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R. A. Cohen Consulting Newsletter |
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Welcome to R. A. Cohen Consulting
Greetings!
After 20 years as advisors in over 130 staffing industry mergers and acquisitions, we've gathered many insights for sellers and buyers that we would like to share with you. We hope you will find them informative and enlightening. |
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Introduction
We introduce a new concept in this Newsletter-"Salability"- it looks at how easy or difficult it will be to sell your staffing business depending on various factors we will outline. If you have any thoughts or questions about this Newsletter, please contact us.
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What is the "Salability" of your Staffing Firm?
It's an odd looking word but a very important one when it comes time to sell your business. 'Salability' addresses both the market for a specific business (i.e., demand) and the factors unique to that business sale that determines the probability of success.
Our firm has begun to see measurable improvement in the market since 2010 even though it has been somewhat cyclical over that period. While we have been able to successfully help our clients sell businesses of various sizes, various sectors and under many different circumstances, there are some factors that investors and buyers consistently tend to focus on that are strong indicators of the 'salability' of a business.
The following list summarizes what we believe are the top factors that affect and influence the "salability" of any staffing business. The factors influencing the salability of a business are not intended to be in order of importance because we have found that the order of importance will vary from sector to sector and from buyer to buyer.
However, the list should capture most of the key factors that are taken into consideration by most investors and buyers.
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Factors influencing the "Salability" of your Business
1. Price and Terms--Naturally, price and terms are at the top of the list and often the first thing any investor or buyer will consider before deciding to look further into a specific business. Obviously, this factor is critical because it is usually the first filter used by investors and buyers to determine if further investigation is justified.
If the price relative to revenue, gross profit dollars or earnings are not within a reasonable range of current market multiples for businesses in that sector or cannot be justified by some compelling reason, such as industry leading growth rates or above average profit margins, the salability of that business will be adversely affected and may not get exposure to the full market of qualified investors.
In some cases, the terms of a sale can overcome weaknesses for some of the of the other factors on the list that follows. Most of us have heard the phrase "you name the price and I'll name the terms". While on the surface that remark may sound flippant, it can often lead to an equitable deal. For example sometimes the use of seller financing or earn outs can be used to bridge a price gap between buyer and seller.
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The key is to get a quality business valuation and meet with an Advisor or Intermediary who specializes in sales and acquisitions in your industry.
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2. Depth of Management
In the staffing industry, many firms may be far too reliant on their owner for the specific knowledge and/or relationships that may be critical to the success of the business. In these situations "when the owner is the business" the necessary knowledge and customer relationships, critical to the business, reside with the owner. After unrealistic pricing in relation to current market values, this is probably the second largest factor that makes some small businesses unsalable. The value and salabity of a business can be dramatically increased by either developing or mentoring key employees that in effect allow the owner to replace himself or herself, while they are still there. If the mentoring job is not complete, that can be remedied by the owner staying for a transition period.
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3. Business Growth
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Business development strategies and capital investments that help your business grow faster than the overall industry growth rate will increase the value and salability of your business. The key here is to find ways to have managed growth exceeding your industry peers. In addition to organic growth through internal improvements, explore growth through acquisition as an opportunity for rapid and successful growth. Share any plans for growth or expansion you may not have been able to implement, it will show the new prospective owner, there is more growth than originally thought.
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4. Stability of Earnings
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This factor takes into consideration the age of a business, how volatile or stable the earnings have been historically and how the profitability of a business compares with industry peers. To help identify improvement opportunities, benchmark your business growth, profit and other financial ratios against industry peers to identify strengths and weaknesses. Developing sales strategies to maintain stable or growing sales and operational strategies to improve profitability through expense reduction will definitely improve your bottom line and increase the value and the salability of any business.
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5. Customer Base and Concentration
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A key risk consideration that significantly affects business value and salability is the degree of reliance on a small number of customers for a large percentage of revenue. While taking on a large customer can be instrumental in growing sales, a disproportionate reliance on one customer is generally viewed as high risk. To the degree practical, it is important to develop a diverse customer base over time and reduce over-reliance on any one customer.
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6. Diversification of Services, Sectors and Markets
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Similar to the benefits of a diverse customer base, revenue that is derived from a diverse base of services, sectors served or geographic markets is also an effective means of reducing business risk and increasing the value and salability of a business. Implement sales plans to develop new markets and/or customers.
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7. Quality of Financial Records
The importance of high quality financial records is often overlooked. Increasing the accuracy and transparency of financial records not only helps you better understand opportunities for business improvements, it improves the confidence of lenders and investors, both of which increase the value and salability of your business.
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Contact Sam or Bob who have successfully completed over 130 staffing industry transactions, if you'd like to discuss M & A matters related to your staffing firm on a confidential basis. |
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