SI Review: September 2010


Analyst Take, SI Review September 2010

Interview with: Sona Sharma
Senior Research Analyst, Staffing Industry Analysts

Sona Sharma covers staffing M&A activity, among other topics. We interviewed her regarding recent research on the subject.

Q: You recently released a list of staffing firms that are in acquisition mode -- looking to acquire other staffing firms in 2010. Can you tell us more about it?
SS: Yes, 119 firms reported their acquisition plans. The idea of the list, the 2010 Staffing Acquirers Shopping List, is to help acquirers and potential sellers connect up. Staffing firms looking to sell their business can use the list to find interested buyers. The report includes details about what each acquirer is seeking -- first, second and third priorities. Additionally, each potential acquirer listed in the report has also given contact information, so sellers or their representatives can contact the right person directly.

Q: How did you accumulate such a large list of acquirers?
It wasn't easy! We collected data through an online survey and by telephone and email interviews with staffing firms. We conducted the survey in May of this year.

Q: What are acquirers paying nowadays for an acquisition; what kind of multiple?
Well, the latest data we have is for 2009, and multiples were very depressed then, naturally. We surveyed staffing firms on that, and the median reported multiples paid for acquisitions in 2009 were 0.2x for price/revenue, and 2.0x for price/EBITDA. Even at the high end, only a quarter of reported acquisitions earned multiples of 0.7x or greater price/revenue and/or 5.0x or greater price/EBITDA.
These multiples are low, relative to common expectations, and likely reflect distress sales in the weak 2009 economic environment. The M&A firms we talk to generally reported higher multiples, about 4.0 to 6.0 times EBITDA, but of course they mostly deal with sales of larger and more established firms, so those would typically earn a higher multiple.

Q: How do buyers decide how much to pay for an acquisition?
There are many variables that come into play when determining the value of a firm. You have to look at cash flow, which includes earnings and gross margins. Typically, buyers look for working capital, predictable earnings and above industry average gross margins. Some of the red flags for buyers are things such as customer concentration -- the top 10 customers should be less than 25% of the company's total revenue. They also look at things such as workers comp claims and bills receivables. Another important factor in ascertaining the value of a firm is management stability.

Q: Do sellers typically get more if they go through an M&A firm?
Not necessarily, but that's not the real reason sellers use such firms. One of the biggest benefits of M&A advisors is the list of potential buyers they provide a seller. Also, they give a structure to what can be a long and complicated process. Most of them offer free consultation prior to contractually engaging in the sales process. These consultations focus on how to enhance the value of your staffing firm, a quick "back-of-the-envelope"ÂÂÂ� valuation of your company's worth. Really the only downside to them is the price -- they are very expensive.

Q: How much?
: Most of the M&A advisors will take a retainer of $10,000 to $25,000 after the seller signs them up to officially represent them. Some charge a monthly fee until a sale is concluded. But the big chunk of an advisor's fee is the success fee, which is contingent on sale. This fee is a percentage of total sale value. Some brokers also have a minimum fee requirement. The fee is commonly calculated based on the Lehman formula.

Q: But you don't absolutely need such a firm...
Not absolutely, no, but you probably do need an intermediary of some kind. If you try to do this process by yourself, it will be a challenge to stay anonymous. And you need to stay anonymous, because it's not a good idea for your employees and customers to find out about your plans for sale prior to the actual deal taking place. It can have all sorts of negative impact.

Q: So if a staffing firm were going to use your report, the 2010 Staffing Acquirers Shopping List, you would recommend that they have an intermediary -- their lawyer or accountant or an M&A firm -- actually make the contact?
Yes, I would.
Q: Any other advice you would give staffing firms that are thinking about selling?
I would say that even if you are not sure whether you will go with an M&A advisor, just talk to them. They have good advice for you and most of them are willing to share it with you. They will be able to tell you whether you are ready to sell right now or if you should come back in a few months after making some changes to your business to enhance the value of your firm. And while the fees might be daunting, just remember that most of the fees are due only if a sale takes place.

If you would like to receive the 2010 Staffing Acquirers Shopping List, referenced above, contact or call 1-800-950-9496 and ask about corporate membership. If you are already a corporate member, the report is included in your membership.


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