All about Multiples

September 30th, 2013

What every Staffing firm owner should know!

I sold my business for a Ten Multiple

Don’t you just love to hear this boast, as we have heard this bold statement at least a dozen times. Before we can draw any value conclusions we may want to ask a multiple of what or when this occurred?

The Metric depends on the type of Company

For publicly owned companies, the most noted multiple is that of after-tax net income and it often applied to projected income over the next twelve months. For early-stage companies, it could often be a multiple of revenues primarily for two reasons; they are often:

a) Not profitable at this stage but are expected to be in the future once their product or service is proven out or,

b) They are in high growth mode, and profit levels are depressed as a result of higher than long-term average spending on R & D and product/service marketing.

For established private companies, like most staffing firms, the most commonly used valuation metric is a multiple of trailingtwelve monthAdjusted EBITDA  for profitable firms.

EBITDA

Stands for earnings, before interest, taxes, depreciation and amortization, if any;andit therefore allows for a fair comparison between companies because it negates the following four effects on profitability:

1. The effect of having different asset bases by cancelling depreciation;

2. The effect due to different takeover histories by cancelling amortization often stemming from goodwill;

3. The effect due to different tax structures; and lastly

4. The effect of different capital structures by cancelling interest costs.

Adjustments are often thought of containing fluff used to boost profitability, so be sure you can verify and justify all items that you are proposing to add back.

 

The Time Frame Matters

The period the multiple applies to is also important. While Valuation is conceptually a forward-looking principle and publicly owned firms will often present their earnings on the next 12 months performance; for most privately owned companies the time frame is generally the Trailing Twelve Months (TTM) performance as a result of the difficulty in predicting what the next 12 months of earnings may be.

Other Considerations in determing Value

A. Did the buyer assume any of the seller’s debt?

B. Were their working capital adjustments made?

C. Over what time frame was the purchase price paid?

D. Sellers seeking 100% cash on closing will take deep discounts if they can even find a buyer.

E. Are payments set or contingent on performance?

F. Are there claw back features if the business becomes less profitable?

G. Are their enhanced payments for superior performance?

All of these questions will impact valuation and the amount the seller receives over time.

So, the next time someone tells you they sold for a ten multiple, focus more on the total value that was received, since we can’t spend a multiple, we can only spend the cash in our pockets. A multiple is just one-way to express value however as we can see from the questions above, what is counted in a multiple can vary a great deal due to the circumstances of both the buyer and seller.

When we actually probed one very proud seller about his ten multiple that he kept bragging about, we learned that his multiplier was all of $1,500 dollars of adjusted EBITDA, so his ten multiple was real; however it amounted to all of a $15,000 purchase price. So focus on the dollars you will end up with and try not to get hung up on the multiple, after all it is only a number without context unless you have a more complete picture of the transaction.

This posting contains substantial contributions from an article by Derek van der Plaat.

Do you want to buy a Business? Part 1

February 11th, 2013

Buying Considerations

Companies acquire for a broad variety of reasons. Some acquire to:

  • Increase market share
  • Create economies of scale
  • Offer new services
  • Generate new sources of revenue and profits
  • Acquire management
  • Bring in fresh ideas
  • Enter new markets

When you look at building or buying, the fastest and often easiest path is by buying, provided you have access to capital at reasonable costs and the ability to effectively integrate the acquired business.

The challenge in making acquisitions work is managing each step of the process carefully. This often works best when clear-cut goals are thought out and presented to your current employees, many of whom will perceive these decisions as affecting their future opportunities. It is worth taking the time to get key employees to buy into the larger future you are creating. Clearly defined objectives can also serve as a guideline at several stages of the process.

There are a number of areas you need to review prior to seeking acquisition targets. The answers to the following questions can save your firm valuable time and resources. These core issues can serve as a template for your acquisition opportunities.

1. What are your goals in acquiring?

  • Expand in existing markets
  • Open new markets
  • Increase market share
  • Spread infrastructure costs
  • Reduce or eliminate competition in a particular market

2. What are your acquisition criteria?

  • What is the annual sales range of your targets?
  • What are the financial performance goals you seek (e.g. Gross Margin / EBIT / average bill rates / sales history growth rates, etc.)?
  • What geographical markets do you want?
  • What sector(s) of the industry are you looking for?

3. How will your acquisitions be funded?

  • Internally
  • Borrowed, if so, are funds approved and in place
  • Private Equity / Venture Capital

Are you looking for top-shelf well run companies or distressed properties? What resources are you better equipped to offer, financial, operational or human? This may influence the type of business you can integrate most successfully.

4. In choosing an acquisition target buyers often look to create value for themselves by:

  • Lowering unit costs through economies of scale and better cost management
  • Increasing market power by spreading its’ brand over a wider base
  • Entering new geographic or industry markets
  • Offering existing customers additional services
  • Creating synergies so 2+2 equals at least 5
  • Gaining new technology
  • Expanding their customer base
  • Acquiring management talent

In Part 2 we will explore additional Buying Considerations and take stock of what are answers to these questions have told us about ourselves and the best types of businesses for each of us to seek for acquisition.

For more information on Staffing M & A or a quick and accurate complimentary Valuation of your business or a confidential discussion, contact:

Bob Cohen at 416-229-6462 or Sam Sacco at 910-509-0691. We can also be reached at bob@racohenconsulting.com or sam@racohenconsulting.com.

Sam and Bob have successfully completed over 140 staffing industry transactions. Visit our website for more articles and information at: www.racohenconsulting.com

Strong Growth Forecast for 2013

January 28th, 2013

Long-time Staffing Industry Observer and respected Commentator Jeffrey Silber of BMO Capital Markets – US Equity Research News tells us that his group is projecting a 6%-8% increase in temp usage for 2013 and 2014. While this is slower than the (9%) growth the industry experienced in 2012, it still represents solid growth.

The staffing market and economy both face uncertainty, whenever business people perceive uncertainty they tend to be reticent to make significant expense commitments (like hiring more direct staff, more contractors/temps will be used) until the dust clears and there is more clarity. The uncertainty is caused by several factors including the political/economic landscape in the US and Europe, the costs of the Patient Protection and Affordable Care Act; (PPACA) and the growth of real GDP and the general direction of the economy.

New Unemployment claims are down well below the cautionary 400,000 mark according to Staffing Industry Analysts (SIA) Reports. Employment in most States is growing and contractor/temp wages have softened a bit which is a two-edged sword; while, it is easier to find needed workers it is harder to maintain higher margins as the supply strengthens.

For more information on Staffing M & A or a quick and accurate complimentary Valuation of your business or a confidential discussion, contact:

Bob Cohen at 416-229-6462 or Sam Sacco at 910-509-0691. We can also be reached at bob@racohenconsulting.com or sam@racohenconsulting.com.

Sam and Bob have successfully completed over 140 staffing industry transactions. Visit our website for more articles and information at: www.racohenconsulting.com

Using LinkedIn to Grow your Business..one in a series of LinkedIn basics!

November 12th, 2012

This post was written by Prialto who gave us permission to reprint some of it here hopefully furthering our desire to keep you be better informed.

Upgraded users of LinkedIn (Premium Members) can see a full history of who has viewed their profile.

Relationship-focused sales executives invest a lot of time identifying new prospects.   While many executives browse new prospects for outreach through LinkedIn, a lesser known tactic exists to quickly and more easily identify prospects.

And whether you’re aware of this or not, these particular prospects have already engaged with you.

Identify prospects

An intriguing aspect of LinkedIn is the opportunity to see each contact that has viewed your profile.

To enable this feature, you need to allow others to know when you view them as well.  With the free version of LinkedIn, you are restricted to seeing the last five contacts–for a more comprehensive view, monitor activity frequently or upgrade to a paid account.

Fundamentally, contacts viewing your profile have indicated interest in you.  If your profile is viewed by contacts you haven’t yet engaged with, this presents you with ideal prospects.

 Research prospects

With a quick assessment of the contact’s profile, you can assess whether they would be a good match for your business.   Then, you may quickly research these prospects on publicly available databases (look for Prialto’s forthcoming guide to prospect research).

As you research these prospects, add their email, phone, and LinkedIn profile to your CRM for outreach.  Alternatively, delegate the process of monitoring and researching to an assistant as many Prialto members have done.

Outreach strategies

Once you have identified these new prospects, there are a number of effective outreach strategies Prialto has helped members develop:

  • Wait a few days, then cold call:  Since these prospects viewed your profile, they are likely aware of your company.   One effective strategy for outreach is to schedule a cold call 7-10 days after your profile has been viewed.   When you call, the prospect will often remember their interest in you and engage quickly in dialogue.
  • Send an email:  Another approach is to send a note to the prospect with an eye catching introduction such as “I don’t normally do this but I saw you viewed my profile and wanted to reach out…”  Break the ice by sharing a mutual interest, or a specific desire to know more about an aspect of their experience.
  • Leverage an introduction:  Asking for an introduction from a mutual connection with the prospect is a great way to allow others to feel generous in doing a favor for you.  This is a great way to paradoxically grow your network by using it. Similarly, include mention of your mutual connection in the email outreach approach above.
  • Engage on social media:  If the approaches above don’t fit your situation, and the prospect has listed another social media account–like twitter–you can follow them and work to engage them in a more casual dialogue.Prospect research doesn’t need to be time-consuming or stress-inducing.  By incorporating some or all of the approaches above with your LinkedIn profile views, you can create a consistent outreach pipeline of prospects to help grow your business.            http://www.prialto.com

For more information on Staffing M & A or a complimentary confidential discussion, contact:

 Bob Cohen at 416-229-6462  or  Sam Sacco at 910-509-0691.

 We can also be reached at bob@racohenconsulting.com or sam@racohenconsulting.com.

 Sam and Bob have successfully completed over 135 staffing industry transactions.

Visit our website for more articles and information at:  www.racohenconsulting.com  

 

Selling Your Staffing Company – Some Key Points Before you sell

August 13th, 2012
  1. Settle all litigation and financial issues before putting the company on the market.
  2. Hire a good transaction lawyer because the buyer will have one.
  3. If company owners are totally inflexible, the buyer may walk away from the transaction.
  4. Be prepared to accept a lower price for lack of management depth, dependence on a small number of customers or clients, and lack of geographical distribution.
  5. When a buyer indicates he or she may be ready to submit a Letter of Intent, tell them up front what items you want included. For example, price and terms, what assets and liabilities are to assumed, if an asset purchase, what contracts and warranties are to assumed, time schedule for due diligence and closing – these are just some of the items a seller might want included.
  6. Be advised that many buyers will view the value of Sub Chapter S corporations to be worth less than if the company is a C Corporation. Others will find it much more appealing to be able to buy selected assets from a “Sub” Chapter “S” Corp, rather than having to buy the stock of the seller, which makes the buyer liable for everything that happened before, which will increase their due diligence and investigative costs and add pressure to the type and nature of Reps and Warranties they will need from the seller.
  7. Make the company more visible by attending trade shows, tie up patents, copyrights and trademarks, create a public relations program – these areas all create perceived value.
  8. Selling a company involves sometimes-inconsistent objectives: speed, confidentiality and value (price and terms)- pick the two that are the most important to you.
  9. Keep in mind that companies get stale after sitting on the shelf for a while.
  10. Don’t expect your lawyer to win every point of contention – you want a deal maker, not a deal breaker.

 For more information on Staffing M & A or a quick and accurate complimentary Valuation of your business or a confidential discussion, contact:

Bob Cohen at 416-229-6462 or Sam Sacco at 910-509-0691.

We can also be reached at bob@racohenconsulting.com or sam@racohenconsulting.com.

 Sam and Bob have successfully completed over 135 staffing industry transactions.

Visit our website for more articles and information:  www.racohenconsulting.com

 

Why Some Transactions Fall Apart- Part 1

July 10th, 2012

Skeletons in the Closet

Selling a staffing company can be a challenging task. This is why we highly recommend hiring an M & A advisor to help you with this extremely important step on your way to retirement or another career. We would like you to hire us, however you should interview a few of us and decide who you feel most comfortable with handling one of your larget assets. Ask for references and please contact them. We are sure you will make a good decision even if you choose someone else. Its most important not to go it alone.

An undisclosed material fact discovered during the due diligence phase or just before closing can crater a deal quickly. Every business has its own good, bad and uglies – items that are less than perfect, pending litigation, warranty problems, back tax issues, etc. The buyer may discover that workers comp expenses are under reported or that certain key employees are not under a non-compete agreement.

The deal could be blown if the seller discovers that the cost of replacement employees will force a reduction in the purchase price or the buyer is unwilling to invest additional funds to correct the workers comp errors. These are not hypothetical we have the scars from each of these challenges as a reminder of how important it is to reveal everything to your Advisor, an experienced Advisor will know how and when to address the issue (s) to minimize its impact.

The best way to handle skeletons in the closet is to reveal them from the very beginning of the deal. Buyers (and sellers) hate surprises. Addressing them from the beginning with a plausible explanation should eliminate this problem. Sellers should realize that the skeletons will come out of the closet somewhere along the line. Since you “can’t conceal it”, be upfront about “revealing it” and build trust.

Financial Issues Surface

A major deal breaker occurs when sales and/or earnings suddenly drop. If the buyer has been made aware of a drop – for example, decreased sales due to seasonal business – most likely, no problem. But, if there is no apparent reason, the buyer could become spooked and either lower their offering price or drop the deal all together. It is important that management continue to run the business effectively during the sales process.

 The other financial issue that may surface involves the seller getting cold feet. All of a sudden, the seller realizes that the proceeds from the sale are not what he or she expected. After paying off suppliers, bank debt, taxes, etc., the seller realizes that it really doesn’t pay to sell and the deal craters. A seller should sit down with his accountant and intermediary and go through the numbers to determine just what the real proceeds will be preferably before a decision to go on the market is taken and certainly before an LOI or Term Sheet is signed.

Part 2 will follow next week and will discuss two other common causes for M & A deals falling apart.

For more information or a complimentary confidential discussion, contact:

Bob Cohen at 416-229-6462 or Sam Sacco at 910-509-0691. We can also be reached at bob@racohenconsulting.com or sam@racohenconsulting.com.

Sam and Bob have successfully completed over 130 staffing industry transactions. Visit our website for more articles and information at: www.racohenconsulting.com