Insights | Mar 25, 2019
By Tom Kosnik
In my last blog, I wrote about some common errors that buyers make in acquisitions. Let’s look at the other side of the coin and address some of the mistakes sellers often make when trying to sell their business.
The number one error that many owners of privately held staffing firms make is not paying five or ten thousand dollars to get a valuation of their business. There are several kinds of valuations that can be conducted: multiple of EBITDA, multiple of gross profit, discounted cash flow analysis, market-based valuation versus a non-market-based valuation. Why is it so critical to have a valuation conducted on the business? Because the seller will have absolutely no valid third-party document in which to negotiate with. When it come to the dollar value of the acquisition, a lack of valuation reduces talks down to, “This is the amount of money I need to retire.” This is not a position of strength for a seller.
The last I heard, one third of the staffing companies that sold over the last couple of years sold with no representation. Another third of the staffing firms that sold did so by utilizing representation unfamiliar with the staffing industry. Representation comes in various sizes and shapes. Over 98% of the acquisitions in the staffing industry do not require an “Investment Banker”. Lawyers and accountants, which I will comment on later, often lack the “start to finish” expertise in selling businesses. Brokers, which we more commonly see in the staffing industry, have varying degrees of expertise. Why is the appropriate representation so important for a seller? Because a seller will typically leave thousands of dollars on the table when they are not adequately represented. Finding adequate representation is critical.
Small to mid-sized business owners work their businesses for their entire career. They become experts in selling, operations and managing their people, making many mistakes along the way and improving over time to survive and thrive. This is not the case when it comes to selling the business. For many business owners, it is a one-time event in their lives. Business owners attend conferences, read stories and hear about local competitors that sell for “x” or “y” and form an idea of what they think their business is worth.
I have seen some business owners conduct a financial analysis with an advisor and arrive at a number for a comfortable retirement. However, this is not what drives the market value of the asset that the business owner owns. It’s far better to figure out the retirement number five plus years prior to existing. Or, even better, get a realistic understanding of how a staffing business is valued and what it costs to grow the business to achieve the desired financial expectation.
I have yet to see an M&A transaction not slow way down once the lawyers get involved. There are two very big mistakes sellers make with lawyers. First, they utilize a home-grown lawyer who is unfamiliar with selling a staffing business or has limited experience in M&A transactions. Second, they utilize a lawyer who is inflexible and antagonistic toward buyers. Securing a lawyer who has both industry expertise and negotiating finesse is ideal. Sellers not only need to choose an experienced lawyer, but also must manage their lawyer. Timelines are so important. When lawyers take weeks on end to respond to requests, this indicates they either don’t have the bandwidth to handle the sale or lack the expertise to adequately fulfill the work. Both are disastrous to a seller!
Accountants are not M&A experts. Some accounting firms will have M&A expertise within the accounting firm, and this can be good. Again, having staffing industry experience is extremely helpful. The absolute worst thing you can do as a seller is utilize the advice of a small-time accountant that has no experience in how a staffing business is valued, how such transactions are structured, or what makes a good deal for you. I have seen a lot of deals and favorable offers go sideways because of an accountant overstepping his bounds and giving bad advice. A seller must manage the accountant and find adequate representation to offer high quality advice throughout the entire transaction.
It behooves any seller to get their books in order prior to going to market. What exactly does that mean? First, the P&L’s need to be in a staffing industry standard format. Certain things like “cost of sales” go below the gross profit line in the “general & administrative” expenses. I often see expenses in areas of the P&L that throw off the true gross profit number. This creates work for the buyer and communicates that the seller does not know what they are doing regarding the financial management of their firm.
Second, have the books audited by an outside accounting firm. This shows, from a financial perspective, that a seller has nothing to hide. Third, not having excess debt in the business is always a plus. Again, excess debt conveys that the seller is not a prudent financial manager. A buyer will transpose that thinking to other parts of the business by asking,“What else are they not managing well?” As a result, they go looking for holes, rather than synergies.
This a big mistake I see all the time. Sellers sometimes hide things from a buyer. What do they hide? This can range anything from specific things about a key client or branch office production, or things about internal employees or lawsuits, near past or present…, the list goes on. When sellers hide things from a buyer and inevitably gets discovered, the buyer immediately thinks, “Can we not trust this individual?” In other words, their defenses go up. Being open and honest from the start pays sizable dividends on the back-end. If a buyer trusts a seller, any and all issues the seller sees as sensitive and devaluing will work themselves out to everyone’s satisfaction.
There are always multiple steps in selling a staffing business. In this blog, I didn’t get into the various documents that are involved or how staffing firms are currently valued. If you are thinking about selling or merging your business into another staffing business, feel free to reach out to me to discuss best practices or next steps.
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