlike so we've all talked about it with the right intents, right? But what's the real cost of operating an entity that's intentionally unlicensed?

Christy (35:47.64)
I there there's huge consequences. I mean there's from it being a felony to paying very large fines based on like Michael just said, you know, if you if you collect on two accounts and the the fines based on two accounts, that's one thing, but if it's based on, you know, two hundred thousand, that's a huge difference and and you're fine. And the states look at it that way. They want to know every time you contacted somebody, not just

I contacted this one account. Well how many times did you contact this one account? and it just goes down a rabbit hole, it gets deep.

Michael Lamm (36:26.805)
And what they'll do is they'll segment the accounts. So if there's a particular state that they haven't gotten a license back, they won't collect in that state for a period of time, which is a financial dynamic to deal with in that state till the licensee comes in.

Adam Parks (36:44.8)
I could definitely see people stopping, but I was curious, I think Christy gave me a pretty solid answer to it. Is like, okay, so if you're just not gonna do things the right way, like what's the real cost? And it sounds like the cost is both criminal and civil and significant in both aspects because nobody wants to get charged with a felony, especially for, you know, something as simple as collections.

And it sounds like there's real financial consequences to not operating that too. I mean, beyond criminal, it sounds like the fines are significant for an organization that chose not to do it. Now the account segmentation piece, breaking off these accounts, letting them sit off to the side, I mean, they're not giving up those accounts. But if you're operating as a contingency agency, I mean your accounts probably are not gonna still be available to you by the time you get your license. So you're losing a significant amount of opportunity there, like you Michael talked about the financial dynamic of it all.

But I would think that there's understanding that if we operate unlicensed or that if we hold accounts off to the side that there's significant cost. Try to understand some real world examples around the cost of finding a licensing problem later in the process, because now that deal's getting delayed, our prices for the organization are changing. But what are some of the levers, Michael, that you might use to hold a deal together if a licensing issue is found deep into the process?

Adam Parks (38:19.306)
Or deep into the transaction.

Michael Lamm (38:19.367)
I mean, yeah, I mean, for us, if there's a particular state dynamic, the question we always try to ask is, number one, what is the problem and how do we rectify it as quickly as humanly possible? Like, is it a disclosure issue? Is it a regulatory issue? Was there some recent issue with one of the owners that wasn't disclosed properly? We're trying to solve for that and then
understand what we need to tell the state or who we need to talk to at the licensing board to resolve whatever issue that may be without it blowing up the transaction.

Christy (39:02.176)
We've had a lot of times where something's popped up and obviously nobody has favors with the state. They're gonna treat everybody the same. But a lot of times we'll say, Hey, I know an attorney that's had a similar circumstance with another one of our clients where they got involved and dealt with the state and helped the process along. Let's consider bringing that person in. And that helps sometimes to get the right people on the phone or in front of the regulators to to get those issues resolved. I mean they're still issues, but getting them resolved as fast as possible.

Michael Lamm (39:35.53)
Or another issue that comes up too, Adam, is like, a lot of the states require financial disclosure. So if there's been any financial difficulties, like the balance sheet's out of whack, they don't have the right level of working capital for the business, those are issues that may be a short-term problem that need to be fixed prior to the licensing being renewed or being approved. And so as Christy said, you've got to be able to have a person or people to go call and say here's the issue, how can we resolve it? What is the way of doing it? And as there's no preferred treatment here, it's like a VIP list, but having at least knowing to call, who to call and who to reach out to at the state does make things a bit easier to kind of get to a solution if there is one.

Adam Parks (40:29.738)
I mean I think that makes sense. No, we've talked a lot about debt collection licensing, but for debt collectors, they may be doing other things, debt buying and things that require additional licenses. As an organization is looking to, let's say, acquire a collection agency and expand its footprint into right, they want to buy it so they can go into debt buying and other things. How does that due diligence process change as they're thinking about kind of adding pieces through that acquisition process? Is that done as much in due diligence? Like what does that look like and what's the timing of that look like in a transaction.

Michael Lamm (41:06.293)
If they want to buy the agency and then add debt buying to the table very quickly, if they have portfolios lined up to purchase, they better be thinking through the states that are going to have different set-aside licensing and other requirements for you as a debt buyer. That should be one of their key areas of diligence to make sure that they can move or transition into that area and have the appropriate licenses in place.

Because then if they do that, then they're waiting another several months to get those licenses as well.

Christy (41:43.012)
A lot of the deals that we work with, that's the case where they're doing some debt buying and or starting to do it for the first time. And so there's new licenses that are needed. And so obviously, you know, our guidance or our thoughts are always you need to handle the acquisition, the change of control, because you're dealing with licenses, you're dealing with licenses that are in place. Let's get those moving, but right at the same time, let's start filing those new applications with the new ownership and getting those in the queue to get approved.

They're gonna take a little bit longer than the whole change of control, but the sooner we get there, the sooner they're gonna get approved. So it's a lot of loss of work in the beginning, especially if they're starting something new.

Michael Lamm (42:25.301)
I don't know if you remember this year, yeah, Adam, I don't know if you remember this, but years ago, debt buyers were like, I don't have to be licensed. There's no licensing requirements for us. And of course we've seen that world shift. Christy knows what I'm talking about. I mean, there were so many of those conversations, I'm a debt buyer, what do I need to be licensed for? So that's changing as you've seen over the past five, 10 years.

Adam Parks (42:50.104)
I think especially when it comes to the debt buyers, they've seen it, but I know that there's been other servicer licensing and other things that have kind of fallen into let's call it the gray area around debt collection. Is this license needed or not? And we've talked about doing the evaluation of like, okay, what do they have? And but I think there's still that gap analysis of what they should have that Christy's talked about a little bit as well.

Christy (43:14.466)
Yep, absolutely. And that's where they need legal counsel. They need to do a full audit

on the licenses that are held, on the licenses that are maybe gaps, and or the new licenses that are needed. That's a crucial part of the whole process. and you know you do it once, but you do it again too because licenses are out, the laws are always changing and you know a license might not have been needed for this asset class, you know, last year, but now it is. So it's a continual compliance thing that you have to keep track on you know what laws have changed and what licenses you're triggering based on you know existing

activity and or new activity that you plan to do.

Adam Parks (43:54.986)
Also makes a lot of sense. Now, when we talk about the licensing and the due diligence that needs to happen and all the things, is there a standardized format for transferring this information or organizing it back and forth? Or do you see a mix of let's say a hodgepodge of different styles and methods for actually tracking, organizing that documentation and transmitting it?

Christy (44:23.316)
On our end, I mean it's usually there's a legal assessment that's, you know, this huge document that is fifty, eighty pages long that identifies this is what you're doing, this is the license you need. And so, you know, those are transferred back and forth. You know, a lot of the documents look very similar, but you know, everybody has a little bit different, you know, tweak they'll throw in on it. But you know usually it's pretty straightforward when it comes to those kinds of things, at least on our end.

Michael Lamm (44:52.885)
We see people wanting to get access to the MMLS system in order to check things. assume, you do that or do see that as an item as well?

Christy (45:05.922)
Yeah, we definitely do audits to go out and see what licenses they hold. The NMLS is obviously the first place we start because there's so many licenses on there now. and you can, you know, it's public. You can get a lot of information just by going to their website and looking. You can see if there's any consent orders from the states that are licensed, that those are listed there. So the NMLS is definitely a good tool for anyone in the licensing world to that's one of your first go-to sites.

Adam Parks (45:36.022)
Well, NMLS is definitely one of those, you know, the one of the popular spots for going to check it. help me understand as you're going through that process and you get this document, you're gonna get a legal document and then you're gonna get a document dump of the actual licenses. It's coming over with a spreadsheet. I'm just trying to look, trying to think through how like if I'm if I'm preparing to sell my agency, how do I prepare my data room?

So it's ready for transactions. Like how do I prepare myself as an organization so that I'm gonna make it easier for the buyers?

Michael Lamm (46:09.659)
Usually it comes over, Adam, as a spreadsheet that goes into the data room. Of all the states that they're licensed in, they pull it from NMLS or from Christy if they're a client, and then they give us a report that shows what licenses they're active in, which ones are deactivated for whatever reason, and when the renewal is, and that they're in good standing with the state. Those are the, at the initial glance, that's what they care about. In diligence when we get under LOI, they're going to dig further. They're going to like, let me see that you're in good standing with XYZ state versus me just looking at the spreadsheet and assuming it's correct.

Adam Parks (46:51.477)
Well, that's that deeper validation, right? But what I was trying to understand is like how do you prepare yourself as an organization that wants to execute a transaction? I want to sell the business. Like how do I prepare for that? What do I organize and how do I start getting that together? And it sounds like even as a seller, I might want to reach out to Christy in advance and say, Hey, I'm thinking about selling my organization. Like let's get a light let's get a licensing audit gap assessment. Like let's start working our way through the process.

Michael Lamm (47:22.677)
We urge them to, Adam, and a lot of times they listen and they call Christy right away. Other times say, I don't want to waste the money on that yet. I want to deal with that later, you try.

Adam Parks (47:38.966)
Delaying the expense in order to delay the entire transaction because it's like the one thing that you can't make move any faster. Right? It's one of those few things where we have zero control over the timelines. And so it does have a, you know, a pretty direct impact. Now, you know, for

Adam Parks (47:59.412)
You guys know who's in our audience today. You've got a pretty good understanding of what the marketplace is dealing with. What else are they unaware of today or need to be considering as they are either preparing to buy or sell a licensed entity?

Michael Lamm (48:19.541)
I would say, Adam, I want from this webinar for people to think about licensing more as a, not as an afterthought, as like a primary area to diligence upfront if you're the buyer, if you're the seller and get all the education you need for how the licensing process works. And if you're the seller, make sure that you've got your ducks in a row and you have a full project workflow around your licensing to make sure you're in compliance with the states that you're operating in.

Christy (48:55.396)
Yeah, and being able to put your hands on those things, like you know, we've got Atlas, it's a portal that our clients have access to. It's got all their license certificates, it's got all their inventory report, it's got due dates, it's got expiration dates, it's got all of that information that you know a spreadsheet that at one point a buyer may want to see your spreadsheet, but then they may want to see your actual, you know, Michigan license certificate with a seal on it. So have everything ready and prepared, and you know, it's a lot of documents that are going to transfer back.

forth with any acquisition but the licensing is it's there's 50 states there's multiple cities there's you know multiple licenses it it can become a lot of documents that you know a a a buyer is going to want to see and understand and you know if they're new to the industry they're not gonna understand it so there's that you know learning curve there that that has to be done

Adam Parks (49:49.792)
And so what about on the buyer side, Christy, what kind of materials can you make available to someone who's going into that acquisition process to help them get comfortable who's maybe never been in the debt collection space before? Do you have things, you know, prepared to help educate them, bring them up to speed, and help get them comfortable with what that acquisition and what their business will look like post acquisition?

Christy (50:12.856)
Yeah, absolutely. We do a lot of lengthy calls with folks kind of walk them through the different pieces of it. You know we mentioned the NMLS . We use that as a reference a lot of times and I'll have it pulled up on a screen and I'll walk through and show them kind of how to read and understand what they're seeing. I will go throw in some definitions that are the definition of a control person that's extremely important when it comes to licensing. And what your definition of a control person is may not be what the NMLS says the definition is.

And so we spend a lot of time going through that and helping them understand that you know if you throw an internal title on an org chart that you're given to some to the state, even though they're not a corporate officer, now that you threw them on an org chart, they are. So those are the kind of things that you talk through and understand and make smart decisions instead of just sending an org chart with 500 people on it that then have to go do an M2 and do fingerprinting. So you can cause a lot of headaches.

When you don't mean to when you're just this is our org chart but those are internal titles so that's not a control person so those are the things we talked through and spent a lot of time on in the in the the early on

Michael Lamm (51:25.725)
Licensing isn't one and done, Adam. A lot of people think, I get licensed in the States, I'll be good forever. Not at all. The States have their hand out every year, every quarter, every six months for dollars that are gonna flow to them to make sure you're in compliance. So you're going into a workflow that's not going to go away if you're an owner and you're active in collections. It's just gonna be a part of your day-to-day operations.

Adam Parks (51:54.527)
Just part of our lives now.

Christy (51:54.84)
Yeah. And then obviously if you're doing debt buying. Yeah, obviously if you're doing debt buying, that's a whole second level to consider. I mean, we've all been around for a very long time in this industry. We didn't talk about debt buying twenty years ago, but now it's every conversation I have, that topic is a very key piece of it.

Adam Parks (52:13.707)
Well, the dynamic of the industry has changed. And I think as people are looking at where and how to deploy large amounts of money into our space, that's one of the vehicles that they can use to deploy that capital, right? That's asset backed or or at least tied back to maybe a distressed asset, but an asset nonetheless. That's kind of interesting. You know, Michael, any advice for folks other than, you know, get your documents organized that would help increase the efficiency of the due diligence process?

Michael Lamm (52:44.533)
I just that spreadsheet that we talked about earlier that you're pulling is so important because if you at least have a handle on where you are licensed when the licenses are D are need to be renewed by Who's the agency manager in the states that require that for the testing at the initial level whether you're selling your company or not It actually doesn't even matter having that and keeping it updated is critical

Adam Parks (53:14.507)
Well, it sounds like putting it into Atlas is the way to do it, right? Plug it into the system. And Christy, when you pointed out the org chart thing, the first thing it made me think of is, well, then that's why I need a consultant to walk me through this process because you know the thought process of like who is this person on the org chart? And it sounds like it's the little things in the documentation that can cause the biggest headaches. So

Christy (53:15.182)
Very true.

Christy (53:20.172)
That's it.

Adam Parks (53:36.863)
Kind of having some overwatch on that, having somebody looking over your shoulder might not be such a terrible idea as you're going through that mountain of paperwork.

Christy (53:45.912)
Yeah, absolutely. It's a great value to have somebody that's walked these, you know. Michael and I have probably done way more than we want to admit of these. So having the experience there is just, you know, it has value.

Michael Lamm (53:59.766)
When Adam, I get really concerned when I'm in the middle of a deal and I'm like, if there isn't somebody that's competent on the licensing side like Christy that can get them through it, it's like a major red flag for me. Because I'm gonna, because our goal at the end of the day is to consummate a transaction. And if I don't have the right people around the table, I know I'm putting the deal at risk.

Christy (54:04.292)
Yeah.

Adam Parks (54:26.987)
Well, you've done enough transactions to be able to. It's like being on a collection call and identifying pretty early on, am I gonna get paid on this call or not? Right. Like that experience is mission critical. And when you start thinking about it in the terms of not an individual, you know, collection, but like the sale of the entire organization, like your life's work, I think being prepared is the responsibility of anybody selling an organization. Like we're responsible to prepare our organization.

Christy (54:31.908)
Okay.

Adam Parks (54:56.941)
Organizations for sale. And like you said at the beginning, and we've said, you know, in previous webinars and podcasts, that three-year timeline to prepare yourself for an asset exit sounds like a long time, but three years goes by in the blink of an eye. Right. I think we were at you know RMAI 2023.

Christy (55:14.262)
Absolutely.

Michael Lamm (55:15.017)
It does.

Adam Parks (55:18.513)
three, you know, feels like yesterday. So all this starts to move very, very quickly and just being able to be prepared, be organized and and stay on top of it, I think of it as a challenge. But going into our final minutes guys, any final words for our audience? Any final things you want to make sure that we covered today that we have not discussed yet?

Christy (55:42.84)
I think my parting words are, you know, this wasn't said to scare you. This is just the process to to work in our space.

And when you surround yourself with the right people, you've, you know, got the Michaels of the world that are leading the way. You're you're making the good decisions that are gonna make it successful for you as you're you're you're you're exciting. You know, it's still your baby, you've grown that company, so you wanna leave the legacy behind and being ready sets that new buyer up for success as well.

Michael Lamm (56:15.101)
If you're selling your business or buying a company in this space, get the right team of people around you that really know this stuff around licensing and bonding and regulatory and compliance. Do it before. Do it well before you're in the market talking to buyers or you're selling your business. It will be invaluable to your time and getting to the end game of a transaction closing.

Adam Parks (56:44.117)
Well, luck is where preparation meets opportunity. And if you're not prepared, the opportunity showing up isn't gonna make the difference. You have to prepare there as well. wise parting words from both of you. I really do appreciate you guys coming on today, sharing your insights. I feel like this was a productive session. And like always with both of you, I learned a little something about how to prepare an organization for an acquisition, for a sale, and some of the licensing challenges that can be faced and the cost of unlicensed debt collection activity. But thank you guys so much. We really appreciate you coming on, sharing your insights today.

Christy (57:24.004)
Yeah, I appreciate you as well, Adam. Thanks, Michael. Always a pleasure.

Michael Lamm (57:27.295)
Thanks again, Adam and Chris, it was great.

Adam Parks (57:30.301)
And thank you everybody for watching. We appreciate your time and attention today. We'll see you all again soon.

Christy (57:36.996)
Take care.

Adam Parks (57:39.756)
It's a tight note.