If starting your business was difficult, selling it can also be complicated. During a sale, business owners have key financial and emotional considerations, including giving up control and figuring out what to do once they don’t own that business. So while the money from a sale can be life-changing, it’s secondary to the work as an entrepreneur. But even before one gets to that point, sometimes the sale is fraught with issues that the business owner or board just did not think through.
To help with this process, we spoke with several staffing M&A experts and asked what predicaments staffing firm owners should be aware of when selling their firms. Understanding the snags staffing firms can run into before and during a sale enables business owners to avoid the pitfalls and present the firm in the best possible light. We take a look at some scenarios that should be avoided.
Poor Financials
If you’re not prepared, “you don’t necessarily present your company in the best light,” says Rick Wilson, managing director of Crutchfield Capital Corp. “If you have a good, solid financial reports, you are tracking KPIs [key performance indicators], you have a good, solid business strategy, that says a lot about the organization and I think will result in a better valuation.”
Having accrual financial statements and audited or reviewed statements reduces the uncertainty to the buyer, which would result in a higher value, says Al De Bellas, president of De Bellas & Co. “Any kind of auditor involvement is helpful.” Ideally, companies will have management information systems that provide the ability to break out information such as revenue and gross profit by segment as well as revenue and gross profit by customer.
Unrealistic Expectations
Owners need to have a realistic view of what their company is worth and what amount is acceptable to them, says Jim Childs, managing partner of Childs Advisory Partners. And it’s advisable they get good, objective advice about their company’s value. Unrealistic expectations about value are the No. 1 reason deals don’t happen.
“When you undertake a process to sell your company, it’s a really timeconsuming process, so you really want to be sure it’s successful from the outset,” Childs says. “If there’s a low chance of success, you shouldn’t take it on.”
Others also spoke to expectations. Jack Lyons, president of Lyons Solutions, says sometimes owners are disappointed in the pricing they get, and the commitment level to sell falls.
However, owners must realize that price varies for each transaction and each buyer, Lyons says. The multiple for one company likely won’t be the same for another.
“There’s so much variation between companies, how strong their management teams are, what their customer concentration is, what their infrastructure looks like and there’s no such thing as a cookie-cutter approach to valuation,” he says. “Don’t think that your multiple will be the same as someone else’s valuation multiple even if it is based on having the same adjusted EBITDA.”
Impractical Forecasts
Another important pitfall to avoid are unrealistic forecasts of business performance that overstate what your company can do.
“It is critical that you have realistic income statement budget forecast for the next 12 months,” says John Niehaus, director of staffing M&A services for Duff and Phelps. “One of the biggest pitfalls sellers make is they don’t have it, or it is too aggressive. The quickest way to lose credibility is to have a forecast and miss numbers in the first month.”
Underestimating the Task of Selling
When owners engage an intermediary to help sell their company, they need to realize that most companies take minimum of six months to sell once the marketplace is aware that the company is for sale, Lyons says. Some companies have taken up to two years to sell. And due diligence always seems to take longer than people think — never shorter. In addition, the more a firm will sell for, the more due diligence is involved.
Factors that can increase the the sales cycle include whether private equity is involved or if the company is a bit different from the standard firm. For example, if it is not a pure-play staffing firm but has more than one segment it offers, finding the right buyer will likely take more time because the buying universe is significantly smaller and harder to identify.
Inability to Multitask
Selling a staffing firm is a long, emotionally involved process, and companies need to have the management bandwidth to handle work on the sale as well as continue to run the staffing business successfully, Childs says.
“A lot of times companies will get distracted and miss results during due diligence, which will often kill a deal,” he says.
Timing
“The best time to sell is when you don’t have to sell, when your company is going strong,” Lyons says.
It can be costly for an owner to wait until he or she is ready to retire rather than sell when the company is going strong. The company may not necessarily be in its strongest position at exactly the time a person is ready to retire — and it may get a lower valuation as a result. In addition, buyers of staffing firms may want the owner to remain on board for two three years after a sale, which would be tough for a person planning to simply sell a firm and retire.
In addition, it might not necessarily pay to wait for a company’s growth to ramp up. If your company is going to grow 50% next year, that might be a good reason to wait to make a sale, De Bellas says. But if it’s growing at 10% a year, then there will always be the temptation to wait.
Trying to time the market for the right moment in the economic cycle can also prove a pitfall. Wait too long and the economy could go sour. “No one is smart enough to know exactly when it’s going to turn,” De Bellas says.
Not Keeping It Confidential
Owners selling their staffing firms should limit the people who know about the sales plans to only those who have an absolute need to know, De Bellas says. If word gets out publicly, only bad things can happen. Competitors will try to solicit customers and employees; clients will wonder what the service will be like.
Not Involving Key People
On the flip side, don’t let valued, tenured people read about the deal in the Staffing Industry Daily News. Key people should know about a possible sale before it’s publicly announced, De Bellas says. In addition, it’s good to have a compensation program in place post-closing to retain the people you want. They may be able to participate in an earn-out or have some kind of reward if they stay. Also, you may need their help to put the deal in place.
“You need people internal to your organization to help you,” Niehaus says. “Bringing in key people that you can trust to keep a secret can dramatically streamline the process, make it more efficient, get the buyer what they need, get the deal done faster.”
Crutchfield Capital’s Wilson says people can get upset if they find out that a firm is being sold; some have even left after being surprised by a sale.
“If there are key people in the organization, enroll them early in the process and make sure they’ve got the economic motivation that is in line with the owners’ motivation,” Wilson says. “Anybody that could impact a sale by their departure should be made aware that a process is underway and they should be rewarded upon the sale closing.”
Wrong Representation
Staffing firm owners need to have the right legal team helping them, and that means an experienced M&A attorney, Lyons says. An attorney unfamiliar with M&A will be in learning mode, and they tend to make issues of things they shouldn’t and not make issues of things they should. “It’s pretty easy for an inexperienced attorney to blow the deal,” Lyons says.
It’s also a good idea to have other appropriate professionals working with you as well.
Getting the Pricing Wrong
“Most sellers want a healthy amount of cash and the balance could be either notes or earn-outs or stock,” De Bellas says. Regarding notes, you want to get as much protection for those notes as you can, and check the buyer’s financial statements for creditworthiness. If it’s stock, then you have to see what your path is to liquidity.
If earn-outs are going to be based on earnings, then the buyer has to leave the seller in control all the way down to earnings, he says. If the seller isn’t going to keep control all the way down to earnings, earn-outs will have to be based on gross profits.
Misunderstanding Add-backs
Understanding an add-back is important, Niehaus says. An add-back is an adjustment on an expense that the sellers incurred but is not likely to be incurred in the future. An example is excess compensation paid to the owners. While an owner may have paid himself or herself $ million a year, the buyer will likely pay a lot less if the owner stays on to help run the firm — the difference between the $ million and the former owner’s new compensation is an add-back. However, if there are synergies where a buyer will be able to save money, they may not be add-backs. For example, the buyer may already have a back-office system in place and won’t need two payroll employees.
Refusing Earn-outs
“In my opinion, refusing to consider an earn-out as part of the transaction, you’re leaving money on the table,” Niehaus says. “Buyers will almost always pay a higher amount if some of it is based on future performance.”
Earn-outs can also be a bridge between what the seller thinks a firm is worth and what a buyer thinks a firm is worth, he says. Some deals are all cash, some are heavy on earn-outs, but depending on the deal, refusing earn-outs could mean leaving money behind. This is despite attorneys being notorious for hating earn-outs.
Sweating the Small Stuff
Finally, don’t sweat the small stuff, De Bellas says. “Pick your places where you are going to be firm.” Buyers can run out of patience, then the deal is off.
