Lessons Learned from Selling a Staffing Company

The staffing industry provides a great opportunity for entrepreneurs to start, grow and, with a little luck, sell their business.  It seems like there is an announcement in nearly every Staffing Industry Analysts “Global Daily News” publication about a recent sale.

Several months ago, my colleagues and I sold our own staffing business to a larger strategic buyer. It was a whirlwind process that took nine months from start to finish. The intervening months have provided ample opportunity for me to reflect on the sale process.

There is a significant amount of information available on the steps involved in selling a business. In general, they include things like defining an exit strategy; determining the value of your business and enhance that value before sale; gathering due diligence materials; locating a buyer; and negotiating the deal.  All good advice, if at times a bit simplistic.  In my experience, the actual sale process requires a lot of work and can create a fair amount of stress on the participants if it is not managed properly.

I participated in all phases of our sale. I felt I had a pretty good understanding of M&A work as a certified public accountant. I learned a lot more going through the process. In this article, I want to share some of the lessons learned.

1. Ensure owner alignment. All owners of a business must be in alignment concerning a sale. That means they must agree that the time is right to sell as well as on a target sale price. Check your stockholder or operating agreement to ensure that you understand how it may affect the sale process. Can one stockholder block a sale?  Is a stockholder vote required to approve the sale? This can really get interesting if you have multiple owners representing multiple generations.

Don’t overlook the importance of tackling this issue as the first critical step. My company had seven owners. We spent a significant amount of time discussing these issues as a group before we decided to move forward with a sale.

Even a sole proprietor needs to spend time addressing this. Take some time for some serious self-reflection: Are you ready to walk away from the company you built?  Are you willing to stay on and work for the new owners?  What will you do next?  A buyer will want you to enter into a non-compete agreement.  Are you willing to do this?

It is important to spend the time thinking through the ramifications of a sale before starting down that road.

2. Get a valuation. As we ran our business, we had made it a point to get a valuation approximately every five years. This information was extremely helpful in educating the owner group. It also provided us with a starting point for our discussions on a target sales price.

A smaller staffing firm may only need to obtain a valuation prior to finalizing their decision to move forward with a sale. Many investment banking firms provide this service for a reasonable fee. Going through a valuation provides you the opportunity to work with the investment banking firm prior to engaging them in a sale transaction. One of our key factors in the selection of the investment banking firm was our experience working with the person who did our valuation.

PREMIUM CONTENT: Staffing Industry 2018 M&A Update

3. Do tax planning. Most owners are surprised by the tax implications of a sale. Don’t fall into that camp. Bring your tax advisor into the process before deciding to proceed with a sale. Make sure you understand the tax ramifications. The sales price is important but the actual cash you get to keep is where the rubber hits the road.  For example, a sale of a limited liability company interest may generate capital gains, but IRS regulations include references to things like “hot assets” and “unrealized receivables” which might generate ordinary income for the members.  For many staffing companies, their single biggest asset is receivables. Having a tax strategy in place will also help when you negotiate the terms of sale with the buyer.  In today’s rapidly changing tax environment, engaging a tax advisor early is money well spent.

4. Learn about the Net Working Capital Adjustment. This is a purchase price adjustment based on the working capital (current assets minus current liabilities) of the selling company. A buyer typically expects to purchase a certain level of working capital (excluding cash and debt) at the time of sale to allow the business to continue to operate normally. A target working capital amount is usually calculated using a six- or 12-month moving average. This target will then be compared to the actual working capital at the date of sale and the purchase price is adjusted up or down based on the difference between the actual and target amounts.

You should calculate the six and 12-month moving average prior to entering negotiations with a potential buyer.  Determine which one gives you the best (lowest) amount.  Consider whether there are any components of working capital during that period that are unique or unusual. You will want to try to have them eliminated from the calculation.

Here is an example: One of your regular customers had a unique project that generated a significant billing and your receivables were larger than normal for two months. This type of project will not happen again but, it is included in calculating the working capital moving average, causing it to be higher than normal. If the higher balance is defined as the target, it may generate a reduction in the purchase price at closing.  Be proactive in understanding this adjustment. This will help you when you are negotiating your terms of sale.

These are just a few of the lessons I learned through the process of selling my staffing business last year. Each transaction will have unique aspects and unexpected surprises. Build your team of trusted advisors. Rely on them to help you negotiate the best deal possible, to get the outcome you deserve!

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Brian Frydenlund

Brian Frydenlund
Brian Frydenlund joined De Bellas & Co. as a managing director after De Bellas & Co. advised on and sold the staffing company he co-founded, TeamPeople LLC. in September 2017.

Brian Frydenlund

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