Diversified: How Your Staffing Company’s Diversity Certification May Impact a Potential Sale
The Significance of Diversity Certification
A diverse supplier is a business that is at least 51% owned and operated by an individual or group that is part of a traditionally underrepresented or underserved group. Common classifications are small-business enterprises (SBEs), minority-owned enterprises (MBEs), and woman-owned enterprises (WBEs). Over time, the definition of diversity has expanded to include businesses owned by other minority groups such as LGBTQ, veterans, and proprietors with disabilities.
According to the Census Bureau’s 2021 Annual Business Survey, which covers the reference year 2020, approximately 1.24 million (21.4%) of employer businesses in 2020 were women-owned, 1.15 million (19.9%) were minority-owned, and 320,864 (5.6%) were veteran-owned.
In its recently published “2023 Diversity-Owned Staffing Firms” list, Staffing Industry Analysts noted 239 firms in the US and Canada that self-identify as being under diversity ownership, an increase of 33 firms from their 2022 list.
Certification Opens Doors
Diverse owners of staffing businesses look to undergo the rigorous process to meet specific criteria and gain certification through one of the many third-party certifying organizations, such as the Women’s Business Enterprise National Council (WBENC) or the National Minority Supplier Development Council (NMSDC). Certification opens doors to various opportunities that might otherwise be challenging to secure. Many corporations, government agencies, and larger enterprise organizations have supplier diversity programs in place, and they actively seek to engage with certified diverse suppliers.
UPS, for instance, now spends $2.6 billion annually doing business with around 6,000 small and diverse suppliers with a goal to increase that spend amount year over year. Google set a goal to grow its spend with diverse suppliers to $2.5 billion in 2022. JPMorgan Chase has spent $11 billion with diverse suppliers since 2015. A common trend among many large enterprises is to set goals that range from 5% to 20% of their total procurement spending with diverse suppliers.
Impact on a Sale
But how does a diversity certification impact your prospects when looking to sell your staffing business? Does it have any impact on how a potential buyer may view the business? In this article, we look to share our insights on the topic to better prepare you for what to expect when considering the sale of your diversity-owned staffing business.
For buyers that do not have a diversity certification, one of the primary concerns they have when acquiring a company with diversity certifications is whether the certification will continue after the acquisition. This concern stems from the fear that the change in ownership might lead to the loss of the certification, potentially affecting the company’s ability to maintain existing contracts and customer relationships. Recall, one of the requirements for certification is that the business continues to be at least 51% diversity-owned. The majority of potential buyers of staffing companies are organizations that do not have a diversity certification.
Buyers often worry that customers who initially engaged with the company due to its diversity certification may no longer see value in the business after the acquisition. This concern can lead to apprehension about customer retention, especially if the diversity certification was a significant part of the company’s branding and marketing.
A significant amount of time, money, and effort goes into completing an acquisition from both the buyer’s and seller’s end. Because of this, buyers tend to be very skeptical and will highly scrutinize a company’s customer relationships and agreements when diversity certifications are involved.
Strategies for Sellers
In the last three years, Momentum Advisory Partners has advised and represented the shareholders of four diversity-owned and certified staffing companies in their sale. Not one of the buyers were certified as a diversity-owned business. Many of the companies we work with or are approached to represent in a potential sale have a diversity-owned certification, so it is common and should not be viewed as a negative.
Evaluating Certification Importance
The fact is that these certifications may open up opportunities that weren’t otherwise available, but it doesn’t mean that losing the certification means you lose out on the business. The challenge is getting a potential buyer comfortable enough to pursue the acquisition.
Customer Outreach: Reaching out to customers to inquire how the contract will be affected in the event of a sale and the loss of the diversity-owned certification. You may learn that maintaining the certification isn’t as important as having it when the account was obtained.
Refine List of Potential Buyers: In the aforementioned, Staffing Industry Analysts “2023 Diversity-Owned Staffing Firms” list, there are a number of organizations that both have made and are looking for potential acquisitions of staffing companies. Targeting these buyers that already have a diversity-owned certification eliminates this as a potential concern in most cases.
Retain Control: Although not an ideal situation for most, selling 49% or less of the company to a non-diversity-certified business provides a liquidity event for the owners while also retaining majority control. This scenario is more likely to occur with a financial buyer (private equity) than a strategic buyer as the strategic buyer will want to have control over the company. This has an impact on the universe of potential buyers available.
A joint venture may also be an option whereby majority control is retained and a strategic partnership put in place that benefits both organizations. Again, not an ideal situation for many that are looking to fully exit the business but an option nonetheless.
A diversity certification should not be seen as a roadblock to selling your staffing business. As noted earlier, our firm has advised multiple diversity certified companies in a successful sale and it happens quite often. For those that are considering a sale, it’s important to be prepared to address a buyers questions and potential concerns before beginning the process of a transaction. Being armed with the information to address those questions and concerns early in the process will increase a potential buyer’s confidence in pursuing the transaction further. Not being able to address those questions and concerns will only lead to further doubt.
Disclaimer: The information provided in this article is for informational purposes only and should not be construed as legal advice. The content is based on general principles and observations in the field of mergers and acquisitions. Every staffing business sale is unique, and the legal and regulatory requirements can vary. It is strongly recommended that readers consult with a qualified attorney or legal expert to address their specific circumstances, legal questions, and concerns related to selling a diversity-owned staffing business. Any actions or decisions made based on the information in this article are the sole responsibility of the reader.