What Staffing Buyers Want In Today’s M&A Market

474763073During a recent conversation with an active buyer in the staffing industry, the buyer remarked to me that “we acquire other staffing businesses because we’re seeking to make our company stronger, not simply for more cash flow or to provide an exit opportunity for the seller.”  This simple statement struck me as being quite profound, as many sellers are not focused on exactly why a buyer may be interested in acquiring their business, nor on how they can transfer sustainable value to the buyer.  Having a keen understanding of what buyers are seeking to accomplish in an acquisition is crucial to positioning your company for a sale and ultimately achieving the best possible value for your business.

A buyer may want to acquire a staffing company for a variety of reasons. Besides increasing sales and earnings, buyers often use acquisitions to add new service offerings, expand into new geographic markets, increase market share, capture new clients, acquire new management talent, or to diversify their existing revenue and earnings stream. Buyers may also make acquisitions because they do not have the in-house expertise to expand into a new business line themselves, or it may simply be faster to buy an existing business.

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It’s also not uncommon for a buyer to pay a premium valuation for a very strong staffing business. Obviously, a buyer doesn’t want to pay a dollar more than is necessary. But buyers today are willing to pay more than fair prices for staffing companies with most, if not all, of the following attributes:

  • Substantial Size. Larger companies command a higher relative value and are more likely to sell at the high end of the quoted EBITDA multiple ranges.  Larger firms are also more likely to be of “institutional quality,” with established systems, policies and procedures in place to accommodate continued growth with no further investment from the buyer.
  • Strong Growth Rate. A buyer will frequently pay a premium for a business exhibiting strong growth trends that are deemed to be both sustainable and in line with or exceeding industry norms.
  • Mix of Business. Buyers will often pay a premium for a specialty staffing company, as specialty firms are likely to exhibit many attractive characteristics.  In general, specialty niche companies have higher bill rates leading to higher gross profit and operating profit margins, faster growth rates and less competition.
  • Above Average Gross Profit Margin.  In most cases, the higher the gross profit percentage, the better.  If a company’s gross profit percentage is perceived to be unrealistically high, a buyer may question if it is sustainable.  If a company’s gross profit percentage is declining, this may be an early indicator that sales may soon decline as well, as the company may be reducing margins to keep existing business.
  • Experienced Management and Staff. Breadth and depth of management is key to a buyer.  The value of a company is impacted by the buyer’s belief that management will be motivated to continue the company’s success after a sale.  Retention of a competent staff is essential.
  • Diversified Customer Base. A diverse customer base will allow for a higher value than a concentrated client list.  The characteristics of the client base are also important, such as the industries represented, the type of skills required, the history, and the relationships with clients.  Direct relationships with clients are much preferred to subcontract relationships.
  • Desirable Markets and Position. The value of a business is impacted by the markets it serves, including their size and growth potential. Buyers are more likely to be interested in “A” or “B” markets than the smaller markets. A company that is recognized as a leader in its market(s) typically commands additional value.

While the M&A market for staffing companies today remains strong, understanding buyers’ rationale for pursuing transactions will help you prepare for selling your business. This includes knowing who the possible buyers are and evaluating what you can do to make your company more attractive to them. I often hear people refer to owners who sold their business at the peak of the market as “lucky.” They were only lucky in that they were prepared to act when the opportunity presented itself. Exit opportunities are available for many staffing company owners, but being prepared and knowledgeable about the market for your company, as well as understanding what makes your company uniquely attractive to a buyer, is essential in attaining the best possible price and terms for your business.

John Niehaus

John Niehaus
John Niehaus is a managing director with Duff & Phelps Securities LLC. He has been actively involved in the management of staffing-related M&A transactions for more than 20 years. He can be reached at john.niehaus (at) duffandphelps (dot) com.

John Niehaus

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