Capital Club Radio
Hosted by: Michael Flock
Sponsored by: Flock Specialty Finance
Providing a forum for leaders in the middle market segment which has typically been undeserved by traditional banking.
Listeners gain valuable business insights and perspectives to deal with market uncertainty. Topics include: key success factors, both personal and professional, dealing with adversity, outlook for the industry and your business.
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00:04 Opening: Broadcasting Live from the 2018 RMA International Conference at the Aria Resort in Las Vegas. It’s time now for a special episode of Capital Club Radio. Broadcasting on the Pro Business Channel and across 16 Syndication Networks. This show made possible in part by, Flock Specialty Finance. For more info, visit flockfinance.com And now, here’s your host, Chairman and CEO of Flock Specialty Finance, Michael Flock.
00:30 Michael Flock: Thank you and good afternoon. We are absolutely delighted and honored today to have one of the icons of the accounts receivable managements industry on Capital Club Radio: Mike Ginsberg, CEO of Kaulkin Ginsberg. Now I’ve known Mike for, gosh, I think it’s now almost 20 years since we first met when I was running the Dun & Bradstreet’s receivables management company, and he’s got a terrific history. And he started with partnering with Marv Kaulkin. He founded one of the, probably the leading at the time, M&A advisory firms in this industry. I can’t keep track of all the different tombstones. You’ve got dozens and dozens of these tombstones. So he was really the first real leader, I think, in M&A deals in this sector. Later, he and Marv founded insideARM in 2000. Mike is also founder of KG Prime, which provides market intelligence for ARM professionals. He’s also a co-founder of Topline Valuation Group, which provides ARM executives with technical, financial, and benchmarking services to improve their decision-making. Mike is also a member of ACA, DBA, now RMA, where we are here today in Las Vegas, and as a recognized authority on important industry issues. He’s a sought after public speaker and recipient of many industry awards, including the NARCA Don Kramer Award and Collection Advisor’s Award. Welcome, Mike, and thank you for being here.
01:57 Mike Ginsberg: Well, thank you for having me. This is indeed an honor. Mike, I’ve known you now for easily two decades. Back in the days of Dun & Bradstreet and then the various things that you’ve been a part of very successfully since then: RMS, and clearly with FLOCK Enterprises, and all the wonderful things that you’ve done for this industry. So I’m flattered to be here. I’m excited to talk to you about my background. And it’s been a… What did the Beatles say? “A long hard road.”
02:27 MG: But it’s been a very enjoyable road, and I call it an evolution.
02:30 MF: Well, Mike, none of us ever dreams of getting into collections, but I think our listeners would like to know, how did you get into collections? What motivated you to get here in the first place, and how did you get started with Marv Kaulkin?
02:45 MG: So Marvin started our business when he was 60 years old. He started it as a boutique M&A advisory firm, a retirement career. If he did one or two transactions every two or three years, he would have been thrilled. Prior to that, he had a family business. He got out of the family business, not collections, it was floor coverings. Managed his own investments, got credentials, partnered up with a former goalie of the Washington Capitals, Bernie Wolfe, and started managing other people’s. High net worth individuals, athletes mostly. Their net worth and investments. But Marvin is not an investments guy. So somebody called him and said, “Can you sell my business?” Not a collection agency. He, nine months later, completed that transaction. It was his first transaction. And he got hooked and said, “This is a cool business.” You got a nice paycheck, which is always fun.
03:42 MF: Right.
03:43 MG: And he made somebody’s life different, improved it. And he said, “This is great. I’m done selling stocks, bonds, annuities. And the junk market, I’m out. Right? I’m gonna do this for a living.” He hung up a sign, and he became an M&A advisor in 1998. Excuse me, 1988. I get these years and these decades confused after a while. It shows all the gray hair. But interesting story: Marvin had a rule. When he started his business, he started in Bethesda, Maryland. Why in Bethesda, Maryland? Because he lived in Bethesda, Maryland. And at the age of 60, he wanted to walk to work. So he walked to work. And he had another rule: He wanted to be home every single day for lunch. This is true. This is true. We laugh, but this is true. So if he had… And he never made a cold call in his life. So if he had a referral, he would entertain maybe selling their business. But in Bethesda, Maryland it had to be inside the Beltway, because he had to be able to go home for lunch. If it was in Baltimore, he turned it down. Too far. If it was in Richmond, he’d turn it down. Too far. So I came to him, and I’ll get off base a little bit but I’ll come back to this in a second. I came to Marvin in 1990. Graduated from the University of Maryland, College Park. Go Terps.
05:02 MG: And at that point in 1990, it was prior to the financial crisis, the worst time to try and find a job on Wall Street doing anything related to merger’s, acquisitions, investment banking, capital rate. They were laying off by the tens of thousands, certainly not hiring an undergrad from University of Maryland with an Econ degree. It’s not going to happen. So I begged and I pleaded wherever I could. Through a mutual friend, I met Marvin Kaulkin. Started this boutique M&A firm. That’s exciting. Let me go meet this guy. And he wasn’t hiring anybody. He didn’t want any staff. He had a couple of people who were doing deals around him. He didn’t want anybody there. So he said to me, “Listen, I’m not looking for anybody.” And I said, “I’ll take the job.” He said, “No, you’re not listening. I’m not hiring.” And I said, “Thank you, I’ll take it.” And he ended up taking me on literally as an intern. Unpaid for about six months. And I said, “You know, this’ll be great. I’ll go back to New York. I’m from the Bronx. I’ll end up on Wall street. This’ll be great.”
06:06 MF: And this was right after college?
06:08 MG: About six months after college.
06:10 MF: Six month. Okay.
06:11 MG: I was ringing up debt on my credit cards. I put myself through school. So I was ringing up debt on my credit cards. And I didn’t wanna go back home and just live at home. I wanted to have a job. So I was actually working at a toy store with a friend of mine, playing video games all day. But this was a great opportunity. So I met Marvin.
06:28 MF: A video game
06:29 MG: I was a video game guy. So we met, and he said, “I’m not hiring anybody.” And ended up, he took on me as an intern. About six months later, he took me on as… I think my first title was Associate, which basically meant he was paying me $200 dollars a week, which in Bethesda, Maryland in 1990, now ’91, wasn’t a lot of money. And he said, “You’re responsible for your own parking.”
06:52 MG: So I learned where to park that I wouldn’t get booted or towed. And every so often I got booted or towed, but that’s where I parked. So that kind of worked for a while, and then the rest is history. But to get into the collection business, I wanted to give you that little background. So now I’m with Marvin.
07:10 MF: Okay.
07:11 MG: And about six months later…
07:12 MF: Hold that thought. But where did Marvin get his knowledge of M&A? Did he just teach himself? Did he…
07:18 MG: So Marvin ‘s knowledge of M&A is through the school of hard knocks. So he had a referral, sold a business. He owned a business, he sold his business. So he got experience by transacting. But Marvin, more than M&A, was a guy who understood business. He understood the mentality of an owner. Okay, an owner, it’s a very lonely profession. You can’t really talk to anybody about what’s going on in your business, because they won’t fully understand. You can’t go home and complain about your business, ’cause your wife or your significant other might start to think that the world is coming to an end. Right? At work, you have to show up regardless of how you feel with a big smile on your face. We all kinda know this, right? And you have to play the game. But he could relate to that as a business owner himself. And he understood financial statements and got a credential to be able to do that kind of stuff. And M&A, it’s not as much a science as it is an art, and being able to put deals together. The key obviously is to find the right buyer, find the right valuation proposition, structure the deal. But then you have to find the right attorneys and accountants to help facilitate the transaction.
08:32 MG: Marvin was extremely well networked, so he was able to do that. And really he called himself the quarterback. He was the quarterback of the transaction. He would bring in the right professionals to be able to assist, but at the end of the day, he kept the deal in line. He was like the guard rails, kinda keeping the deal in line. So we, getting back to my initial story on how we got into the collection business, which is what you were asking me about, Marvin had this rule: He wanted to be home for lunch every day. That’s true. We had a referral. It was a collection agency. It was headquartered in Beltsville, Maryland. At this time we were selling a car, a cleaning company for cars, auto detailing. That’s what I was looking for. We were selling an apple orchard. True. Selling an apple orchard. So somebody we… Oh, a chicken company, a poultry processor. Have you ever walked into a poultry processor? Do not do it on a full stomach.
09:30 MF: Oh no.
09:31 MG: Because it’s an interesting place, especially almost 30 years ago. It’s a lot different than today, but I’ll tell you, Perdue is a different kind of animal. Anyway, getting back… We digress. But getting back to the story at hand here, this company was located in Beltsville, Maryland, so it qualified. Marvin can get home for lunch. It was about $3 Million in revenue a year. Profitable dropping about a million to the bottom line. Two owners. One was the past president of the ACA, so that was helpful.
10:00 MF: Who was that at at the time?
10:02 MG: This guy Goldberg. Mike Goldberg.
10:02 MF: Okay.
10:03 MG: And his partner Jerry Glazier was a sales guy. So needless to say, they were connected. And they knew some people who were also connected. And we didn’t know the industry at all. We didn’t even know an industry really existed. It was not something that we got into intentionally. This was a referral. Marvin was starting a business that was industry agnostic. It was geographic: If it wasn’t in this area, we weren’t gonna do the deal. That was it. So this fell into our laps, and we sold it. We actually sold it to an investor out of New York for cash, because truth be told, we didn’t know anybody in the industry. We didn’t know to take it to Payco American at the time, the largest, or FCA International. How would we know that? We didn’t come from the industry. So we actually took it to a financial buyer out of New York. This guy was second generation. Born with a silver spoon in his mouth. In the petroleum industry. Good tennis player by the way. And he ended up butchering the business. He bought this one. He lived on Long Island. This is fun aside. He lived in Long Island, in a nice house. The guy who lived next to him lived in a beautiful house. He was a bill collector. He owned a collection agency. So this wizard bought not only the collection agency we were selling, he bought the collection agency next door. Destroyed them both. Basically turned the keys over to NCO years later. Was another transaction that NCO ended up buying. That got us issues…
11:26 MF: And which company was that?
11:27 MG: Eastern… Eastern Revenue. Eastern Collections. Eastern Collections. There are a lot of Easterns. In this industry, there are a lot of companies with exactly the same names or the same initials. I sold three companies with the initial CCI. One was in Cleveland, one was in California, and one was in somewhere else and shouldn’t of been named CCI. But we sold it. So there’s a lot of name sharing in this industry. But that was our very first deal. And that served as a catalyst taking us from this local generalist into an industry specialty.
12:00 MF: And what year was this? ’91. Okay.
12:02 MG: And in 1992 we fan the fire and did about a dozen deals in this industry. And most noteworthy, what really… And you might know this company. What really put us on the map was the sale of TRW’s collection agency operation called Chilton Corporation, out of Texas to a company… So TRW was headquartered in Cleveland. There was this Texas collection agency that we sold to a Philadelphian investor, who started the company CRW. His name was Brian O’Neil. That kind of put us on the map. O’Neil properties diversified into collections. And it was off to the races after that.
12:38 MF: But wasn’t this about the time when NCO was just starting its rollup strategy?
12:43 MG: Prior.
12:44 MF: It was prior to the roll up?
12:45 MG: NCO wasn’t even a large business at the time. NCO went public in 1996.
12:50 MF: Right. But they…
12:50 MG: We sold them a company that at that time gave them critical size of about $50 Million a year.
12:56 MF: Okay.
12:57 MG: That was about a $15 Million business, and NCO was only a $35 Million business at the time, combined $50 Million. If you ask the underwriters who took them public, today, if they would even touch a business of that size. Back then they would; it was a $50 Million revenue stream that went public in ’96. That’s when they really started their consolidation strategy.
13:18 MF: And you and Marv were part of all that, I think, weren’t you, over time?
13:23 MG: Absolutely. The first… What I remember, the very first time that we got involved was a company by the name of OSI. Before OSI was started, David Kris actually came to us for equity. And he had an equity financing source, Heller. But Heller decided they weren’t gonna do equity. And that’s when the private equity firm McCown De Leeuw…
13:49 MF: Right.
13:49 MG: Who started that company, got involved with David Kris. And Heller actually financed their first transaction.
13:57 MF: Right.
13:57 MG: So that really…
13:57 MF: Is that when Tim Veffer was there? Tim Veffer came… He came after…
14:00 MG: That was way later. That was way later.
14:00 MF: Kris?
14:02 MG: That was after the… Right around the time that they bought Payco American. So Kris has a different strategy, and they ended up parting ways or whatever. And then Kris got involved again in the business. And, yeah, we were very, very involved with that whole private equity. Fact, an interesting statistic: Between 1995 and roughly 2005, with the exception of one company, GC Services, all of the top 10 players were involved in at least one sale. Every one of them. RMS was one of them. There were lot of sales. Wasn’t that to a Pittsburgh bank, right? Initially.
14:40 MF: Yes. Hold on. Which one was it?
14:43 MG: I put you on the spot for a change.
14:44 MF: Oh gosh.
14:46 MG: It was Penn…
14:47 MF: It was PE fund right outside of Pittsburgh.
14:49 MG: Yeah, that’s exactly right.
14:50 MF: It’ll come to me in a second. But I wasn’t part of that. I had left…
14:53 MG: You had left by then.
14:54 MF: By that point. And I had a retainer from GTCR, Bruce Rauner.
14:58 MG: There you go. Well, GTCR was a fun story. I’ll tell you a fun story about private equity. So GTCR is based in Chicago. ’92, ’93, ’94, ’95. We’re doing a whole slew of deals, many of which with private equity. We were doing some strategic buyers and some industry buyers, but a lot of private equity were emerging. We were showing GTCR a bunch of deals. Rejecting every single one of them. Not even responding in some cases. So I’m a kid from the Bronx, so I have an attitude. So I picked up the phone, and I called and I said, “Who’s in charge?” [chuckle] And the poor woman on the other side probably had a heart attack. She said “Hold on a second.” And she came back and she said, “Who would you like to speak to?” I said “I don’t know.” So a gentleman by the name of Bruce Rauner picked up the phone. I don’t even know who this guy was. And he picks up the phone and he says, “Who are you?” And I said “Who are you?” And we had a good starting conversation.
15:56 MG: And he said, “If you wanna learn how to do transactions,” he says, “Come up to Chicago and meet with me.” And I said, “When and where?” And he said, “Are you kidding?” And I said, “No.” He said, “Meet me at the bar in the O’Hare Airport at X number time, or whatever, and we’ll talk.” So I said, “Okay.” So I went to the bar, and I met at the O’Hare Airport. And we talked, and he said, “20 minute meeting.” I flew from Washington for a 20 minute meeting at O’Hare Airport with this guy I never before, Bruce Rauner. He says to me, he says, “Mike,” he says, “Stop showing me deals and show me a leader. If you show me a leader, I could back a leader. But I’m not just gonna buy a company. It’s like buying a boat without a rudder.” He says, “I’m not gonna do that.” I said, “I got it. I got it. I understand.” The meeting was over in 20 minutes. I went back home. So a few… Probably a week… No, about a month later, I called Rauner and I said, “Payback’s a bitch.” Can I say that on a radio? I said, “Payback’s a bitch. You need to meet me now at Atlanta.”
17:01 MG: I said, “I have a CEO for you. And we’re gonna have a meeting. He’s picking the restaurant, and he’s gonna pick the day. Are you in?” And he says, “Absolutely.” So he flew down at the time Dennis Cunningham was the CEO of the combined collection agencies of first data corporation and first financial asset management, a company called Nationwide Credit. And he was sitting fat and pretty, with his stock options and a thousand employees, whatever, and excited. And he says, “I’m not gonna meet with you.” Well, he reluctantly agreed to have lunch as long as we met in Buckhead. I think everything in Atlanta’s Buckhead, right? So we met in Buckhead. Oh no, everything in Atlanta’s Peachtree, right? So we met in Buckhead on Peachtree whatever, at some restaurant. And here’s a restaurant, whatever you wanted to do. And they met. And about a month later he resigned. And about a month later he started as the CEO of a new company called Risk Management Alternatives.
18:00 MF: Yep. RMA.
18:01 MG: Eight months later we did our first deal. He was on the payroll for eight months. He bought credit converters out of Minneapolis, home of the Super Bowl. But that’s 30 years later. Anyway he… Credit converters. We sold them a number of companies, and followed through to the end, and we ultimately sold that business. They should have sold it probably a year earlier; it would’ve been an interesting, different transaction. I think companies like maybe Sallie Mae would have bought it. It ended up NCO. A lot of roads lead back to NCO, right? NCO bought it years later. But that was a fun story. And I had become very friendly with Bruce Rauner. And now he’s the Governor of…
18:40 MF: Illinois, yeah.
18:41 MG: Illinois. So it’s been an interesting evolution. Yeah, this is what happens in the collection. This is what happens in the collection business: You have governors of Illinois.
18:49 MF: How many tombstones do you and Marv have now?
18:53 MG: In this industry we’ve done upwards, rounding up, about 150 transactions in this industry.
18:57 MF: Oh my God. A 150 transactions in… What? 25 years.
19:00 MG: Small, small. Mid-size. Some mid-size. Yeah, our first was in ’91. Mid-size transactions, some large companies, a lot of add-ons. We’ve brought in some of the largest strategic to this industry. West Corporation. Fun story, West…
19:18 MF: So you brought that one in?
19:19 MG: West was really impacted by the national Do Not Call Legislation in 2005. As a call center, probably half of their revenue was gonna go bye-bye as a result of that legislation, and they needed to fill that void pretty substantially. Well, they had some friends on Wall Street and a company, a firm by the name of Lazard, actually referred them to me in the collection business because they wanted to buy a market leader in the collection business. But they needed also, similar to the story I just told you about GTCR, needed a leader. But also needed a large operation. I convinced Jim Richards to meet with them, but Jim was only 18 months into a company called Attention LLC.
20:03 MF: Right.
20:04 MG: He had no interest in selling. In fact, he was very upset with me when I even brought up the idea of selling his business. But I said to Jim, and this is how we operate, I said to Jim, I said, “Jim, in confidence, you shared with me your five year plan. What if I told you that this gets you there quicker with a heck of a lot less risk? And you’re gonna get a greater return if you do this transaction?” He said, “With who? I’m listening.” And he reluctantly agreed to a meeting in New Orleans. We met in New Orleans. And Rob Johnson was there and a few other people at the time. And ultimately that deal was done. That was their first acquisition at West Corporation. Their first acquisition.
20:42 MF: And Jim became the head of that division, right?
20:44 MG: Yeah. And Worldwide was a part of that and then…
20:47 MF: That’s when they handed the company… Right.
20:48 MG: They sold it all off to LORECa and all that years later.
20:50 MF: Did you do that deal, too?
20:52 MG: The Worldwide deal?
20:52 MF: Yeah.
20:53 MG: No, that was direct. That was direct with Jim, and Frank, and all that kind of stuff. But there’s just been… And the other… I’ll tell you another large, a strategic… This a fun story. GE, small company. GE decided they wanted to be in the collection business. Do y’all remember when Jack Welch was running the company? We’re going back a few years. He had a meeting with all of his seniors. They call them the B’s. Anybody who runs a billion dollar division of GE is called the B’s. Well, he had a meeting with his B’s and said, “We’re going to start vertical integration. Okay? We’re gonna start looking at our PNL and figure out who we could buy, and what we could do, and how we could do deals. Whatever.” So one of their divisions, one of their B’s, was FGIC. FGIC was a guarantor of bonds for municipalities across the country. Well, they wanted to buy a collection agency that serviced municipalities.
21:52 MG: So he came down to our office. We’re in Bethesda, Maryland at the time. We sat down with literally 10 of these guys, and a small army. And they came down; they wanted to talk about doing deals. They actually had a list of the 10 companies that they thought that they should buy. Well, these were… At the time, GE had a motto: “We’re number one or number two in any industry that we get involved in, or else we get out of that industry. We have to be number one or number two in the industries we service.” Okay. So they had a list of the top 10, what they perceived as the top 10 bill collectors at the time, and they wanted to buy one of them. Alright, that’s cool. So I looked at the list. And they hired us to do research. Well, I quickly could have told them, “You can’t buy any company on this list.” ‘Cause the largest one that actually serviced the type of paper that they wanted was GC Services.
22:39 MG: But GC Services, 90% of their business was not in municipalities. So you’re gonna overpay to buy a company that provided the service you were looking for. I said, “What if I told you you could buy a municipality specialist?” It’s a fun story. I said… They were excited; that’s what they wanted to buy. So I said to them, “Yeah, we have a company that’s in Spokane, Washington. It’s available for sale, and I think it’s a good fit for you.” “So, yeah. How large is it?” And I said, “10 Million.” They said, “10 Million in profit?” I said, “No.” They said, “10 Million in monthly revenue?” I said, “No.” They said, “10 Million in annual revenue?” I said, “Yes, but they’re a specialist in municipalities.” They said, “Don’t you understand you’re working with GE?” Well, they ended up buying that company. And they paid cash for it. It was a nice business.
23:30 MF: Which company was that?
23:32 MG: It was called, S as in Sam, SEA Credit. It was out in Spokane. It actually was in Spokane, Northern California. And about three years later they realized they needed capacity, and they bought a small collection agency by the name of Great Lakes. About four years later…
23:49 MF: In Buffalo, right?
23:50 MG: Yes. And about four years later they realized they shouldn’t be in the collection business. And we divested that business also to NCO group. So all roads do lead back, many roads.
24:00 MF: So you helped them divest?
24:02 MG: Four years later we did full circle with them.
24:02 MF: So you made money on both sides of the deal?
24:05 MG: Three ways. That was a three-way transaction. [chuckle] Contrary to what Donald Trump would say, it doesn’t have to be a winner and a loser in every transaction; sometimes there could be winners in the transaction. In this case we actually were.
24:16 MF: But the broker wins each time.
24:19 MG: Well, I didn’t want them to get out; I wanted to continue to gobble up and grow, but they decided they wanted to divest. Luckily, they wanted to divest with us. So that was okay. So you provided me with… I know we’re going off on a tangent. You provided me with a series of questions, but all I did was tell you stories.
24:35 MF: You said you have 150 tombstones over 25 to 30 years. So what are some of the common denominators? And I’ll just tell you a few that I’ve heard. It’s more art than science, right? You’ve gotta think like an owner. Leadership is really important. Also, you’ve got lots of big capital sources that you’ve lined up to buy these companies.
24:56 MG: Correct.
24:57 MF: But what else? What are some of the common denominators of success that you and Marv have learned over these three decades when you’re clearly the leader of all M&A deals in the middle market?
25:08 MG: Well, thank you, and I appreciate that. I don’t know if that’s the case.
25:10 MF: Even a large market. You’ve got some large deals here that were not trivial.
25:13 MG: Yeah, various deals over the years, well over $3.5 Billion of transactions values. The answer to the question is not simple, but I think there are a few components to it. First, these are service businesses, whether it’s an add-on to an existing platform or a starting point for someone to get into this industry. And I don’t care if it’s a financial investor, or another player in the industry looking to diversify into a new market segment, or a company like GE getting into collections for the first time. It’s a service business. These businesses don’t run themselves. And the disasters that I’ve seen in the marketplace is when they parachute people in who think that they could run these businesses, and they’ve never run and operated these businesses before. This industry had what was called the “Poof IPO” years ago, Compass International. A roll-up IPO. Five companies came together. This was a sexy strategy on Wall Street at the time. Companies that didn’t have the capacity to go public as a standalone, they come together as a merger almost simultaneously, and they go public.
26:27 MG: Well, Compass did this. They alienated each and every one of the CEOs of these divisional service companies. Even though some of them had stock more than others, they all had some stock, that was the nature of this transaction. But they parachuted two guys in from American Express, and they didn’t know how to run a collection agency. They didn’t know how to manage it down, let alone deal with the clients. They didn’t know how to deal with collectors. It just didn’t work that way. So I think one of the major, major ingredients is to recognize, “I don’t care how many credentials you have, or how many degrees you have from Harvard, or whatever. This is a tough business. It’s the collection business.” And these people thoroughly understand how to run and operate a call center successfully…
27:15 MF: So strong operators.
27:15 MG: And deal with clients. Strong operators and succession. Strong succession. Don’t alienate the existing team; that’s number one.
27:25 MG: Number two, and in no particular order, technology is very important in this business. It’s an enabler; it’s an ability for these guys to service tens of millions of accounts on an annual basis, especially if they’re dealing in markets like financial services or telcom. These businesses, many of them are cash cows, and they don’t reinvest back into the business the way they should. Well, I try to explain to an owner in a boardroom, You can’t have it both ways. If that business is your personal piggy bank, well God bless you and that’s great. But if you’re not properly capitalizing your business, you’re not gonna get paid a premium; it’s not going to be a successful transaction, because the sustainability won’t be there post-transaction. So reinvestment back into the business is a simple answer for a nice return on equity when you’re ready to sell the business. Technology’s very important. The other thing too that I think is extremely important, that we just learned last couple of weeks: Client concentration will kill you. It will kill you in this business.
28:32 MG: Classic example is the US Department of Education. The largest plum client. Everybody wanted a piece of the Ed contract. If you couldn’t get it as an unrestricted, meaning the large, you got it as a restricted, meaning the small, ’cause the government requires small companies to service their accounts. Or you got it as a subcontractor. A lot of folks got it as subcontractors. But we learned this go-around that it went from last time was 17 large agencies, to seven large agencies who got the contract. They thought they got the contract, but only two of them have it going forward, and only one from the seven who were awarded the contract last year don’t even have it. By definition they all suffer from concentration. Now larger companies, maybe like GC Services or Transworld Systems, might not be as impacted as some smaller companies who have a disproportionate percentage of their revenue and profit coming from this one client. We also saw this years ago in financial services. The catalyst for this industry, the largest growth catalyst leading up to the Great Recession, was credit-card proliferation. Non-performing, non-secured loans. Subprime was a major, major catalyst. But if you really peel away… This is part of my book, as a matter of fact.
30:00 MF: We’ve gotta get this book published.
30:00 MG: If you really peel away… It’s a good book. You’d read it. No one else would read it. My mother might read it.
30:05 MF: I’ll help you. I’ll help you write it.
30:06 MG: My mother’s gonna listen to this radio story. Anyway, these companies… What was I just talking about?
30:15 MF: Credit card proliferation.
30:16 MG: Oh yes. So the credit cards were dominant in the time leading up to the great recession. But it was really four large banks. If you think about the large banks, 80% of the revenue that was generated in financial services came from four banks: Capital One, B of A, Chase, and Citi. That was it. American Express and others, Wells wasn’t even in the picture at that level at that time, though they’re the largest now. Four large banks created this industry. When I say “this industry,” the debt buying association, now RMA, was started in the heydays because of the debt sales of four large banks. That growth was substantial, but a lot of agencies took it on the chin in 2007 with the mortgage and then 2008 with the financial crisis because they did not diversify. So the next word on there is diversification.
31:11 MF: Right.
31:12 MG: The last word that I would put on there is sustainability. Okay. It’s a simple word. Sustainable top line and bottom line performance. Buyers don’t like erratic lines like you see in emergency rooms. They don’t like that kind of stuff. They wanna see consistent top line and bottom line growth. You rarely see that in business, so you need a good operator who could explain that. Why did that drop? How’s it gonna go back up? Why did it spike? And be able to really have a good basis for your assumptions, especially if you’re gonna project. A lot of companies in this industry don’t even have a budget, let alone a projection. They really don’t even have a budget. They have historical financial statements. Many of them are audited because the client demands it. Most of them are not. But they don’t have a budget, and they don’t have a… Let alone a forecast. And they don’t have the basis to support it.
32:09 MG: I don’t need all of that, but if you wanna see a successful transaction, show some substantially. Because buyers seldom wanna buy a business that’s going away. They wanna buy a business to grow it. Why are they buying the business? They wanna get a return on their dollars. Or else they keep their money in their mattress.
32:27 MF: But the diversity helps the sustainability because that’s the…
32:29 MG: All of it goes together.
32:32 MF: Goes to the concentration issue.
32:32 MG: It’s critical. And these are all… And these are simple components of a service business. But if you check the box and you have all those things kinda going for you, even in down markets… ‘Cause one of the things you wanna talk about was the recession and how impactful that was. That was the single most pervasive event in the history of this industry. People say, “Well, what about the Great Depression.” Well, collection agencies didn’t exist in the 1920s.
32:56 MF: Right.
32:56 MG: They really started after World War II with the advent of credit. That’s really when this industry started. Well, if that’s the case, nobody remembers the Great Depression, but everybody remembers the Great Recession, because it directly… Prior to that, people thought this industry was recession-proof. They use that word a lot. I always educate them that it was recession resistant. It lagged behind most major indicators, and it came out of a recession quicker. It was good barometer. But the recession really punched this industry square in the mouth.
33:29 MF: The recession followed by… I would call it the Great Regulation of the CFPB, which changed… It was a game changer in many respects.
33:36 MG: Absolutely it was.
33:37 MF: Especially for debt buyers with all the rules on…
33:39 MG: Still is.
33:40 MF: On reselling, and chain of title. So what’s your outlook for the debt buying industry right now? We were in the dregs, we were in the drought a few years ago. It seems like it may be coming back now.
33:54 MG: Well last year, we had a changing of the guard with the Trump administration and the Republicans now in office, right? So it’s an exciting time. You come to this conference literally last year. Years before it was somber. People were like scared to be here, was a ghost town, people were quiet.
34:11 MF: There was contraction in the industry.
34:11 MG: Last year there was excitement. People were thrilled that there was a changing of the guard, and really because regulation was going to be impacted, specifically Dodd-Frank. And we thought if Dodd-Frank was going to be addressed, then the CFPB of course would also be addressed.
34:28 MG: We never thought it would be disbanded. We thought it would be overhauled and balanced. The pendulum really went towards the consumer. We hope that the pendulum would come back to equilibrium so businesses can perform in this industry. It still hasn’t. And unfortunately whether you’re a republican or a democrat, and I don’t wanna make this political conversation, but sometimes Trump can’t get out off his own way. And the things he says, and obviously Russia and other issues that he has to deal with. He was supposed to… One of his major initiatives was regulation.
34:58 MF: Well, deregulation, yeah.
35:00 MG: Tax reform was one, and ObamaCare was another. But addressing regulation to deregulate and to bring it back towards equilibrium. Well, he hasn’t addressed Dodd-Frank yet. Until that happens, the CFPB will continue on its way. Now they have a little bit more of checks and balances. There was a little bit of a changing of the guard there. But it’s still impactful, and it’s going to be impactful. TCPA, the lawsuits out there are hugely impactful. Technology is about 20 years ahead of where regulation is in this industry. And until they catch up, it’s very hard to use technology without a lawsuit.
35:37 MF: Well, Mike, this has been fascinating. And we’re running out of time here. We’ve talked a lot about some terrific stories, and you could be the historian really for this industry.
35:47 MG: Well, thank you.
35:48 MF: You’ve had an awesome track record.
35:49 MG: You gotta have a parting shot. You gave me 15 questions there.
35:51 MF: We’re gonna have to invite you back.
35:55 MG: My mom doesn’t wanna listen to this yet. Give me something.
35:56 MF: No, we’re gonna have to invite you back because…
35:57 MG: Give me something my mom can listen to.
36:00 MF: We wanna invite you back very soon, but before we say goodbye this afternoon… You’ve talked a lot about the industry, and your outlook on the industry, the ups and downs in the industry. What is your outlook for Kaulkin Ginsberg going forward, and how is Kaulkin Ginsberg gonna continue to grow and serve this industry. I know you’ve got insideARM, you’ve got KG Prime. Give our listeners kinda how Kaulkin Ginsberg and Mike Ginsberg will serve them in the future.
36:27 MG: So in our past we had a… It’s interesting. We did start the first M&A firm specializing in the ARM industry. We’d had that. And we still have that today. We started the first news business, news information portal in insideARM. And that’s a fun story, and I’ll tell you that another time, the evolution of collection industry.com
into insideARM. Management now runs and operates that business, and they do a fantastic job. Stephanie was groomed for that business really. She does a fantastic job running insideARM. Topline is a support business for valuation and financial products in the industry. Very proud of that. We teamed up with the leading accounting firm, Santos Postal in the Washington area, really to provide an array of financial products to this industry that didn’t exist before. But the future of this really is, in my opinion, is KG Prime.
37:29 MG: KG Prime is a member-only exclusive business, and we created this for one sole purpose: We wanted ARM companies to be able to come together, to share information, and feel comfortable doing so, without the parasite attorneys that are out there suing these companies. So it’s a restrictive site. And there’ll be live events, and things like that. But it’s really created… If you think of us as strategic advisers, we’re trying to create that one spot where folks can come for strategic advice. Okay? So it could be a technology company, and they could be launching an AI, Artificial Intelligence way of doing things. Well, if they promote it, that’s publicity and that’s great. But if we really look at it strategically and how it’s impactful to the business, now owner operators can make an informed decision. We’ve been doing that in the board room; now we’re doing that online. And that’s really in the future of what we’re doing. We’ll continue to do transactions. I’m a deal junkie. I’m always looking for my next fix. I hate to use drug analogies. We’re in Vegas, though.
38:35 MG: What goes on in Vegas, stays in Vegas.
38:37 MF: Yeah.
38:38 MG: But seriously, M&A is a strategic advisory work. All we’re trying to do through KG Prime is create a universe. We could do that online. That’s what it’s all about right now. So that’s like the next 20-year vision.
38:49 MF: And the intelligence of KG Prime, could you be a little more specific? What exactly would be…
38:55 MG: So we…
38:56 MF: Give us an example.
38:57 MG: Absolutely. We, about five years ago, started a fellowship with the University of Maryland. Right around the time that they moved to the Big 10, as a matter of a fact. And that was great for us, because their access to information was unparalleled, as far as I’m concerned. And we have tremendous non-commercial access to information, so we’ve actually hired a few people from that program. We’ve had about 150 students come through that program. We do a lot of research. We’ve written reports over the years, seven reports on the ARM industry, a global debt buying report, various other reports. But the problem, Michael, if I send you a report, 150 page PDF, you’re gonna look at me like I’m blue, okay? And you’re gonna say, “What am I gonna do with 150 page PDF? It looks great; I’ll try to put it right over here.”
39:42 MF: Right.
39:43 MG: But today, people want short bursts of information. So we blew up the report writing model. We’ve been doing research for 20 years. But we no longer write reports. So everything online is in small doses, so people can gather the intelligence that they want. And our analysts, and we have analysts who really do this, help you navigate by related research. So if you want more information, you can find more information. But if you want short bursts of exact information that you’re looking for, for the first time, not only you get that information, but it’s a social media platform. You can share it with people. And that’s really what it’s all about.
40:20 MG: So we’ve done a lot of intelligence, market intelligence, and information. Now we’re partnering with firms who provide information like compliance, that we can’t provide. They provide information like technology, that we can’t provide. And these are people who are contributors to this industry who wanna see it moving forward in a uniform way, who are spending, and I kid you not, tens of thousands of dollars a month to market their products and services, by coming to conferences, and advertising, and doing a whole variety of different things. But they don’t really have that point where they can congregate. And we’re trying to create that one point where people can congregate to make an informed decision. It’s really that simple. So it’s not complicated. I’m not a complicated guy. I went the public school in ’95. I graduated from Mahopac. And I have a undergraduate degree from University of Maryland College Park. I can’t be anymore uncomplicated than that, right? Is uncomplicated a word? It is today.
41:21 MG: But anyway, it’s a simple philosophy but it’s like seeing the field a little bit different. We digressed, but I’ll just tell you a very fun story as we end this. So we sold that first collection agency Eastern… It will be quick, I promise. I know you’re looking at your watch. We sold Eastern Credit in 1991. I called my mother: “Mom, I sold this company.” Moms get excited, right? She said, “Oh, really, what’d you do?” And I told her about the transaction. She said, “What kind of company did you sell?” And I said, “It’s a collection agency.” And she says, “Oh yeah, Michael?” When she calls me Michael, you know there’s problems.
42:01 MG: “Oh yeah, Michael?” What do they collect? She was hoping I would say garbage, right? Or art, maybe art collections or something. And collections is kinda both of those, right? But I said, “No, they collect bills.” She said, “Pack your bags, you’re coming home; no son of mine’s gonna be a bill collector.” And I said, “Mom, you have no idea what I do for a living.” To this day she has no idea what I do for a living; however, I gave her two grandkids, so she’s happy.
42:28 MF: Oh, okay.
42:28 MG: Right. And they’re both healthy and been married for 25, almost 25 years. So she’s happy about that. But moms are great. Anyway, I thought I would end on a fun story like that.
42:38 MF: Mike, this has been a terrific conversation this afternoon. Starting as an intern with Marv Kaulkin, doing your first deal at Eastern Credit, and now after, what, nearly 30 years and 150 tombstones.
42:51 MG: And a lot of gray hairs.
42:53 MF: A few. We all have that.
42:54 MG: Well, no, you’re blind. I see you’re gonna either go white or you’re gonna…
42:58 MF: Don’t go there. But the first really M&A successful boutique, dedicated to this whole industry, the first news organization, and now the first market intelligence company that you’ve got, KG Prime.
43:12 MG: Thank you.
43:13 MF: Very, very impressive track record. And I just wanna thank you for this rich story of the past, Kaulkin, Ginsberg, and the outlook, which seems pretty bright and expanding for your company and for our industry. And thanks personally for your commitment to being the enthusiastic cheerleader for all the members here at DBA, now called RMA. It’s been outstanding. We wanna have you back. These are incredible stories. And you’ve got to write that book: Infinite… You’ve started. You gotta publish that book, and I’ll give you a few chapters you can add to it.
43:45 MG: Absolutely. I wanna thank you and your team here. Very professional. Extremely well done. You made me at ease by providing me with really thoughtful, not only questions but conversation pieces. You’ve guided this magnificently. Clearly, you’ve done this many times before, and you’re extremely comfortable in what you do. But this is in a tremendous platform, and it’s been a lot fun. I’ll tell you, my former partner Marvin Kaulkin passed away a little while ago, and I think he would be extremely proud. He always said to be successful, you have to be sustainable yourself; you have to be in business to be in business. And after almost 30 years of doing this kind of stuff I think one thing we do have, maybe it’s the only thing we have, is sustainability. But I’ll tell you, this has been a lot of fun. And I really, really enjoyed it. And personally thank you for the opportunity to talk. This has been wonderful.
44:39 MF: Mike, we’ll do it again very soon.
44:41 MG: I hope so.
44:41 MF: And congratulations on the tremendous track record you’ve got.
44:44 MG: Well, thank you and thank you all.
44:45 MF: Okay.
44:47 Closing: We want to thank you for listening to this special episode of Capital Club Radio With your host, Michael Flock and his guest live from the 2018 RMA International Conference at the Aria Resort in Las Vegas. Made possible in part by Flock Specialty Finance, more than a transaction. For more info, visit flockfinance.com
To listen to a rebroadcast and more episodes, visit capitalclubradio.com