Authored by Patrick Morin, Managing Director, Transact Capital
The US has seen over 600 staffing company transactions in the last three years – an eye-popping number. M&A in the space continues unabated and owners are benefiting significantly from exiting in such a frothy market. Still, our experience with selling staffing companies has exposed some unique perspectives in how to get more value out of a sale.
In this space, one can count on EBITDA being the cornerstone of the company’s value; a reality that a curious number of owners ignore. Businesses are predominately bought for their cash flow. Are there other accretive reasons? Sure. Getting into new markets, adding a new production capability – but cashflow is normally the first consideration. Therefore, scrub your operating expenses thoroughly of any extraneous items (personal perqs included) and keep your foot pressing hard on the revenue accelerator. Continue to try to grow sales right up to the day of closing.
Moving Beyond EBITDA
Additional factors will also contribute to how easy it will be to attract a buyer, and sell your staffing company with more favorable terms.
Having a strong management team is an important step for preparing your business to sell – especially in staffing. It IS a people business. Buyers will vet the team you’re leaving behind to make sure that the business wasn’t completely dependent on the owner: a cult of personality. While you may have been a very important piece of the company, you will want to begin transitioning all your responsibilities and expertise to those who would be there after the sale of the company. It lessens the risk to the buyer and makes your company more attractive.
An often overlooked part of selling a company is the MOD rate, or EMR (Experience Modification Rate). A MOD rate is an index that shows how much a company pays each month for worker’s compensation premiums relative to the market. A quick glance at this rate can determine how prone a company is to accident and compensation and helps determine its insurance rates as a whole. When buying a company the buyer will examine your mod carefully to determine: 1) How loosely/tightly did you run safety programs, 2) How much excess-premium will buying your company cost them, and 3) If you have a high MOD, are there potential lawsuits lurking that even YOU, the seller, don’t know about. If you’re currently experiencing a high mod rate (>1) TALK to your insurance provider. They may be able to restructure your current premiums or provide other suggestions to lower your MOD rate.
Asset Based Lending
ABL, or asset based lending is a form of a business loan in which the loan is secured by assets – usually receivables. Staffing companies are particularly prone to employ this type of financing. The ABL must be paid off before or concurrent with the closing and buyers will net it out. Most staffing transactions are done on a debt-free-cash-free basis so tapering off the use of ABL in the months and years ahead of the sale can be very rewarding at time of sale.
A business that has defined, repeatable processes for delivering its product commands a higher price. Period. The better run your organization and the more fully-developed your internal processes are the more attractive your business is. This is because a well-defined, documented process lowers the buyer’s risk of not being able to duplicate your results. Make sure that you have a centralized place for all training and process documentation. The more you show that you’re prepared and welcoming to a new buyer, the higher perceived value in your company.
When prospective buyers are looking to buy a staffing company they’ll likely see efficiency in one that specializes in staffing a specific specialty: light industrial, medical, skilled, etc. Buyers know and hunt for specialization and expertise because it usually leads to higher operating margins. While specialization is important, diversification of your client base is also critical.
Client (and Revenue) Concentration
Client concentration is rarely considered by business owners as a factor in the valuation, but individual clients must not hold too much power over the company’s future. If your staffing company relies on only one or two clients for a large chunk of its revenue, this will make your business less attractive to prospective buyers. All buyers will fear one of your major clients leaving. Many smaller clients are typically better than a few mega-clients, so the organization will be able to accept attrition without losing a large chunk of revenue for it. Using 20% as a baseline — does any one of your customers represent more than 20% of your revenue? Of your profits? Fix it.
Ready to Sell?
Seem like a lot? Yes and no. In today’s market, there will be buyers regardless of the condition of your company – people buy Pintos as well as Porsches. However, if you want to increase the odds of exiting for a better price and better terms, take some time to examine and adjust some of the above factors. Questions? Just call.
To learn more, please call Patrick Morin at 804-612-7103 (Patrick@TransactCapital.com), or contact Steve Zacharias at 804-612-7102 (Steve@TransactCapital.com). Additional information about Transact Capital Partners can be found at www.TransactCapital.com.