Selling A Staffing Agency
It is no secret that our nation is currently facing a severe labor shortage. Demands for better pay and more flexible working conditions from workers along with changing demographics has resulted in low labor participation rates. Employers are finding it more and more difficult to find and hire staff. Staffing agencies fill this void by providing ‘labor for hire’ to employers. The resulting boom for staffing agencies has made it a great time for staffing company owners to think about selling their business. Keys to selling a staffing company include reducing the agency’s level of dependence on the owner, diversifying the client base, and having a transparent set of financial records.
Evaluate Staffing Agency Based on Owner Benefit
- The first step to evaluate a staffing agency is determining the adjusted owner benefit of the business.
- The owner benefit represents the true economic profit derived by the owner of the business.
- In order to calculate the annual adjusted owner benefit of a staffing agency, one first determine the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) from the most recent financial statement.
- Then one must ‘add-back’ the owner’s salary, unrecorded sales (if proven), and the owner’s personal expenses that flow through the financial statement.
- The result is the true economic profit that a working owner will enjoy from the business.
- Staffing companies usually have next to no equipment or physical assets, so the value of the business lies strictly with its intangible assets including the customer base, brand name, and employment agreements.
- The value of the intangible assets should show up in the adjusted owner benefit, which should be weighed over a three year time period.
- Staffing agencies usually sell for 2-3 x the annual adjusted owner benefit.
- The valuation range in large part depends on the growth rate of the agency, the customer mix, the stability and longevity of the agency, and the ability of the agency to recruit staff.
Gross Margins of Staffing Agencies
Some staffing companies are able to pay their staff about half of the hourly rate that they receive from the employer (who hires the staffing company and not the individual staffer). This equates to 50% gross margins (or what is left over for the staffing company after paying the staff members). Many healthcare staffing companies have historically been able to achieve these high gross margins because of strong demand from employers for healthcare workers. The stronger the labor needs in a particular industry, then the higher the gross margins. Other staffing agencies have lower gross margins because of higher labor costs or less demand from employers needing the services of staffing agencies to fill their labor needs. Buyers of staffing agencies closely analyze gross margins, and sellers of staffing agencies should do everything possible to increase this critical metric before selling.
Net Margins of Staffing Agencies
The pre-tax net margins of a staffing agency is simply the net profit (or adjusted owner benefit) divided by the gross revenue. This metric incorporates the staffing agency’s overhead, which mainly consists of advertising and recruitment costs. A well established staffing agency should be able to keep these costs low and avoid high recruiting costs to attract staffers. Ideally, a strong staffing agency has staffers seeking employment with them (rather than recruiting staffers to work for the agency). Thus, a staffing agency with low net margins may also mean that the staffing company is having to spend too much money on recruiting and signing up staffers.
Growth Rate of Staffing Agencies Key to Valuation
- A staffing agency that is growing their sales and net profits will receive a far higher valuation than a staffing agency with stagnant or declining financials.
- The agency may be growing because it is in a favorable industry with more and more employers needing staffing agencies to fill their staffing needs.
- Other agencies may be growing because they are simply out-working their competitors and can provide employers with better trained staff at more reasonable rates.
- Normally, growing staffing companies are growing for a reason.
- They may have an unusually productive way of attracting and retaining talented staffers by virtue of their reputation in the industry (from both staffers they hire and from employers for whom they provide staff), possibility of advancement they may offer to staffers, and customer service they provide employers.
- The higher growth rate – along with reasons for why the growth will be sustainable for the buyer of the staffing agency – should be analyzed and explained to all potential buyers by the listing business broker.
Non-Compete Agreements Common
In the context of business sales, a non-compete agreement is often given by the seller of the business to the buyer of the business. The seller agrees to not compete or interfere with the buyer’s business for a period of time within a limited geographic region. When buying a staffing agency, buyers are more likely to want the seller to sign a lengthy and comprehensive non-compete. This is especially the case if buyers know that the seller has personal relationships with the customers or staffers. The buyer may fear that after the sale, the seller could easily steal business by owning or working for a competing staffing agency. Sellers of staffing agencies should be forewarned before the sale by their business broker about the need to alleviate this fear from most buyers.
Owners of staffing agencies may certainly want to take advantage of the favorable industry dynamics and consider selling their agency with the assistance of a professional business broker.
Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.