Ok, I admit it. I’m a “process guy”. Whenever I have an important decision to make, I try to establish a process that, if followed, will be a major factor in enabling a sound decision. When looking to buy a particular business, a good “process” begins with having an overall goal, i.e. the decision to buy or not to buy, then, determining the right questions to ask and when to ask them, gathering the relevant information, getting other informed opinions, and, finally, making the decision.
In buying a staffing company there are usually many items that either enhance value or detract from it. In looking at what may be several “soft assets”, the question becomes; “what is the value of each in delivering an excellent ROI?
The purpose of these 15 topics is to aid a prospective buyer of a staffing company to establish, or contribute to, a “process” for doing so. It does not attempt to be a comprehensive list but rather a good list of things to consider.
As you move along in your own process you will add your own topics or even eliminate some of mine. In the end you want the best decision to either make a purchase or pass on to another opportunity.
Some buyers always assume that the motivation for selling always involves some sort of problem. Why would they be selling a good business otherwise? Not always true but not a bad assumption. If something is wrong, you will need to find it.
Because you are negotiating, it is usually not a good idea to try to discover any“problem” in the first meeting or even the second. The problem may not even exist, and your probing may risk alienating a buyer and losing a profitable acquisition.
If something is wrong, and the overall process you have established is thorough, any problems will usually emerge.
At some point (later in the negotiation) you may also introduce a “failure to disclose” document that spells out the legal consequences of not disclosing critical information like a threatened lawsuit with a written request for settlement.
Some problems may even be an advantage as in lower than average pricing and profits. The purchase will reflect the current situation and the “bonus” will be the opportunity to correct the situation after the sale by increasing both. Not the usual
A more difficult case is if the seller’s business is highly leveraged and some recent setbacks are recommending or even forcing a sale. But even in this situation it may still be a good investment if the seller has not waited too long and the business is still in good shape.
It is usually be a good idea to wait until all the information is on the table, i.e., trust your own process.
Sometimes the creditor(s) will settle for a discounted amount even if it allows the seller to walk away with a respectable amount of cash. This assumes that your own much more complete evaluation of value, and the price that is agreed upon,will still allow your investment to yield a significant ROI.
So, the seller’s motivation in selling may not be as important as it may seem. The process you have established should discover all the critical information to move forward or not, and the seller’s motivation may ultimately be irrelevant.
In the typical staffing company, there are usually not a lot of hard assets like real estate, machinery, or passive income streams. The value is going to come from softer assets which may be difficult to assess.
Buyers will usually start with some sort of accepted soft asset formula but with any fixed formula there are going to be wide variations based upon many other factors that contribute to, or detract from, your ability to get a very favorable ROI.
Since ROI is what most investors are looking for, I would suggest that the company’s overall value is in its likelihood of delivering a favorable ROI. This should be the standard. I would target, perhaps, a 16-20% annual return. Savings through consolidations would be an additional return.
Since a soft-asset company has many intangible factors that contribute to value, or its ability to deliver a favorable return, we are going to look at variety of these soft assets that together should give a greater degree of reliability that your investment will be a good one.
A good owner/operator will have tax returns available showing year after year profitability for at least 3 consecutive years. A review of some supporting documentation like bank accounts should also be available at some point in the negotiation.
Making your analysis more difficult are the owners who“show” as little profit as possible in order to save on corporate and individual taxes. So, they “hide” actual net income in a variety of creative subterfuges (i.e. tax fraud), and, amazingly, will be happy to tell you about it. They now “need” to tell you about it to get the best price.
Also surprising is how many individually owned companies will use their official company bank accounts as if they were personal. Nothing illegal here if they report all income, but it does make your job more difficult in determining the company’s ability to deliver a good return on your investment.
Certainly, a sloppiness (and possible deceitfulness) in these regards may be a “red flag” as well as added work for you, but they do not, per se, rule out what may otherwise be a good purchase.
Since there is often a variance in the percentage of mark up in labor rates charged by different staffing companies, you will want to see (at some point) what is being charged by your seller in order to evaluate any vulnerability to more competitive pricing.
High or unsustainable pricing will usually indicate a similar unsustainability of profits. Lower pricing, if, a certain level of profitability can also be shown, may indicate a future opportunity to increase prices.
Sometimes, otherwise good, or even excellent owner/operators will have lower prices and lower profitability because they have been generally happy with their incomes and secure in the knowledge that their lower pricing protects them from competition.
High and unsustainable pricing may even be a short-term stratagem to show a greater profitability in advance of selling to maximize the price. A good accountant can usually discover things like this, especially if cautioned by other irregularities.
The “fairly” new (2013) U.S.government regulatory standards now holds both the staffing company and their clients as “joint employers” and therefore jointly responsible for compliance. From issues of safety to sexual harassment, it is now imperative that staffing companies spell out the responsibilities of each in their client contracts and general arrangements for providing temporary employees.
Equally important are the internal activities for making employees aware of hazards on different job sites, training programs, safety equipment availability, and, of course, documentation.
As a buyer you should review the seller’s client contracts and their entire program for ensuring regulatory compliance.
Even though a new owner will not be held personally or corporately responsible for incidents that happened before the sale, all the news articles about violations, fines assessed, or lawsuits initiated will make prominent mention of the company you have recently purchased.
This may negatively affect your business with prospective clients as well as making recruitment activities more difficult. In this eventuality, a very pro-active Public Relations would be in order.
Well written contracts, together with awareness notifications, good training procedures, safety equipment availability, and documentation procedures will give you some real confidence that the company being purchased is not likely to have an issue come up in the future. The company’s history of compliance will reinforce this opinion.
The client retention experience of a company usually gives a good indication of how stable the client base may be in the future. This stability will certainly make it easier to manage a transition than the opposite situation.
Client retention should also be based, primarily, on the good management of the company in delivering its services and not be heavily reliant on the more “political” relationships. The latter can spell difficultly in keeping clients after the sale.
Loss of clients can be caused by a variety of factors that do not reflect on the management of the company, yet often does. If there is instability in this regard it could also be a “red flag” indicating other structural problems, you will want to be aware of.
The point of this brief section is not to discuss details of a business plan but simply to note how it may come up in the process of investigating a potential acquisition as a potential asset.
Developing a detailed business plan, implementing it, and reviewing/updating annually is probably the best thing any business can do. If the company you are considering acquiring has been in this habit,it would be a good sign.
This experience should, however, be otherwise evident in the company’s growth patterns, staff professionalism, training, compliance history with regulatory agencies, client stability, etc..
As a buyer, your “process” discoveries during the negotiation will, after the sale, provide an excellent guide to developing a new business plan for your acquisition.
Added to this resource would be the current ownership willingness to share detailed elements of their past and current business plans. This nominal gesture might also be listed in the conditions of sale.
Stability of Key Staff:
Especially in a small business, the key staff person is often like a co-owner and may, therefore, have a real stake in the business. That “stake”should be neither high nor low but “fine-tuned” to keep high motivation and commitment to the success of the business.
The key staff person needs to be real employee as well, answering cooperatively and enthusiastically to management or owner initiatives.
All staff persons should have an enforceable non-compete agreement. (See “Non-Compete agreements” below)
Because a key staff person knows the business, the management software, the clients, the market, other staff members, and temporary employees, they can be a real asset to you, or not.
Are they “on board” with the potential sale? Do they have a financial interest in the sale (bonus or percentage)? Are they available to stay on?
You need to know the full terms of their employment, including salary, bonuses, profit sharing, sales commissions, vacations, sick days, hours of work, work schedule, health insurance, and, any other “understandings” they have had with the owner.
The stability of key staff person(s) is important in other less obvious ways, such as their good relationship with clients, other staff, and contract employees. If the key staff person does not work out, should there be a requirement in the sales agreement for the former owner to step in for a limited period until you have filled the position?
Work Environment (Physical)
Although everyone has preferences there are certain basics that should be in place. The physical workplace should be well organized for efficient workflow, spacious, bright, equipment in good condition, clean, and without offensive odors of smoke or food preparation.
If there is a breakroom where food is heated it should be well ventilated, so those odors are minimal and do not invade work areas. That area should also be appropriately furnished, clean, and inviting to most anyone.
The physical environment speaks to the “culture” of the business and how its business operations are being run.
Every staff person should be required to sign a legally enforceable non-compete agreement. A too restrictive agreement may be invalid and could make it void. The agreement should restrict any attempt to solicit your clients for a period of one year after leaving your employ.
It is always seriously illegal (i.e. criminal) to be on the payroll of a company while at the same time working against it for personal benefit or to benefit someone else. The penalties for such behavior (fraud, theft by deception, etc.) are civil and criminal and every employee should be made aware of this in a separate section of even the simplest of non-compete agreements.
It should also be clear, as a matter of firm company policy and procedure, that all violations will be prosecuted.
An attorney should review documents for confirmation of legally enforceable standards, and, the signed originals of each should be retained at his or her office.
As a buyer you will want to be made aware of, and/or review such agreements.
Any professional staffing company today needs to have a comprehensive training program for both its core staff and contract employees.It does not need to be elaborate but a professional one which covers effectively a little more than the essential information that the regulatory agencies require for the areas your employees are working in.
As a potential buyer, you will need to evaluate it in order to know that it is both effective and documented, or that it is not. If not, then, at a minimum, the cost of putting one in place with all the necessary materials, equipment, staff training, or new hire, will need to be deducted from the selling price.
A bad or minimum training program may well indicate that a future enforcement action or lawsuit against the previous company could adversely affect your new purchase because the surrounding bad publicity will constantly reference the name of the company you purchased.
If this is a serious concern you may not want to buy the actual company name but use another one and negotiate an appropriate discount in the selling price.
Membership in a professional staffing association has many benefits in keeping a company up to date on legal and regulatory requirements as well as providing comprehensive information on a staffing company’s general operation.
The formal and informal interaction with colleagues, who are not direct competitors, is a valuable source of all kinds of assistance.
Membership and active participation at national or regional conferences may be a good indication that a staffing company is a professional organization that will instantly confer value to the buyer from the date of sale.
That assumes that the exposure to professionalism will also be evident in your own evaluation.
The first person to acquire the certifications and training available from government agencies and staffing Associations (ASA, SIA) should be the owner. If this has been done, the company has had the benefit of a well-trained trainer and it should be evident.
The effects will not only be in the company’s regulatory compliance program, but also in an obvious professionalism of the staffing company.
If an owner has also sponsored key staff for further training and certifications in order to advance the professional credentials of the entire organization this is a value that will continue beyond the sale.
The cautions are obvious, but a good owner should be the source of employee advancement.
If good employees cannot advance professionally within an organization, they may well take their knowledge and experience to a company that will.
Key staff who are competent, well trained, and experienced, should be able to convert that into the overall growth and profitability of the company. This should be a known and anticipated part of the deal. Ff successful, the key staff person will be entitled to increases in compensation as they increase yours.
Recruitment & Sales:
The key activities of a good staffing company are in recruiting and placing qualified persons in temporary and permanent positions. (“It’s what we do”)
The company’s success in these activities, has been learned over time in specific markets with methods and persons who will be continuing to accomplish this long after the sale has been consummated.It is thereforean important asset of the company. It is a significant source of value in delivering a return on your investment.
Often sellers will be very reticent about this area of their business and for very good reason. It should not be news to any sophisticated businessperson that there are people “out there” who feign an interest in buying a company in order to gather “intelligence” to compete with it.
The conditions of sale should include all specifics of markets, methods, client information, business plans, etc., in order that you can achieve the best return on your investment. Pushing too hard for some “confidential” information, that is not necessary, may cost you a profitable acquisition.
Be patient. Before the sale is complete you should have all the information needed to make a good decision to either buy or pass, If the purchase is made your conditions of sale agreement (as mentioned above) will provide all the additional information that you may want or need.
Stability of Temporary Employees.
Almost by definition a temporary worker is not engaged in a “stable” working relationship. But many good temporary staffing companies have, and can show, several “temporary” employees who have worked for the company on several assignments over a fairly long period of time. Sometimes many years.
College students who work for your company every summer and on other vacation breaks, moms who take assignments as they can that fit their busy schedules, full time employees looking for weekend work, seniors looking to supplement Social Security etc.
If the company, you are considering, has this type of experience it shows a certain stability that quite probably indicates a good company to work for. In other words, a company with a good reputation among the people you will need to recruit every day. This quality can be a real asset.
While there certainly may be more considerations than these fifteen topics, if these are in good shape, you may be on the verge of a very attractive purchase. Enjoy the “process” and the achievement.!