Labor Shortages Has Made Staffing Agencies More Valuable
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 can 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. Let’s explore how to best evaluate and sell your staffing agency in South Florida.
Evaluate Staffing Agency Based on Owner Benefit
- The first step to evaluate a staffing agency is determining the owner benefit of the business.
- The owner benefit represents the true earnings of the business.
- After the company’s EBITDA (earnings before interest, taxes, depreciation, and amortization) is determined, one must also add the owner’s salary, non-cash expenses such as depreciation, and the owner’s personal expenses that flow through the business in order to uncover the true owner benefit.
- Staffing companies usually have next to no equipment or physical assets, so the value of the business lies strictly with the owner benefit.
- A professional business broker should look at the last three years of the staffing company’s owner benefit, with more weight given to the most recent 12 months of results.
- The labor shortage exacerbated by Covid has caused many staffing companies to increase their ‘current run-rate’ of earnings, so the broker must carefully scrutinize the current earnings level in order to maximize the advertised owner benefit and hence the asking price of the agency.
- Staffing agencies usually sell for 2-3 x the current level of the true 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 Very Important
Some staffing companies are able to pay their staff about half of the hourly rate that they receive from the employer (who is hiring the staffing company and not the individual staffer). This equates to a strong 50% gross margin (the margin that is left over for the staffing company after paying the staff members who are in turn hired out to the employer). Many healthcare staffing companies have historically been able to achieve these high gross margins because of strong demand from employers for healthcare workers.
Potential Sellers of Staffing Agencies Should Focus on Their Gross Margins
Other staffing agencies have far lower gross margins because they incur higher costs to pay the staffers or because of less demand from employers who are unwilling to pay much of a premium above what the staffing agency pays the staffers. Buyers of staffing agencies closely analyze gross margins, and sellers of staffing agencies should do everything possible to increase this critical metric before selling their agency.
Net Margins of Staffing Agencies Factor in Advertising and Overhead Costs
The pre-tax net margins of a staffing agency is simply the net profit (or owner profit) divided by the gross revenue. This metric incorporates the staffing agency’s overhead and advertising/recruitment costs. A well established staffing agency should be able to keep these costs low and avoid costly 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 for Sale A Key to Selling Price
- A staffing agency that is growing their sales and net profits will receive a far higher asking price than a similarly situated 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 (to both staffers they hire and employers to 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.
Sellers of Staffing Agencies Typically Sign Non-Compete with Buyer
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.
Sellers of Staffing Agencies More Likely to Compete with Buyer
Buyers know that the seller is likely to personally have relationships with the customers (or employers) of the business, and have the knowledge and expertise to recruit and hire staffers in the industry. Thus, the buyer will be wary that after the sale, the seller may work for or create another staffing agency that could compete with or harm the buyer’s agency. Sellers of staffing agencies should be forewarned before the sale by their business broker about the need to alleviate this fear from buyers and agree to sign a non-compete agreement.
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.