Introduction
For some, building their staffing business to eventually sell is a deliberate strategy; for others, the idea of selling emerges gradually, often intertwined with thoughts of retirement, a shift in professional goals, or investment to fuel further growth. Regardless of the initial intent, the decision to sell becomes a pivotal moment in your organization’s history, a culmination of years of dedication and hard work. This once-in-a-lifetime event, requires preparation and a strategic, well-thought-out approach to ensure that you’re maximizing the value of your life’s work.
But how do you prepare your staffing business for a sale? What should you know about selling that may not be obvious? The emotional, practical, and financial implications aren’t often discussed but should be understood. With over 15 years of experience advising founders of staffing companies of all sizes in a sale, here are a few of the top considerations you should know that I firmly believe will put you in the best position to achieve a successful outcome.
Preparing for a Future Sale
Succession Planning: Develop a clear succession plan that ensures the business can operate at a high level even after you step away. This should include identifying and nurturing internal talent capable of leading the business, as well as defining their roles and responsibilities prior to a sale. To be clear, this doesn’t mean disclosing to your team that you’re exploring a potential sale. A well-thought-out succession plan gives buyers confidence that the business will continue to thrive without the current owner’s involvement.
If your goal is to step away from the business following a sale as opposed to staying on in some capacity with the buyer, it’s important that you are not key to the operations. Even the perception that you are can present concerns for a prospective buyer. Start thinking about transitioning customer relationships and your day-to-day responsibilities to your key people. This suggests long-term sustainability, which is a critical factor for a prospective buyer.
Obtain a Professional Valuation: Understanding the value of your business is a critical step before entering the process of selling. Engage with a firm that understands the staffing industry and how businesses like yours are valued. This step will provide a realistic understanding of what your business is worth and how the market is likely to value it. A professional valuation will help set realistic price expectations early on and can serve as a benchmark for evaluating offers.
Financial Review and Preparation: Conduct a thorough review of your financial records. Ensure that all financial statements are accurate, complete, organized, up-to-date, and are prepared on an accrual basis. Accrual-based financials are not only beneficial to you whether you’re considering a sale or not, it’s the preferred method for buyers since it provides a more accurate picture of the company’s financial health. Consider hiring an outside accounting firm to help with this process. Having your financial statements reviewed by a third-party accounting firm can be highly beneficial. Reviewed statements provide a level of assurance to buyers about the accuracy of the financial information.
For larger organizations, it’s worth looking into completing a seller Quality of Earnings (QoE) review, especially if your business has complex revenue streams or significant assets. This QoE review, often conducted by an external accounting firm, provides an in-depth analysis of the company’s earnings, expenses, and long-term sustainability.
What You Should Know That May Not be Obvious
Earnout Agreements: Sellers might not realize that a portion of the sale price may be contingent upon the future performance of the business, impacting their total proceeds received. Transactions in the staffing industry oftentimes, but not always, contain a contingent component, also called earnouts. Earnouts are used to bridge valuation gaps, reduce risk, and align the interests of the buyer and seller post-transaction. Understanding how they work, what’s required from you as a seller, and how they can be structured to benefit you is vital.
This is not to say that all cash transactions don’t exist. They most certainly do. However, earnouts are quite common in M&A transactions, not just in the staffing industry.
Buyer Due Diligence: The intensity and scope of a buyer’s due diligence process can often catch sellers by surprise. This phase is extremely thorough and can feel cumbersome, as it involves a deep dive into every aspect of the business – financials, legal matters, client contracts, employee records, compliance with regulations, and more. Buyers scrutinize these details to assess risks and validate the value of the investment. It’s important for you to be prepared for this rigorous examination and have all necessary documentation organized and readily available. Understanding the extent of due diligence helps you anticipate the demands of this process, reducing stress and facilitating a smoother transaction.
Escrows for Representations and Warranties: Sellers often overlook the fact that a percentage of the sale proceeds are held in escrow to secure their representations and warranties made about the company. This escrow serves as a financial guarantee against future claims that may arise from breaches of these statements, and the amount and terms can vary significantly based on the deal.
Engaging an experienced M&A attorneys during negotiations of the purchase agreement documents can provide invaluable guidance on the customary practices and help structure the escrow in a way that protects your interests. They’ll work to ensure that the representations and warranties are clearly defined, reasonable, and limited in scope.
