Private equity competition is heating up, spurring more of these active investors to consider businesses and industries have not historically been in their sweet spot. While a few firms have made investments in staffing business, the bulk of private equity investors have not favored staffing and human capital organizations due to the industry’s lack of recurring revenues, its cyclical nature, and the general aversion to “human assets.” However, as more private equity dollars are chasing fewer deals, more firms than ever are taking a hard look at the staffing industry, opening up an exciting new set of buyers for your staffing business.
Selling to a private equity firm brings a number of financial and strategic benefits, but also a complex deal-making process that company leaders must be prepared to navigate. In this three part series, we’ll cover the different types of private equity acquisitions (and why they matter), how to position your staffing firm for the best investment results, as well as how to sell to a strategic buyer outside of the staffing industry.
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The Difference Between Platform and Add-On Acquisitions
Before pursuing private equity investment, staffing company leaders should understand how these firms approach new investments. For purposes of this series of articles, we are focusing on a control investment by the private equity firm, which would generally be considered a sale of all or a majority of the company. In a sale of a majority of the company, the typical structure is that the existing owners or management team would retain some minority percentage, typically 20%, giving them an interest in the company going forward.
Most private equity deals fall into one of two buckets: platform or add-on acquisitions. A platform acquisition is when a private equity fund invests in a company to plant roots in an industry not currently represented in their portfolio. Private equity firms invest in add-ons either through, or with the intention of merging them into, an existing portfolio company to expand its resources or footprint.
Staffing firm leaders need to gauge where a potential private equity investor is coming from in order to tailor their sale strategy and prepare appropriately.
If a fund perceives your operation as a platform, they are likely to pay a much higher price for your business and give you more control over you and your team’s future. Understand that as a platform, however, you’re in for a longer pre- and post-close transaction process. Beyond the detailed market analysis, due diligence and learning curve that comes with being a potential platform investment, you will be working with a firm that is deciding a) whether or not to enter the industry at all, and b) whether you are the company they want to do it with.
As a platform company leader, the private equity buyer will look to you to execute on the post-acquisition strategy. There are benefits that come from being in this position, but those perks may take years to realize. Your incentive structure (and its many variants) will usually be based on your participation with the company over the next several years. With add-on deals, the investor already brings a wealth of industry experience and subject matter knowledge to the table – this translates into a shorter deal cycle, but often a lower valuation and less autonomy later on.
The upside of platform deals
A business perceived to be a platform target yields valuable advantages that add-ons don’t. One of the primary benefits is typically a higher valuation. Because platform deals act as a cornerstone of a private equity fund’s portfolio, investors are often willing to spend more than they would for add-ons. As the name implies, the private equity firm is looking at the investment as a platform from which to create more value, often through significant investment in growth or through add-on acquisitions.
Private equity investors considering a platform investment will often be new to the industry and will lean heavily on your subject matter expertise during the acquisition. This not only gives you more authority over the integration process and any subsequent acquisitions, but also offers opportunities for your entire leadership team to flourish. Furthermore, in most cases, the existing ownership will retain a stake in the business going forward. You, as the firm leader, will have some control over the company’s future and the value of your retained equity, which if all goes according to plan, will significantly increase.
The next post in this series will offer actionable tips for grooming your company into a platform, and increasing the chances that your company will be perceived as such.
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