The staffing sector is seeing strong mergers and acquisitions activity these days. Staffing Industry Analysts reported that M&A activity was up 28% year-over-year in 2017 and indications are that 2018 was just as busy. Now might be a good time to consider selling your staffing business. But while buyers may be quick to line up to “kick the tires” of your staffing business, they won’t hesitate to challenge your company’s value and discount their offer if they discover certain issues during the due diligence process.
Whether you’re preparing now to put your staffing business on the market or you’re not planning to sell your business for several years, it’s important to be aware of common pitfalls that could negatively impact the company’s selling price or even derail a potential sale. To maximize your chances for a smooth and successful transaction, look for the following common mistakes and make a plan to address them.
- Lurking liabilities. Potential buyers are quick to dispute value and lower their offer when they discover financial risks that the seller has not disclosed. Staffing companies commonly make the mistake of not addressing their tax burden in each state where they do business. For example, many states impose sales tax on services as well as goods. Another potential liability is paying workers as independent contractors when they should be treated as employees under federal or state laws. Companies that partially self-insure or that have incurred insurance claims in the past also could be raising issues for potential buyers. You can avoid these concerns by working with accountants and attorneys who know the staffing industry and understand its niche-specific compliance requirements.
- A poor choice of basis or structure. Cash basis accounting may be adequate for running your staffing business, but it’s not the optimal choice if you want to get the best possible price for the sale of your business. Buyers prefer the clarity and accuracy of financial statements based on generally accepted accounting principles (GAAP), which utilize the accrual method of accounting. An appropriate tax structure also makes a difference to the business’ value and after-tax proceeds. C-corps, S-corps, partnerships and LLCs each come with specific advantages and drawbacks that can impact valuation when it’s time to sell. Owners should regularly review their business structure with their accountants and attorneys, especially, as happened recently, when tax laws change.
- Inflated profits and inadequate reserves. Inflating your profitability estimates by under-investing in the business is a ruse that rarely pays off in a higher sales price. Instead, work on maximizing your profits and EBITDA by minimizing expenses that aren’t easily identifiable or clearly related to the business. Maintaining sufficient accounts-receivable and other reserves is another effective value-booster.
- Lack of diversification. The staffing sector is becoming more specialized, like most other industries. Specializing can be a differentiator, but an overly-specialized service line or a significant concentration of customers in one industry can negatively impact the company’s value. Businesses with a narrow focus are especially vulnerable to market changes. Balance your specialties with other services or industries to minimize risks.
- Insufficient accounting systems and procedures. Mysteries make for good reading but poor investment choices. To reassure potential buyers, it’s important that staffing companies maintain clear and accurate accounting records backed by a strong system of internal controls. Pay close attention to little things like having a written expense reimbursement policy and monitoring compliance with that policy. Accounting systems and procedures that are well-established and consistently implemented will present a clear financial picture and allow for accurate independent assurance (such as an audit or review), giving buyers comfort that they’re getting what they expect.
Every business faces a unique set of challenges and exit goals, so your staffing company needs an individualized strategy to maximize its value. The key to avoiding or addressing value-robbing pitfalls is having a strong and experienced management team that will stay intact after the sale, along with the support of experienced advisors who know your industry and the factors that govern acquisitions within the sector. Owners looking to get the most value out of their business should start planning for a sale several years before the target exit date, if possible, which allows time to make value-enhancing improvements.
Addressing existing issues and avoiding pitfalls requires time, focus and specialized knowledge. The benefits, however, make these efforts worthwhile: a higher valuation and deal multiple for your business, and a successful (and profitable) exit from the business for you.