SI Review: December 2012


Exit Right

How to get a good price when selling a staffing firm

By Craig Johnson

If you are interested in selling your staffing business; it’s a good idea to start planning in advance. Revenue growth, a diversity of customers, strong management team and a focus on temporary staffing over perm all help raise a staffing firm’s valuation. However, even if you are not looking to get bought out, it could be a good idea to follow the same principles.

So how do you get the best price for your staffing firm when it’s time to sell?

We asked experts in the field about how to increase a staffing firm’s valuation. Here are their recommendations.

Growth Is Critical

Valuations in the staffing industry are primarily based on a multiple of a company’s last 12 months of adjusted earnings before interest, taxes, depreciation and amortization (EBITDA); although material variations from year to year may call for a different method. Consistent revenue growth and profitability — and a credible plan for continued growth — are among the keys to a good valuation.

“Growth is key, and if you’re under- performing the market, you’re going to get penalized,” says Rick Wilson, managing director of Crutchfield Capital Corp. Buyers like a firm that has outperformed the market and there’s some certainty it will continue outperforming. It helps if the staffing firm has a business plan for meeting the growth targets. “That’s what buyers pay premiums for, they want growth.”

Strong gross margins are also very important and indicative of how your clients view your services, says John Niehaus, director of staffing M&A services for Duff and Phelps. “Buyers want to acquire companies that have higher-than-average gross margins within their segments as companies with higher margins and markups are typically perceived as better quality firms,” he says.

Sustainable profitability ranks high on buyers’ radar as well. And if a staffing firm owner simply stops investing in a business during the months leading up to a planned sale in order to make it appear more profitable, buyers will see through that, Niehaus says.

Owners should watch their markups and gross profits, says Al De Bellas, president of De Bellas & Co. “The importance of gross profits cannot be overstated.”

Strong management team. “You’ll get a better valuation based on the quality and depth of the management team that’s going to be staying on post transaction,” Niehaus says. “Just from the personnel side of the business, you as an owner have to deliver the team. … If you can’t do that , it’s going to impact valuation.”

Owners should make sure employees have employment agreements with non- compete/non-solicitation agreements in place, he says. In addition, owners may want to set up long-term compensation plans that incentivize key staff members to stay in place after a sale.

Further, Wilson says staffing firm owners who plan to leave after the transaction should strive to organize matters such that the organization can run without them. It’s important to have a proven No. 2 person in place who can run it.

Brooke Hollis, president of Hollis Associates Acquisition Advisors LLC, says when he was selling his own staffing firm, he hired a chief operating officer and moved into an office across the street from the firm. That allowed the COO to run operations but still provided Hollis a chance to keep tabs on the firm, and made the ultimate buyer more comfortable with the transition.

It can also be a good idea for an owner to remain involved with the firm for a period after the sale, Hollis says. “It’s reassuring for the buyer to have the owner or owners say they are committed to staying involved for a reasonable transition period or to retain some ongoing financial or ownership involvement,” Hollis says. “The employees feel more comfortable and the buyer feels there’s much less risk around.”

A good transition plan will also help owners who would like to exit the business more quickly, Hollis says. The more of a transition plan that has been put in place, the less the transition time the new owners are likely to want.

Diversified customer base. One of the biggest drivers of value is having a diversified customer base. If a small group of customers represent a major source of a firm’s revenue, the departure of one of those customers could leave the firm in bad shape.

Buyers of staffing firms are concerned about risk, and buyer concentration “is clearly not going to be a characteristic that’s going to be perceived as low risk,” Hollis says. If only a few clients make up a larger percentage of your customer base, this normally is a significant concern to buyers, he says.

But it’s not just about having multiple customers. Having these customers spread across a number of different industries is helpful as well.

De Bellas says it benefits staffing firms to have a diverse industry base. Some staffing firms ran into difficulty when the recession began because their customers were concentrated in industries that were slammed by the economy, such as mortgage banking, commercial title and housing.

Avoid too much perm. If more than 10 percent of a staffing firm’s revenue comes from permanent placement, it can significantly impact valuation, says Jack Lyons, president of Lyons Solutions. Temporary staffing revenue is considered a recurring revenue stream while perm is not. “If they are temporary-oriented rather than permanent- oriented, they are going to be much more marketable,” he says.

Niehaus says direct hire revenue also tends to evaporate more quickly during bad economic times. “When contract catches a cold, direct hire catches pneumonia.”

Direct contact over VMS. Buyers of staffing firms also tend to prefer direct contact with their customers rather than business that goes through a VMS.

“It’s hard to avoid having VMS as part of your business,” Lyons says. “But if VMS is all of your business, margins get really squeezed and is not as attractive to buyers.”

Direct client relationships, though, are perceived as less risky, typically result in a better gross margin and equal a better valuation.

“Being able to walk the halls of the accounts with direct access to the hiring managers is definitely preferred,” Niehaus says.

Workers compensation. A good loss control plan for workers’ compensation can help staffing firms obtain a better policy and reduce costs, De Bellas says. “You can’t do enough loss control.”

Is bigger better? Larger firms are typically more attractive to buyers, Niehaus says, because they tend to have a longer track record and are perceived as less risky to acquire. “Larger companies typically have a much higher quality of infra- structure, procedures, management depth and talent,” Niehaus says. They are also less likely to be dependent on one or two people to run them, and they tend to have a broader and more diverse base of customers.

Hollis says while scale and multiple offices can be an important asset for potential buyers, a number of underperforming branches is not a good thing. Prior to considering a potential sale, staffing firm owners may want to bite the bullet and close underperforming branches and redeploy productive staff where feasible or come up with a plan to improve business at those sites.

Avoid being a ‘C Corp.’ To maximize after-tax proceeds, a company should be an “S Corp.” or an “LLC,” Lyons says. Staffing firm owners should avoid organizing their firms as “C Corps.”

De Bellas says “buyers can buy stock of a C Corp. but generally they pay less for stock of a C Corp. because they give up the right to amortize the goodwill for tax purposes over a 15-year period.”

Orderly financials. Financial records should be in good shape, and it’s ideal to have financials prepared by a certified public accountant following Generally Accepted Accounting Principles (GAAP) standards, Hollis says. “It just makes it a lot easier if you had a CPA prepare the statements that will be reviewed by other CPAs during due diligence,” he says. And the further back the CPA prepared financial statements go, the better. Having at least a full year of audited financial statements ready to show to buyers is also a good idea.

Wilson says an owner not looking to sell should still run the company as if they plan to, and they should work to minimize “add-backs” to EBITDA. An add-back is a nonrecurring expense or certain types of expenses that won’t continue after the staffing firm is acquired — such as the excess salary of the owner.

Find the Right Buyer

Not all buyers are created equal. Some will pay more for your firm than others and with much more favorable terms.

“You’ve got to find the buyers where your company fills a strategic need for that buyer, because that will motivate them to pay the highest price,” Niehaus says. “How will you find the best buyer? Better hire an investment banker that knows the staffing industry and who the most active buyers are. Having multiple buyers involved also will improve your chances for yielding the best possible valuation.”

Having a list of people who may be interested in buying a staffing firm is one thing, but an M&A specialist can help home in on the best buyers, Niehaus says. And who the best buyers are changes frequently.

It’s also important to sell to someone you can trust. “If you’ve got a question in your mind about whether this buyer is going to pay you, don’t sell to him,” Lyons says.


In the end, it can also come down to the timing of the sale. The further ahead a staffing firm owner prepares for a sale, the better it may work.

Preparing three to five years ahead of a sale can allow a firm to do a bit more planning, Wilson says. A firm can make internal changes, such as bringing in higher-powered internal workers to get things turned around if need be. Buyers like a business that has made the necessary changes and the benefits are proven in the financial results.

Planning helps put things into place. For instance, “if you’re a C Corp., it may not be too late to convert to an S Corp.,” Wilson says. It’s important to have a valuation prepared at the date of the conversion to establish the “built-in gain” for the future sale, he says. And relationships matter. Wilson advocates business owners forming relationships with investment bankers. In fact, there are those staffing firm owners who will cultivate a relationship with an M&A professional for years before a possible sale.

There are many advantages that these relation- ships bring. Business owners can learn what potential buyers will think about their companies as well as get information on the top two or three things they could do to increase value. “We frequently spend time with owners who are considering a transaction well into the future, and we always find a few misconceptions they have regarding value drivers,” Wilson says. “An educated seller will get a deal done more quickly and on better terms.”

Knowing When

Selling a staffing firm is also a time-intensive process and can take six months to a year. And when the sale takes place can impact valuation.

“The best way to get a good valuation is to sell when the market is strong,” Lyons says. “A lot of people think that just because they get bigger, then they will be worth more.” However, if they sell in down market they won’t get as much for their firm.

“It’s very hard to time a top,” Lyons says, and the country typically goes into recession every four or five years. A recession can impact the valuation because staffing deals often include “earn-outs” where staffing buyers pay a portion of the selling price months or years after the sale. Earn-outs are based on the financial performance of a firm and a recession can negatively impact that performance. Lyons says earn-outs can be a substantial portion of the purchase price.

In most instances, selling your staffing company at a competitive price is a long-planned process. It makes good business sense to keep in mind the recommendation made by our experts as you prime your firm for sale.

Craig Johnson is managing editor, staffing publications, at Staffing Industry Analysts. He can be reached at


Why People Buy

John Niehaus, director of staffing M&A services for Duff and Phelps lists four primary reasons for buying a staffing firm:

  1. To fill out their geography. A buyer may desire to have operations in a certain geographic market and it would be easier to acquire an existing firm than start from scratch.
  2. To fill out or add service offerings.
  3. To acquire new customers. A firm may acquire another company because it has a long-term direct relationship with a specific staffing user.
  4. To acquire management talent.


Short-Term Steps

Selling a staffing firm takes a while to do properly (six to 12 months from start to finish), and there are some things staffing firm owners can do if they have even just a year to prepare for the start of a sale process.

The first things to focus on are financial reporting and tax planning, to make sure that you have very solid, consistent monthly and annual financial reports for the last three years, says Rick Wilson, managing director of Crutchfield Capital Corp. Audits are nice to have but not essential, and a third-party review of the firm is better than simply providing internal statements to a buyer.

Key people in the firm should be prepared and incentivized for a transaction, Wilson says. A staffing firm owner should under- stand what the sale process encompasses well before starting.

In addition, Wilson says he also favors having informal valuation of the business done by your investment banker. It will let a business owner know how the market will perceive his or her company. It will also let the seller know what can be done to improve the company, although only one year does not allow time for significant changes.


The Good & Bad About Earn-Outs

Earn-outs are a part of many staffing deals. Earn-outs refer to portions of a purchase price that a buyer pays based on the financial performance of a staffing firm months or years after the sale.

Al De Bellas, president of De Bellas & Company, says earn-outs generally range from 10 percent to 40 percent of the purchase price of a staffing firm.

Sometimes staffing firm owners have heard that earn-outs should be avoided at all costs, but that’s not the case, De Bellas says. Staffing firm owners should be careful when putting together the purchase agreement and learn about the ground rules for earn-outs. And De Bellas says in his experience, substantially all earn-outs have worked out well.

He says a majority of deals have earn-outs in them, although there’s a better chance for an all-cash deal in transactions with consideration above $25 million.

Other types of deals that include cash and notes or stock are not nearly as common in the staffing industry as deals including cash and earn-outs. 


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