How to Sell a Staffing Business – Complete Guide to Selling Your Staffing Agency

Staffing has been at the heart of American innovation and ingenuity for centuries. While the makeup of the labor market is everchanging, entrepreneurs in the staffing industry who are able to adapt to the changing economy will still find a growing market. Furthermore, as there are legal complications with hiring continue to increase and US companies look to hire fully remote teams, the demand for staffing agencies as investments for private equity companies continues to expand.

If you are looking to sell your staffing agency and want to maximize its value, Raincatcher is here to help. We are seen as an industry leader in M&A and were even named the #1 business broker by Inc. magazine. Like every worthwhile endeavor, selling a staffing business requires time and meaningful effort to attract the right kind of buyers. While there’s no one-size-fits-all approach to the selling process for a staffing company, we tailor our process to our client’s business in order to drive the most optimal outcome. The aim of this article is to highlight the process of selling from document gathering through the close.

Process of Selling a Staffing Firm (at a glance)

If you’re a staffing firm owner with over $5m in annual revenue and have decided to sell all (or part) of your staffing business, here is a glimpse at what the process will entail over the coming year:

  • Build a strong deal team. Align yourself with a business brokerage firm (for deals under $10m) or M&A firm (for deals over $10m) that has proven success representing human capital businesses such as staffing agencies. Find a proven M&A attorney (we can introduce you to a number of groups that we’ve had success with), and a tax attorney.

  • Compile your materials. Your M&A advisor (Raincatcher) will request a litany of documents from you. This includes financial statements, organization charts, supplier and customer contracts, employment agreements, etc.

  • Market the deal. We create an expansive document and financial forecast for your company and then bring it to market. Most of this work falls on our shoulders as we have an expansive database of investors for companies of all industries.

  • Receive IOIs. Depending on the size of your deal, your advisor may suggest that you market the deal and push for LOIs. Or, if your business is large enough, we look to secure IOIs ahead of time so that we can shortlist the most capable buyers and present them with more information and meetings ahead of receiving an LOI.

  • Management Meetings. Should it be a fit for your business, your broker will join you in hosting investors for a week to share additional information about your staffing agency.

  • Receive LOIs. ‘best and final’ bids will be received after hosting the most capable buyers for meetings.

  • Sign an Exclusive LOI. After some negotiation, we help you select the most capable buyer based on their price, terms, likelihood of closing, and plans for the company.

  • Due Diligence. Another 60-90 day due diligence window commences with the buyer and their advisor’s diligence every inch of your company.

  • Close. Closing time. The deal is done and you’ll typically get 80% – 90% of the payment for your business at this time.

  • Transition. After closing, the buyer will typically require the sellers to stay behind and assist in transitioning the business to them for an agreed-upon period of time.

Hear From Previous Clients Who Sold Their Business With Raincatcher

What Determines the Valuation of Staffing Agencies?

Lower middle market staffing companies (sub $15m EBITDA) trade across a fairly large range depending on how desirable they are. A staffing agency that trades for a high multiple (~10x) is one that has many of these traits:

  1. Specialized end market. i.e. you offer services to just one market (biotech, investment banking, etc.)

  2. High bill rate. (Ideally, you top staffing services will bill at over $100/hr.)

  3. Recurring clientele. (showing that you have sticky, recurring business is paramount in getting top value)

  4. Variety of services. Ideally, you offer some specialized staff augmentation, exec search and a variaty of temp-staffing services. If you only serve as a recruitment agency, that is less desirable than a suite of services to a niche market.

  5. Significant growth. Ideally, you are proving the ability to expand your market share in your existing market or the ability to expand into adjacent ones.

  6. High gross margin. Prospective buyers view a high gross margin as a sign that the staffing agency is differentiated from its competitors.

  7. Limited customer concentration. Proving that you do not have any one client making up more than 10%-15% of annual revenue decreases risk for potential buyers.

  8. Strong leadership team. Decrease your personal involvement in the company’s operations by having a sizable firm and a strong team in place.

  9. W-2 Employees placed at clients’ companies. Having w-2 employees in the field can help de-risk your staffing firm from potential liabilities and makes you more desirable to larger customers.

  10. Well represented by a professional M&A firm such as Raincatcher

The fewer of these criteria your staffing business meets, the lower the multiple will slide. Although rare in the space, it’s true that some staffing agencies don’t sell at all. However, these are typically very small companies (less than $500k profit) and offer a very limited array of services, such as just temp staffing at a low bill rate.

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As discussed above and illustrated in this chart, business valuation in the staffing industry can range greatly. We’ll dig into some of the more critical factors determining valuations for staffing firms below.

More Staffing Resources

One of the most common questions we get from business owners is about valuation. We put together a staffing firm valuation multiples guide that we think you’ll find helpful.

Financial Performance

The historical and projected financial performance of your staffing business is a significant factor in its valuation. Prospective buyers will need to be able to look through updated accounting records, tax returns, and financial statements and records for factors such as revenue, profitability, cash flow, and growth trends to evaluate the business’s financial health and potential returns on investment.

Generally speaking, the larger a staffing business is, the higher valuation it will go for. A staffing agency that generates $500k in annual profit may trade at half the valuation multiple that a like business generating $3m in cash flow trades at.

Additionally, investment groups like to see a gross margin in excess of 30%. High gross-margin staffing agencies are indicative of the business having a moat and being differentiated from its competitors.

Industry Segment and Market Conditions

The industry in which the staffing business operates play a crucial role in its valuation. Factors such as market demand, competitive landscape, specialized knowledge, and industry growth potential impact the perceived value of the agency.

Generally speaking, the more niche an industry is the smaller the total addressable market is. However, it is likely that they have few competitors in that niche and can therefore have more repeat customers and are more likely to survive a recession. Potential investors will have different views on niche markets with most buyers liking them and others disliking them for the limits they place on future growth.

Generally speaking, the more niche an industry is the smaller its total addressable market is. However, it is likely that they have few competitors in that niche and can therefore have more repeat business and more durable earnings. Investors will have different views on niche markets with most buyers liking them and others disliking them for their limited growth prospects.

Growth Prospects

Buyers assess the growth potential of the staffing agency to determine its value. Factors such as service diversification, expansion opportunities, market penetration, average project length, and diversification of customer base contribute to the assessment of future growth prospects and impact the staffing firms valuation.

Working Capital & Intangible Assets

Staffing agencies typically have very few fixed assets on their balance sheets such as equipment, real estate, and inventory. Instead, they have a high level of working capital. Working capital in M&A transactions is the current assets (less cash) and current liabilities (less debt). Due to the long receivables cycles and short payable cycles in the staffing industry, many staffing agencies have a high level of working capital included in the purchase price.

Customer Base

The strength and stability of customer relationships and the diversity of the customer base are considered in the valuation process. A broad and loyal customer base, long-term contracts, and recurring revenue streams can positively impact the perceived value of the business.

What is the Process of Selling a Staffing Agency?

While it may not be a fit for all clients, most of the entrepreneurs we work with who run staffing companies will see the most competitive price and terms for their business coming from a well-run auction process.

Auction processes 7+ months to complete. On certain occasions, we may also recommend that our client hire an accounting firm to conduct a sell-side quality of earnings analysis before we kickoff the auction process. In our experience, this cost and time is justified and can manifest itself in 5% – 20%+ higher transaction values.

We’ll go into each of the steps of an auction process at a high level below:

How we Maximize Exit Proceeds for our Staffing Clients with our Auction Process

Sell-side due diligence

Due diligence is traditionally done by business buyers and not business brokers. However, our comprehensive sell-side process includes a diligence process before we bring a business to market. 

Our comprehensive diligence and sale process is designed to drive the highest value for the business owner as buyers know that there won’t be any skeletons in the closet once they submit an offer and start spending money on legal and financial diligence.

 

Specially designed brokerage or M&A auction process

Depending on the size of your business and industry your company operates in, we may recommend a traditional brokerage process with a listing price. Or, a competitive auction process with buyers submitting the price and terms for negotiation. 

Our buyer list is comprehensive and will be tailored to include (or exclude) and participants in your industry who may make great strategic buyers or who you want to avoid knowing the business is on the market for sale.

Short-listing finalists

It isn’t uncommon for strong, sizable companies to get 5+ indications of interest (soft offers). We’ll then validate those buyer groups, attend dinners where they meet out clients, prepare further data on the business and negotiate the deal terms that the prospective buyers will propose in their final offer.

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Negotiate LOI terms and facilitate diligence

Once LOI’s have been received from potential buyers we work with our clients to select the potential buyer with the most attractive offer before executing the exclusive LOI.

It’s common for diligence to take 60-90 days before closing. This requires a significant time commitment from all parties. Additionally, final deal points are negotiated and contested during this period.

Talk to the experts

Care to learn more about Raincatcher’s brokerage and M&A processes and what we can do for your business? Get in touch with us for a complimentary consultation.

What Affects the Market's Appetite for the Human Capital Industry?

Business service companies with an evergreen demand for their product/service and recurring customers /clients are nearly always in high demand for acquisition from investors such as private equity firms, strategic buyers (adjacent service companies in the same market, larger staffing companies, etc) and search funds.

Generally speaking, business service companies and other staffing agencies are purchased in leveraged buyouts from investment groups. This means the more debt a buyer is able to get from their lender, the higher multiple they can pay for your business. Therefore, we are not just positioning your business to appeal to a buyer, but to their bank/debt investors as well.

A leveraged buyout for a staffing company typically utilizes debt to finance 40% or more of the purchase price. If your business has high margins and a high level of recurring clients the lender may be comfortable lending even more than 40%. For this reason, private equity groups look for growing staffing companies with recurring customers and over 30% gross margin.

Thinking About Selling?

If you are entertaining selling your company, feel free to request a consultation with one of our staffing business brokers or M&A specialists to learn about our unique process and why we believe it is the best in the industry.

What Role Does Team and Operations Play in Investor's Analysis of a Staffing Company?

Strategic buyers and private equity groups alike are interested in buying companies at a discount to the cash flow that can be taken out of them over the coming 10+ years. There are a few ways that they go about this:

  1. Invest in companies that are poised to continue to experience strong growth

  2. Acquire companies that have a high level of recurring revenue. Even if these companies aren’t growing at the same rate, they should have a stable, predictable client base and cash flow. 

In both of these cases, having a staffing agency that has a strong team in place with repeatable processes will create much more buyer demand for your agency. Either these processes and team will be leveraged to grow the business further. Or, it is seen as a differentiating factor to separate your agency from the competition and create a higher margin and more durable agency.

Request a Consultation

At Raincatcher we represent sellers of exceptional lower middle-market companies. Generally speaking, these companies generate anywhere from $2m – $100m in annual revenue. We were even named the #1 business broker by Inc. magazine.

Our team is comprised of former business owners, public accountants and investment bankers. Included in this group is two of our partners who each spent over a decade working at middle-market investment banks where they represented staffing companies. This is one of the reasons we are seen as an expert in the staffing and human capital space.

request a consultation today to review your market value, discuss what type of exit process would make the most sense and meet our team of advisors who have real-world experience selling staffing companies.