How do you compute a reasonable sale price
By Suzanne Barry, Head of Debt Purchase, Cabot Credit Management
When asked what has happened to sale prices recently, any buyer or seller will respond with a raised eyebrow and a wry grin – or was it a grimace? The old maxim that “prices can go down as well as up” has certainly held true. So how on earth are sellers to set expectations for themselves and their internal stakeholders? Is price king, or are there more important factors to be considered? We have all witnessed trades that have completed and may not have been the best outcome for both parties.
Firstly, let’s consider the post sale requirements as these can vary massively. Some of the variation will be derived from the profile of debt that is being sold, for example, older accounts will be expected to generate more disputes. But collections strategies differ hugely and some can provoke far more requests for additional information, either to deal with queries and disputes, or to support court processes and legislative requests. A buyer that has bought from you before and understands your accounts will be able to deal with a fair amount of queries themselves, and this will have an impact on the net proceeds from the sale. Equally, the amount of effort that must be made by the seller in ensuring that their data meets the quality and accuracy demanded by the Lending Standard Board (LSB) is greater and more costly to the seller than ever before.
Also key are the reputations and relationships of the buyers and sellers. The UK debt sale/purchase industry is now well established and sellers will have experienced examples of good and bad practises demonstrated by buyers. Ultimately both parties are looking for partners that are straightforward, easy to deal with, and reputable with the right mix of systems, controls and co-operation. The euphoria of achieving a better-than-expected price may be short-lived if the partner subsequently proves to be a nightmare to deal with.
Equally important are the contracts and execution of the sale. Our industry is no longer awash with funding, and on more than one occasion we have been asked to be prepared to step into the shoes of the winning bidder as they’re not sure that the buyer is going to be able to fund the transaction or because their contract requirements are simply beyond what the seller can tolerate.
And finally, in my opinion, the most important factor is the compliance risk. With the updated OFT Debt Collection Guidance and the LSB Lending Code, there is greater onus on the seller to audit their buyers and be responsible for their actions. Data accuracy becomes far more important as does the consumer focus. Debt sale can be perceived as one of the most vulnerable stages of the customer journey; however by choosing the right purchasing partner this risk can be mitigated. Sellers are rightly looking for partners who have grasped the requirements and are integrating them into their strategies and behaviours. They also acknowledge that the cost of regulatory compliance to the buyer is not insignificant compared with a few years ago, and the result of this is that the number of buyers who are willing and able to make the investment required is reducing and the barriers to entry for new buyers are increasing.
There is no doubt that prices are demonstrating recovery, the extent of which is varied. It is clear that the pace is slowing but as buyers we must have sympathy with sellers as there are both supply side and demand side pressures at work and the equilibrium is shifting month by month. As some of the larger sellers move from process-based to strategic selling, establishing the business case for each sale is nothing if not challenging. It is no longer simply a case of NPV’ing x months of cash flow, there are far more factors at play and each must be addressed before reaching that final sale price.