Understanding Change of Control in Collection Agency Licensing

Change of Control

Changes to the ownership structure of a licensed collection agency occur for a variety of reasons and are a regular part of the corporate life cycle. However, statutory regulations in most jurisdictions prohibit the transfer of debt collection licenses. The inflexible language of these provisions often does not allow for an interim or transitional license, resulting in a gap period during which the ownership structure may change, but new licenses have not yet been processed. Some level of re-licensing is almost always required.

Stock Transaction

In many situations, a buyer may prefer an asset transaction, but there are benefits to a stock transaction regarding state licensing requirements. Notably, corporate registrations required to obtain state debt collection licenses are transferred smoothly to the buyer in a stock transaction, saving time and money. However, if the equity positions on the balance sheet of the entity holding the debt collection license change by more than 50%, the license becomes invalid, necessitating new license applications.

Consider the following questions to determine your re-licensing strategy:

1. What is the quickest way to obtain the required state debt collection licenses lost in the stock transaction?
   Complete the required license applications before finalizing the transaction and submit them to the respective jurisdictions immediately after closing. This action will decrease the time without the required licenses and positively influence state regulators.

2. Will you continue to collect from debtors in states where the license is now invalid?
   Holding accounts in those states until the new license is obtained may mitigate risks but could cost clients. To minimize risks, consider these steps:

   • Complete and submit license applications before the transaction closes.

   • Avoid announcing the transaction until new licenses are approved.

   • Emphasize compliance with licensing regulations to your staff.

As the change in equity for a proposed transaction dips below 50%, the number of jurisdictions requiring a full re-licensing effort declines significantly.

Key Point

State license applications typically request information only about the direct owners of the entity being licensed. To avoid licensing issues related to selling stock, consider establishing a holding company to own 100% of the licensed entity's stock. Selling stock in the holding company would not change the equity position of the licensed entity, thus avoiding the need for re-licensing.

Asset Transaction

In an asset transaction, the seller retains ownership of the corporate entity and is responsible for unwinding it appropriately. The buyer must create a new corporate entity or use an existing one for the transaction. While there are reasons a buyer may prefer an asset transaction, this structure presents several licensing transition issues.

Transition Issues and Recommendations

1. Corporate registrations and debt collection licenses are tied to the corporate entity.
   These cannot be transferred to a new corporate entity created by the buyer. New corporate registrations and debt collection licenses must be obtained unless the buyer has an existing licensed collection agency. It is recommended to obtain these prior to closing, as it may take no less than six months to fully license the new entity.

2. The desired corporate name can create licensing issues.
   The new corporate entity may wish to operate under the same name as the seller, but states generally do not allow multiple entities to operate under similar names. To avoid delays, proceed with obtaining corporate registrations and debt collection licenses under an available name prior to closing. Prepare paperwork for a name change of the seller's corporate entity to minimize downtime in licensing.

Summary

Changes to the ownership structure of a licensed collection agency should be approached with caution. Understanding the impact of the transaction structure on licensing is crucial. Developing a strategy to minimize exposure before closing a transaction is essential. Cornerstone Licensing is a trusted provider in the collection industry, equipped to handle licensing regulations effectively.