by Visus Group Partner Steve Sorrentino, Principal, MergeQuest
Over the years as an M&A advisor, I have come to appreciate that the sale of a staffing business can be one of the most challenging, yet rewarding, endeavors of a business owner’s career. Whether it’s motivated by a planned exit strategy that leads to retirement, or perhaps other compelling reasons, careful planning for the future sale of your staffing business, along with understanding how to maximize the value received for your business, is time well spent. With this in mind, I would like to share with you my list of “must do” things that will help you prepare for this undertaking.
First and foremost, you will need to “get your house in order” – which essentially means organizing, reviewing and updating the following key things:
- Financial books, reports and general business records. Enough cannot be said about ensuring that your accounting records and financial reporting are up to date and current. This information is critical in first, preparing a market valuation for your firm, and secondly, presenting your firm’s financial history and performance to a prospective buyer. You will also want to ensure that your employment records (including employee files and records) are orderly and in compliance with federal and state employment laws. It’s also important to note that your financial statements should be at very least “reviewed” by a CPA.;
- Business and employment taxes. You will need to be certain that your firm’s business and employment taxes have been paid and that copies of at least the past 3 year’s of all federal and state tax returns are available for review. It is also a good idea to check with your state’s Department of Revenue or Secretary of State’s office and request what is known as “Certificates of Compliance” or “Certificates of Good Standing”. These certifications will serve as proof to a prospective buyer that your business and employment state taxes have been paid and that your company is in good standing with your state government;
- Insurance. The key area is Worker’s Compensation Insurance. Be prepared to have at least the past 3 year’s of Worker’s Compensation premium information, including modification rates, claims history and current open claim information. Call your broker or insurance company and request a current list of open claims – including your firm’s claim history for the past three years;
- Legal. It will be important to review the status of any pending litigation, either as a plaintiff or defendant. It’s a good idea to have your attorney run what is known as a “UCC search” (which is an action that most buyers will undertake as well). This action will uncover any known and unknown liens against the assets of your business. Banks and other creditors file UCC certificates with your state’s Secretary of State. This is a public document that is designed to alert potential creditors (or buyers) that certain liens exist against your business assets (and some of these liens may in fact by old and inaccurate – as a former banker or other creditor may not have removed a prior lien after you settled your debt with them). In short, you cannot sell your business assets without the removal of any UCC certificates that may exist against them.
- Customer contracts. Make a list and prepare copies of any and all customer contracts and agreements – something all buyers will want to review. Make note of any contract or agreement that are not assignable and that require the approval and consent of the customer prior to assigning the contract. Be prepared to have a plan of action in mind for the eventual approach and negotiation with your customers for the assignment of their contract to a new owner. As you can imagine, any buyer will want to be certain that your customer contracts are assignable to them before they buy;
- Leases. Prepare a list and make copies of all business leases (e.g. leases for office furniture & equipment, computers, automobiles and real estate). Make note of any leases that are not assignable and that require approval from the Lessor before you can transfer the lease to a new owner. This is particularly important for real estate leases where you may have several branch offices with multiple landlords. Again, any buyer will want to be certain that your branch office leases are assignable to them before they buy.
Assembling Your Advisory Team
The timing of who to engage and at what point can vary depending on where you are in the planning stages of your exit plan. For most businesses, the advisory group consists of an Attorney, CPA, and as the lead advisor in this endeavor, an M&A Advisor who is familiar with your industry. Professional expertise and advice in these areas will contribute to a smooth process and improve the outcome.
- Attorney – The attorney should have experience in business transactions. An attorney will also be called upon for legal document review and preparation, in addition to pre-transaction due diligence, etc. Consequently, it is best to work with a law firm that has expertise in M&A transactions.
- CPA / Accountant – The CPA not only generates your financial statements and prepares your tax returns, but also ensures that your accounting is done under Generally Accepted Accounting Principles (GAAP). Your CPA will also assist you with assessing the tax implications of the business sale – and will advise you accordingly. Finally, a CPA will help explain how a “review” audit of your financial statements will help ensure the credibility of your firm’s financial information.
- M&A Advisor – The M & A Advisor is your link with the Industry’s buyer community. He or she should be able to perform a market valuation of your company and will determine how it aligns with buyer criteria, as well suggest ways to increase the value of your company. When your company is ready, the M&A Advisor can advise how to properly document the company to attract the best possible buyers. The M&A Advisor will package and market your company to the buyer community. During this deal-making process the Advisor will screen buyers for confidentiality, financial and business viability, evaluate offers, negotiate letters of Intent, and help facilitate due diligence and the closing process.
It’s important for you to understand the skills, strengths and limitations of your advisors and how, when and where to use them – and that it’s important to keep these professionals focused on their areas of expertise: attorney’s for legal matters, CPA’s for financial and tax matters and your M&A advisor for such things as business valuation, deal structure, negotiation strategies and buyer introductions – as well as other sale-related transaction matters.
Perhaps the most appropriate place to start in understanding the concept of value is: first understanding what a potential buyer would value. Though buyers may view value somewhat differently, there is at least one viewpoint they all share: every buyer is looking for predictability and certainty for the continued viability of your business. Knowing this, owners should be mindful that any financial or operating characteristics a prospective buyer may see during an evaluation of your company that create uncertainty and hinder predictability will reduce value. In preparing your business for ownership transition, your central objective is to reduce perceived uncertainty and improve predictability for prospective buyers.
That said, let’s consider some of the areas that can create uncertainty and cloud predictability for a prospective buyer:
- Financial Performance. Your financial performance over the last three to five years is where most buyers start their analysis. The buyer is looking at past results, predicting future results based on the past, and paying you today for that future stream of cash flow. The key here is that consistency in revenue and profit growth increases value. In the Staffing Industry, buyers are particularly concerned about your Gross Profit Margin – both in year over year growth and maintaining consistent levels as a percentage of revenues. Also, one final note on financial reporting: audits by a reputable CPA firm are a worthwhile investment. Reliable financial information during the years leading up to a sale will verify your company’s track record and eliminate uncertainty for the buyer.
- Customer Connections. Longstanding, stable relationships with a fairly diverse customer base without reliance on one or a few key customers increases value. Customers that command over say 20% of your total revenues can spell risk to a potential buyer. Buyers do not want to see reliance on one or a few key customers. Buyers also want assurances that the key customer relationships are not tied to you as the business owner, given the assumption that you will eventually exit the business.
- Human Capital. Astute buyers know that employees are critical to realizing future value, especially in a service business. Since your staffing business is essentially driven by the efforts of your employees, you are well advised to meet with your key people – to “re-recruit” them – to ensure that they are happy and satisfied with their employment relationship and experience. A strong management team, complemented by talented and loyal team members, adds tremendous value. Continue to run the business. Bear in mind that it’s also important to stay focused on running your business during the marketing of your business – while simultaneously working to improve its financial and operating performance. This means that you should continue to:
- Drive profitable sales revenue growth;
- Focus on improving your firm’s Gross Margin level;
- Reduce operating costs where possible;
- Hire competent employees to fill any internal job vacancies;
- Weed out and terminate any under or non-performing employees;
- Keep collection efforts focused on collecting past-due receivables;
- Maintain your advertising and promotion programs.
- Have a Business Valuation Performed. You should strongly consider having a business valuation performed by an industry-experienced professional (i.e. an M&A Advisor) to establish a baseline valuation. Note that most reputable professionals will update valuations in the future for a nominal fee – and that having a baseline value is an important benchmark. The valuation will also provide you with detailed insights into your firm’s strengths and challenges – and will address the key financial and operational factors that drive business value in the Staffing Industry. The analysis will also help you understand what corrective steps are needed to improve and maximize the firm’s value prior to sale.
In conclusion, my sincere advice is to take the time to sit and concentrate on writing a simple plan that will keep you focused on the necessary things that will help you prepare for the inevitable day when you say to yourself, “you know, I think it’s time to think about selling my business.” And when that day comes, you can say with confidence that you and your company are well prepared for a successful journey.
Steve Sorrentino is the founder and Principal of MergeQuest, a trusted and experienced M&A Advisory Services firm serving the Staffing Services Industry. Steve can be reached at (508) 395-8940, or by email at firstname.lastname@example.org, (website: www.mergequest.com)
© 2021 by MergeQuest