Selling a staffing business is not a simple endeavor. While not “rocket science,” there are many potential pitfalls in the process, many of which could cost an owner not only significant dollars, but also impact the terms of the deal or potentially delay the transaction. For most sellers, this is the first and only time they will ever sell a business, so it’s important to manage things right the first time, especially when negotiating with a buyer who likely has completed many more transactions than the seller. Fortunately, any staffing company owner can be a savvy first time seller with the proper preparation and guidance through the process.
Prepare, Prepare, Prepare. The path to successfully selling a staffing business begins long before the decision is made to enter the market. Decisions such as how the business is originally structured (S Corp, C Corp, LLC, etc.), whether to pursue a diversity certification, designing succession plans, building financial reporting capabilities, choosing compensation plans, managing the diversification of the customer base and managing the breadth and strength of the operations team, etc. all factor into the ability of an owner to eventually sell the business. Always consider the possible future exit implications as these important decisions are made.
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Build Your Deal Team. Savvy sellers typically enlist an experienced deal team that includes an investment banker, a transaction attorney and a tax advisor. The investment banker is responsible for creating the necessary marketing materials and financial models, identifying qualified buyers and managing the sale process. Finding a banker or business broker with experience and buyer relationships in the staffing industry is essential. The transaction attorney will negotiate the purchase agreement, as well as the schedules, consents, employment agreements and other ancillary documentation needed to complete the transaction. A savvy owner should know well in advance of beginning the transaction process which advisors they plan to utilize.
Be a Student of the Market. Understanding how a staffing company is valued and viewed by potential buyers is critical to achieving the best possible valuation. What are buyers looking for in an acquisition? What are the EBITDA multiples and what factors influence those multiples, both upward and downward? What are the typical deal terms, including percentage of cash paid at closing, typical earnout parameters, net working capital requirements, escrows, employment agreement terms and indemnification terms? Recognizing a good transaction opportunity and knowing what financial and non-financial terms are “market” is just as important as staying away from a bad deal.
Confidentially Engage With Multiple Buyers. The best way to maximize the valuation of a staffing business, as well as optimize deal terms, is to confidentially solicit bids from multiple potential buyers. Each buyer may have different reasons for wanting to make acquisitions and as such, may value the business differently. It’s not uncommon to see large valuation differences from buyers, especially if one or more of the buyers see the acquisition as an opportunity to enter a new market and/or add new customers. And if a seller engages in discussions with only one potential buyer, how will the seller ever know if that one offer is the best possible combination of price and terms potentially available for the business?
Set Attainable Forecast Goals. Strong financial performance throughout the sale process is vital to actually closing the transaction with the same price and terms previously agreed upon in the letter of intent. Many deals can be derailed when a seller presents an overly optimistic financial forecast in an attempt to increase the valuation and then proceeds to miss this forecast during the due diligence and the documentation stages of the process. It’s best to set attainable forecast goals and then meet or exceed those expectations all the way through closing if the seller wishes to avoid a last minute purchase price renegotiation.
As the overall staffing industry continues to grow and perform well, buyer interest in the sector remains high and successful transactions are being completed. However, transactions can be sidetracked along the way due to improper planning or poor execution. By preparing in advance, building a strong deal team and becoming knowledgeable about the staffing M&A market, any owner can be a savvy first time seller of their staffing business.
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