Tips to get top dollar for your staffing firm

Competing offers. Cash buyers. Shorter earn-outs. With demand for acquisitions outstripping supply, there may never be a better time for owners to get top dollar when they sell their staffing firms.

“Quality firms are on the market for less than three weeks,” notes Eric Allison, managing director of Exigo Ventures Inc. “Sellers who would typically receive three to five times EBITDA are now getting seven times EBITDA.”

Steady demand for staffing services and the industry’s projected growth to $121 billion in 2016 are just some of the drivers fueling valuations and M&A activity. Strong interest from cash-rich private equity firms and overseas investors are also stoking the fire, giving resourceful sellers more options and bargaining power.

At the current pace, 2015 is set to be a banner year. However, merely posting a “For Sale” sign in the lobby won’t line your pockets with cash. The best way to guarantee that you’re going to get the highest price for your staffing firm is to follow these tips.

Tout Your Differences

Today’s buyers aren’t looking to increase share in existing markets or boost cash flow when they shop for acquisitions. Savvy purchasers want to add a new service line like IT or RPO, fill a service gap or enter a new market.

Given buyers’ specific motives, staffing firms that have developed a specialized niche, brand or talent pool are attracting multiple suitors and higher valuations, according to Jim Childs, managing director of CHILDS Advisory Partners. “Being a leader or specialist in something is a distinguishing attribute,” Childs says. “It doesn’t matter whether it’s a skill set, customer segment or geographic market. Buyers are willing to pay over and above the asking price to gain access to an exciting, hard-to-enter niche that’s not easily replicated.”

For instance, venture capital firms that are accumulating allied health, travel nurse and physician staffing entities to position for a future IPO will pay almost anything to acquire a missing puzzle piece. And IT firms are eager to enter into a relationship with a cleared customer sponsor so they can provide cleared employees to work on classified contracts. Even small firms with $10 million to $25 million in revenues are attracting suitors, if they have something a buyer wants.

“A buyer may be interested in acquiring your firm just to get your database of locum tenens physicians or a contract with a particular client,” says Jacob Horn, who recently sold MDStaffers and now serves as senior VP of recruiting. “You never know what synergies the buyer may be looking for until you hit the market.”

Customer base is an important consideration for many buyers. “One of the primary things that buyers look at is the quality of the customer base,” says Rick Wilson, managing director of Crutchfield Capital Corporation.

Aspects buyers weigh, Wilson says, include whether a staffing firm has significant tenure with its customers, whether it has direct relationships customers or goes through a VMS, whether there is low turnover among customers and the geographic location of those customers. For the last point, some geographic locations are seen as having more opportunities than others, although location of customers is less important for suppliers of professional- level workers when the firm has a national footprint.

Staffing firms can also differentiate themselves through execution, he says, the top companies simply operate better. “That comes back to how you run the business in terms of the management style, the use of financial and management reporting, how people are measured against key performance indicators, and if policies and procedures are in place and being followed,” he says. “For those companies that do those basic things on a day to day basis, you typically find a better customer base, a better revenue stream and higher profits — they are all related.”

A well-run firm typically means lower integration risk when a buyer brings the new firm under their umbrella. However, Wilson cautions that getting to the top of a company’s game in execution can take years; companies may choose to focus first on the day-to-day management of the business to begin improving its operations.

Al De Bellas, president of De Bellas & Co., says buyers also look at diversification of customers — that they are not concentrated in one industry. This helps stave off problems if a certain industry faces a setback. For example, a firm with a majority of customers in the mortgage business at the start of the last recession would have faced difficulty. Expanding into more than one market is also good; it shows the buyer you know how to manage multiple locations and increases your value. In addition, “the bigger and better your market, the better it is for you,” De Bellas says.

However, specializing in a segment, for example an IT staffing firm specializing in SAP integration, can be a good thing, he says. Specialized firms can have higher gross margins, a plus for buyers. Sellers of staffing firms also need well-prepared financial statements that allow potential buyers to slice and dice results to get a picture of the firm, De Bellas says.

Multiple Offers

“A deal involving multiple bidders typically includes an up-front cash payment from an acquirer of between 60% to 80%, and a 12- to 18-month earnout,” Allison says.

So what can a seller do to attract and encourage competing offers? Plan ahead. Assemble a team of advisors years before you plan to sell. Heeding their advice can position your firm as a premium offering so you’re prepared to capitalize on the next M&A boom.

Obtain offers from at least three to 10 buyers, advised John Niehaus, managing director of Duff & Phelps LLC.

“There’s usually a wide variant in the offers,” Niehaus explains. “We eliminate the bottom 50% and focus on the top 25% to find the buyer who’s willing to pay the most.”

Don’t try to guess who the highest bidder will be; let them go through the process, he adds. Buyers need context to appreciate the value and strategic alignment of a potential acquisition, so the most motivated prospect tends to emerge during the evaluation period.

Leave Some Room

Increasing sales to existing customers and raising bill rates are some of the simplest and best ways for a buyer to finance the cost of an acquisition. So it comes as no surprise that buyers are unwilling to pay a premium for a book of business that’s already topped out.

“Maxing out margins, profits and revenues to boost valuation before a sale is a big mistake,” Childs says. “Leave some room for incremental revenue growth with existing customers or margin improvement, because buyers will discount a firm that doesn’t offer growth potential.”

Seller’s Tips: CEO to CEO

Jenn Fuicelli turned down proposals from strategic buyers and didn’t go with the highest bidder when her father decided to retire from Advanced Medical Personnel Services Inc., the travel therapy firm they had built together.

“I wanted to stay on as CEO and continue to grow the business,” Fuicelli explains. “So, I looked for a buyer who would be hands-off with respect to day-today activities and who would reward, retain and incentivize my staff — not cut their pay and benefits.”

Although Fuicelli ultimately consummated a deal with a “socially conscious” private equity firm, she made some mistakes and learned some valuable lessons about M&As. In fact, she pulled the plug on her initial transaction after signing a brief, non-specific letter of intent (LOI). “The structure of the deal is more important than the multiple, because it ultimately determines your payout,” she explains. “If the LOI is vague, the buyer may try to adjust the price during due diligence or on the back end. The second time, I negotiated all the key deal points upfront and made sure that everything was spelled out in the LOI, limiting last-minute adjustments.” Fuicelli calls earn-outs “outdated” and encouraged owners to leverage their negotiating power by demanding more guaranteed cash upfront.

“Shoot for more cash and stock,” she says. “An earn-out is like a performance bonus that shifts the risk from the buyer to the seller. Don’t take on more risk than you absolutely have to.”

Fuicelli also emphasizes the importance of laying the foundation for a productive partnership with the acquirer during the transaction.

For instance, she reference-checked soon-to-be bosses with other CEOs to assess the potential fit before signing an LOI. And she purposely set her team up for success by providing a conservative sales forecast that was 10% below her firm’s recent run rate and took steps to prevent margin erosion. Fuicelli also used a six-month trial run to evaluate her firm’s budding relationship.

“There are lots of options for good companies and CEOs who want to stay on,” she says. “You have a lot more leverage than you might think.”