In the next three to five years, as much as 40 percent of private business owners will retire, in most cases selling their business, according to various sources. Whether you are thinking of selling a staffing business now, or the thought of selling has not entered your mind, how you run your business today will have a significant impact on its value in the future. Following are eight things you can do NOW to maximize your staffing business’ value.
- Plan For and Demonstrate Growth. Potential buyers will start their due diligence with a review of your staffing business’ earnings before interest, taxes, depreciation and amortization (EBITDA) as determined from your financial statements. Valuations in the staffing industry are typically based on a multiple of a company’s last 12 months of EBITDA. Buyers are looking for a history of consistent growth and profitability along with plans for continued growth. Buyers also look for companies with growth margins that are higher than the average within the staffing sector. And while showing sustained and increasing profitability is clearly desirable, it is also important to show continued investment in your staffing company, even as you approach the time when you want to sell. Buyers will see through a sudden halt in reinvestment prior to a sale for what it is: a ploy to make your company appear more profitable than it is.
- Mind the GAAP. Staffing companies that use the cash basis—only counting income or expenses when the money changes hands—for their accounting method will be at a significant disadvantage when approaching a transaction. Investment bankers, transaction attorneys and accountants agree that financial statements prepared using generally accepted accounting principles (GAAP) present a clearer and more easily understood snapshot of a company’s financial health. GAAP uses an accrual basis which recognizes revenue when the services occur, regardless of when the money is received or paid. Because GAAP is consistently used by most companies, it is a powerful tool for ensuring a fair business valuation. When GAAP is not a cost-effective option, the income tax basis (maintaining financial statements consistent with how the federal income tax returns are filed) may be an acceptable alternative, but only if the business is not on a cash basis. Since most staffing companies use the cash basis for income tax purposes, this may not be an appropriate method. In addition, the American Institute for Certified Professional Accountants (AICPA) recently issued guidelines for a new financial reporting framework (FRF) option for small- and medium-size entities. The new FRF is like “GAAP Lite”. It is based on GAAP and, while less rigorous, provides a reliable accounting framework when GAAP accounting isn’t required. In some cases, the new FRF may be an acceptable alternative to GAAP.
- Ensure there are Adequate Reserves. Maintaining reserves adds an element of conservatism and stability to a staffing business’ financial statements. Adequate reserves—ensuring that assets are not overstated or liabilities understated—raises a buyer’s confidence that unexpected events won’t impair your company’s ability to meet its obligations and continue on its path toward its strategic goals. Reserves can include accounts receivable or other normal accruals for claims, litigation or other estimated costs that have been incurred. Having adequate reserves won’t necessarily impact the size of an offer to purchase your business, but NOT having reserves in place will usually result in an attempt by the buyer to reduce the offer during the due diligence process.
- Diversify Your Customer Base. As the staffing industry, like many others, moves toward specialization, it is still important to your business’ value to ensure you have a diversified customer base. If a significant portion of your staffing business’ revenue comes from a very small pool of customers, or your customers are clustered in one industry, your company and the value of your business could be at risk. Consider expanding your product or service offerings, the industries targeted, or tweaking your advertising and marketing to reach new audiences. While there are potential costs and some risk to diversification, there is also tremendous growth potential and it can help limit the impact of changes in the marketplace.
- Yeah, you need an audit. I wrestle with putting this out there without a qualifier. I’m an accountant who is also an auditor, but that’s not why I advocate for audits. I was recently part of a panel at a conference for CEOs, discussing how to prepare a business for sale. I suggested that whether you need an audit depends on the size of the company, the potential acquirer, and the industry. The transaction attorney and investment banker on the panel quickly corrected me and told the audience members that if they were thinking of selling their company, they needed an audit without question. So, I’ll say it: financial statements that have been independently audited and attested by a CPA are the way to go. At a minimum, a review by an independent auditor (which is less rigorous than an audit in that it doesn’t verify financial statements or controls but still provides a limited level of assurance) should be performed. Buyers are looking for comfort that the company’s financial statements are correct and accurate, and an audit is always going to provide the highest level of assurance, giving you and your prospective buyer clearer visibility into the deal. Additional benefits of an audit include identifying needed system improvements, if any, and verifying the financial results for the owner(s).
- Have a Strong Controller or CFO. A staffing business with a strong controller or CFO will have good accounting systems and procedures. Financial information will be current and forecasts are likely to be accurate. Again, NOT having a dedicated financial controller or executive won’t necessarily impact the value of an offer to buy, but the due diligence process will not go as smoothly without one. Small companies that don’t have a full-time CFO or controller should consider bringing in a temporary resource in the months leading up to a potential transaction to ensure the company’s “ducks are in a row.”
- Consider your Business and Tax Structure. To maximize the company’s net after-tax value, it is important to consider appropriate tax structuring. Partnerships, “C” corporations and “S” corporations each offer benefits and drawbacks, depending on your likely exit strategy and your goals. For staffing businesses, it is generally better to be an LLC or an “S” corporation. Buyers may pass on buying the stock of a “C” corporation because they give up the right to amortize the goodwill and other intangibles acquired over a 15-year period and they may want to minimize liabilities assumed. Consult with a tax accountant who understands those criteria, at a minimum, before you decide to put your staffing company up for sale. Your CPA can ensure that you use the proper tax elections and that you consider the states in which you do business or have bricks-and-mortar (or, in some cases, have a personal residence). An experienced CPA can also help you understand your options, such as an employee stock ownership plan or gifting some of your ownership prior to the transaction to minimize your tax costs. Many of these tax considerations need to be addressed long before a transaction occurs to result in the most tax savings.
- Consult with a CPA. Like most things in life, preparation for a sale is key. Doing your own version of due diligence well in advance of putting your staffing business on the blocks will help make sure your “house is in order.” Consult with a CPA who is experienced in due diligence and transactions as early as possible to discuss your plans and develop a roadmap. A seasoned CPA with transaction experience will ask you questions about your contracts and agreements, whether your personnel are on the payroll or classified as contractors, the extent of dependence on the owner, any pending litigation, cash flow considerations, the quality of earnings and whether you have properly characterized payroll and reimbursable expenses. The CPA will make sure you are up-to-date on your federal taxes, your state income taxes are filed in all states where your business has NEXUS, and you’ve paid property taxes in all counties where your business has property. It will give you better visibility into how the market will perceive your staffing business when you’re ready to sell, and what, if anything, you’ll need to address now to help improve your business’ value. If your CPA isn’t confident or experienced in transactions, find one who is. In fact, make sure you have a team of qualified and trustworthy advisors (e.g., an attorney and investment banker) to give you the best chance for a successful exit.
With the recession in the rearview mirror, improving access to credit, and the impending retirement of the Baby Boomers, we expect to see a significant increase in M&A activity in the staffing industry in the coming years. Now more than ever, buyers are willing to walk away from a deal if there are issues, so whether you plan to sell soon or years from now, run your staffing business the best way you can for the long term. Doing so NOW will maximize your business’ value and give you the best chances for a successful deal when the time comes.
For more information about this article or to discuss your next transaction, contact Bruce Benator, Managing Partner and Audit Partner, Transaction Services Practice Leader and Staffing Industry Specialist