M&A in the Staffing Industry – Webinar

Mergers & Acquisitions in the Staffing Industry - Webinar

We’d like to express our sincere appreciation to all those who were able to attend the recent live webinar, ‘M&A in the Staffing Industry,’ with Momentum Advisory Partners in collaboration with Advance Partners. During the webinar, we delved into several topics, including:

  1. Current M&A activity in the industry.
  2. How staffing companies are valued.
  3. The types of buyers/acquirers of staffing companies.
  4. What to consider and how to prepare when contemplating the sale of your company.

For those who were unable to join us in person, we’ve made the video recording of the event available for viewing below at your convenience. Additionally, we received a number of fantastic questions from webinar attendees that we were unable to address during the webinar due to time constraints. We’ve included the questions with our responses below.

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Q&A

Question: Are there any companies/industry groups that do not have multipliers? Also what multipliers typically apply to staffing businesses?

Momentum Response: All companies, whether in the staffing industry or other sectors, are valued using a multiple-based approach. Staffing companies are typically valued by applying a multiple to the company’s EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization). EBITDA can be thought of as the net income before accounting for interest expenses, tax expenses, and depreciation/amortization expenses. In cases where a staffing company is not profitable or has negative earnings, a multiple may be applied to gross profits instead. Valuation multiples within the staffing industry exhibit considerable variation. Several factors contribute to how a buyer might assess the value of a staffing company. These factors include industry segment, financial profile, customer types, delivery capabilities, market share, management team, and potential synergies. Valuation ranges can vary significantly, spanning from around 3.5x EBITDA up to 10x (of course there are outliers). It’s important to note that company size also plays a role; larger companies typically command higher multipliers. Professional staffing segments such as IT, Healthcare, Accounting & Finance, and Life Sciences generally entail higher multipliers compared to segments like light industrial.

Question: Hi there, What’re the Top 3 factors to significantly increase a firm’s valuation? 
Momentum Response: Secondly, in terms of the nature of business, contract/temp business is favored over direct hire/perm business due to its recurring nature, while the latter is seen as less consistent and riskier. Lastly, from an ownership perspective, buyers seek reduced owner involvement, aiming to ensure the business remains unaffected during the eventual transition of owners. Consequently, companies with strong management teams are more attractive to potential buyers.

Question: What is the current typical multiple that you see currently…what is par (for revenue growth/ EBITDA % for that par multiple?

Momentum Response: Valuation multiples vary quite widely and depend on several factors, with industry segment and size playing significant roles. For companies with less than $100M in revenue, we often observe multiples approaching 10.0x EBITDA, contingent upon the specific segment. As an illustration, a $25M sales company operating in the IT staffing sector might command a valuation ranging from 5.0x to 7.0x (there are of course outliers). Concerning growth in sales and EBITDA, even modest growth of 5% to 10% could lead to that range of multiples. Providing a more precise answer is challenging without having additional information about the company.

Question: Can you share typically the cost of a business valuation?

Momentum Response: The cost varies based on the type of valuation. We are pleased to offer a complimentary valuation. If you’re seeking a comprehensive valuation report, these typically fall within the range of $5,000 to $20,000 or more, contingent upon the firm. However, if your aim is to gauge your company’s position in the market, I would recommend against paying for a formal valuation. We can provide a complimentary valuation, leveraging our understanding of actual buyer perspectives and their willingness to pay. Formal valuations often involve intricate methodologies not commonly used by buyers of firms in the lower middle market ($100M in annual sales or less). If you’re pursuing a formal valuation for purposes such as operating or shareholder agreements, financial reporting, estate planning, or legal disputes, opting for a formal valuation would be more appropriate.

Question: As it relates to overall valuation … how much does perm placement factor in if at all?

Momentum Response: The impact hinges on the percentage of permanent placements relative to overall sales. If it’s below 5% and shows consistent performance, it usually won’t significantly affect valuation. However, if it exceeds 10% of sales, it can become somewhat complicated. Generally, having less direct hire/perm business is preferable when all other factors are equal. Contract/temp business is considered more valuable due to its recurring nature, while direct hire/perm business is seen as riskier and less consistent. Although direct hire/perm business is often highly profitable, buyers are cautious about assigning a multiple to EBITDA for non-recurring revenue.

Question: What are the typically M & A fees in the sale of a company?

Momentum Response: M&A advisory fees vary based on the transaction’s size, and without the knowledge of your company’s size, providing an exact answer is a bit challenging. However, I can outline the typical fee structure: There’s an initial retainer fee, a ‘modest’ upfront payment that signifies our clients’ commitment to the sale process. Although the final decision to proceed with the deal rests with the client, the retainer underscores their seriousness. This upfront fee is also credited back to our clients upon the successful completion of a sale. Subsequently, a ‘success’ fee is implemented, contingent upon finalizing the transaction. This fee is calculated as a percentage of the total transaction value and is structured to align our interests with those of our clients.

Question: How long do you need to live in state to take advantage of their tax status. Example FL does not have STATE income tax. We are looking to take advantage of that but do not live in FL yet.
Momentum Response: This is an excellent question, but unfortunately, it’s not one we’re experts in. Tax laws and regulations can be complex and may differ depending on various factors, including your specific situation, the states involved, and changes in tax laws over time. It’s essential to seek guidance from a tax professional or attorney who specializes in state taxation. They can offer advice tailored to your individual circumstances.

Question: What’s the best advice to navigate the post integration process when you’re fearful of a mass exodus of employees? 

Momentum Response: This is an excellent question. I’ll address it from both a seller’s and a buyer’s perspective. From the seller’s viewpoint, many of our previous clients displayed a keen interest in the buyer’s post-acquisition plans concerning their employees. As I’m sure many of you can relate to and appreciate, they sought assurance that their existing employees would be incorporated into the buyer’s post-acquisition strategies and would be given the chance to advance in their careers. We made this point abundantly clear to all potential buyers early in the process and engaged in numerous discussions about the post-acquisition scenario. Clearly conveying your priorities as a seller is essential, and it’s crucial for a buyer to address these types of questions early on. Additionally, during the webinar, I emphasized that company culture and values play a pivotal role in the success of a transaction. Disparate approaches to business can lead to complications down the line, particularly concerning employee retention. From a buyer’s perspective, gaining insight into the organizational structure, leadership, and management is paramount before a sale. Many buyers prefer to interact with key management prior to closing, though confidentiality constraints may prevent this. Several buyers aim to maintain a degree of ‘status quo’ for a period post-closure, with ultimate plans to integrate the two organizations. Keeping compensation and benefits unchanged is crucial for retaining the acquired company’s employees.

Question: How common is it for Staffing Firms with negative EBITDA to be sold?
Momentum Response: It’s not uncommon for companies to be sold even when they have negative EBITDA. Buyers tend to approach such situations opportunistically, seeking to acquire at a lower cost. In these cases, they assess the business’s value based on a multiple of gross profits. Their approach involves analyzing operating expenses and determining the necessary steps for achieving profitability. Typically, they would explore significant reductions in compensation by integrating their operational strategies into the business. If they conclude that these changes could lead to profitability, they would proceed with the acquisition. However, the market for such scenarios tends to be narrower, resulting in fewer potential buyers.

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