By Sam Sacco and Brian Kennedy
This article was re-written from this year’s SI Review white paper based on some excellent suggestions from our readers. However, the limited space we had in the white paper format that was published in this year’s January/February edition of SI Review required us to edit the copy. Here is the revised article with the complete expanded information.
Create a Report Card for your business to determine its value!
R.A. Cohen Consulting has completed over 190 transactions and has over 78 years of M&A experience exclusively in the staffing industry sector.
We continue to be very bullish on the M&A market for 2022. There is plenty of cash and motivation among buyers and more sellers seem to believe it is a good time for an exit. With the predictions for increased staffing growth in the future, investors see the industry as a great place to increase their earnings.
We’ve had several straight years of high demand and believed last year that increases in multiples would top out at their highest level in two decades, but today we believe that based on current demand there is still room for multiples to move up slightly in 2022. The Covid virus impacted some transactions but also increased competition among buyers including a new group of app software companies, which is a good omen for sellers. There is also an increased demand for Direct-hire (Perm) companies.
Use the information below to rate your company and contact RACC to get a more detailed, complimentary back-of-the-envelope valuation.
By grading the quality of your company based on the information in this article you can roughly determine what your company might sell for in today’s market. Begin by examining the following elements used to help arrive at a fair market value for your business. Assign a point amount for each level of performance by using a scale of 1 to 5 points.
- High Growth Rates are always a sign of a healthy business with strong market acceptance. Since 2016, if you are growing at a rate of:
- 15% per annum or more give yourself 5 points
- 12% -14.9% per annum give yourself 4 points
- 9% – 11.9% per annum give yourself 3 points
- 6% – 8.9% per annum give yourself 2 points
- Under 6% per annum give yourself 1 point.
- High Gross Margins are to some degree relative to your staffing sector; certainly a buyer wouldn’t expect the same margin level from a Light Industrial (LI) firm as they might for a Healthcare Staffing firm. Keep in mind (as an example) because of higher bill rates, GM dollars should be much higher in an IT staffing firm than they are in a Light Industrial staffing firm, even if both operate at 15% GM. So rate yourself accordingly.
- If your gross margin is 25% or more give yourself 5 points
- If your gross margin is 22% – 24.9% give yourself 4 points
- If your gross margin is 19% – 21.9% give yourself 3 points
- If your gross margin is 17% – 18.9% give yourself 2 points
- If your gross margin is 15% – 16.9% give yourself 3 points if you’re in IT, Engineering or other high billing sectors; give yourself 0 points if you’re in traditional sectors, such as LI, Clerical, Commercial etc.
- Major or Growing Markets are always in greater demand by most buyers, although some buyers do prefer secondary or tertiary markets as there is often less competition.
- If you are in a top 25 market and/or a rapidly growing market give yourself 5 points
- If you are in a top 40 market and/or a rapidly growing market give yourself 4 points
- If you are in a transitioning market place, where some of businesses are moving out to healthier markets give yourself 3 points
- If you are in a market place where many of the long-term employers have either closed, moved offshore or to areas with lower labor costs and business friendlier laws give yourself 2 points
- If you are in a town with a population fewer than 100,000 people give yourself 1 point.
- Strong Market Position/Reputation is a less objective measurement than some other items we’ve listed.
- If you are a recognized market leader by customers (yours and others’) in your market area give yourself 5 points
- If you are an up and coming, super-star firm, getting lots of local recognition give yourself 4 points
- If you have had a stable presence in the market for ten or more years give yourself 3 points
- If you are “just there” but with very little awareness of your service in the market give yourself 2 points
- If you are under the radar serving a small group of satisfied clients give yourself 1 point.
- Diverse, Long-term and Stable Customer Base – Buyers always prefer a stable, diverse customer base:
- If you have a stable list of long-term repeat customers, especially if some or many are growing and/or your top client is no more than 12% of your total sales volume give yourself 5 points as buyers seek stability and customer diversification;
- If you have a fairly stable list of diverse customers and your top spending client spends between 12% – 15% with you, give yourself 4 points
- If your top spending client represents between 15 -18% of your sales give yourself 3 points
- If your top two clients spend 30% or more give yourself 2 points
- If you have this week’s customers and you know that next week’s customers are totally different this increases the risk and the cost for the buyer; and/or if your top customer is more than 30% of your revenue, give yourself 1 point.
- Multiple Offices are preferred as they are perceived by buyers to spread risk.
- If you have annual sales volume above $12M with 3 or more offices give yourself 5 points
- If you have annual sales of $9M with two or more offices give yourself 4 points
- If you have 2 offices doing $7M in sales give yourself 3 points
- If you have a single office doing over $5M give yourself 2 points
- If you have one office billing less than $5M, give yourself 1 point.
- Annual Sales Volume – Size in terms of annual sales volume adds value to the buyer, all things being equal (e.g.: GM% and bottom-line profitability). There are no points allocated here; the chart at the end of this document takes this into consideration.
- Good management depth is extremely important to a buyer so they can see the business can be managed after the seller’s exit.
- If you have solid, experienced line management operating your business that will stay on and grow the business, give yourself 5 points
- If you have young, sharp, aggressive, keen but less experienced staff that will stay on and contribute to the firm’s on-going growth, give yourself 4 points
- If you have a solid crew of performers that are capable of maintaining the business give yourself 3 points
- If you have one or more weak links or vacancies in an important functional staff/management area, give yourself 2 points
- If the owner is the key to the business and the buyer will need to install a manager(s) give yourself 1 point.
- Good Insurance, a clean legal history and accurate record keeping build confidence in buyers.
- If you have declining WC incidents and/or fewer SUTA claims, combined with books of account that add up properly give yourself 5 points
- If your books balance and insurance claims are steady give yourself 4 points
- If your books balance and your insurance claims are in line with industry numbers give yourself 3 points
- If your insurance claims are in line but your books don’t balance give yourself 2 points
- If your WC losses or SUTA claims are increasing and if your books are not totally reliable give yourself 1 point.
- More Contract/Temp Staffing vs. Perm/Search Revenue improves value because contract and temp revenues are more stable and predictable than Search or Direct-hire revenues.
- If your Search/Direct Hire business is less than 5% of your annual revenues give yourself 5 points
- If your Contract/Temp business volume is 90% or more give yourself 4 points
- If your Contract/Temp business is growing in proportion to your Search/Direct Hire business give yourself 3 points
- If your Search/Direct Hire business exceeds 15% of your annual revenues give yourself 2 points
- If your sales in Search/Direct Hire exceed 20% of your annual business volume give yourself 1 point.
Now take your total points and if you have 9 to 15 you are at the low end of the multiples below; if you have 40 to 45 you are at the higher end.
Note 1: The chart assumes the Seller retains the Balance Sheet.
Note 2: If sales are below $5M per annum, multiples will be lower.
There are always exceptions to the ratings above, if you would like a confidential analysis of your market value contact:
Sam Sacco T/ 910.769.4057 firstname.lastname@example.org
Brian Kennedy T/ 416.229.6462 email@example.com
This is a © work product of R. A. Cohen Consulting and may not be distributed or reproduced without their express written consent.