Staffing Company Valuation Multiples – Agency Valuation Guide

FAQ

How Much do Staffing Agencies Sell For?

Now that you know how valuation multiples work and which types of human capital and staffing agencies are most appealing to buyers, you’re better prepared to answer the question of how much staffing agencies sell for.

80% of staffing agencies sell for a 3.5 – 5.5 X multiple of their earnings (adjusted EBITDA).

Larger agencies that have a wide margin and a longer contract length will often-times sell for higher multiples.

For small agencies (under $500k in profit) we typically refer you to a small, local business broker. They’ll have you on the market in 2 weeks. With luck, you’ll find a buyer within a year.

For staffing agencies we work with ($500k  -$10M in profit) we will run an M&A style auction process. This means that you’ll get multiple bids and it will take 8-9 months in total to sell your staffing agency.

We put together an article all about this here: selling a staffing firm.

Here are the steps at a glance:

  1. Request a valuation from a capable M&A firm. Ideally, one that has worked with human capital and professional service companies.
  2. Gather your financials, org charts, supplier/agency agreements, HR documents.
  3. Your advisor will prepare a CIM and teaser (marketing materials) on your business.

As private equity investors, and other business buyers seek to but and invest in employment agencies such as staffing companies the multiple approach is far and away the most common process of arriving at the proper value range.

In this article, we delve into the world of staffing company valuations, exploring their definitions, types, and the typical process of valuing a staffing agency. We will examine the factors that influence these multiples, analyze real-world case studies, and discuss sector-specific variations.

Additionally, we will explore the impact of the current economic environment on the recruiting and staffing agency valuations, offering insights and guidance for investors and staffing company owners in navigating this evolving landscape and elements of their staffing company they can look to improve ahead of an exit to achieve higher valuation multiples.

How Valuation Multiples Work for Staffing Companies

In valuing companies in the recruiting and staffing industry, the valuation multiple is based on the attractiveness and desirability of the staffing company and is applied to a trailing twelve-month (TTM) EBITDA figure to calculate the final valuation.

EBITDA, an essential metric of financial performance, measures operating income and the employment agencies capacity to generate cash before servicing debt or paying taxes. The acronym stands for earnings (net income) before interest expense, taxes, depreciation, and amortization.

To accurately determine the valuation multiple, staffing industry investors and buyers assess several factors specific to staffing firms.

Multiple figures start as low as 2X for smaller companies with commoditization, low growth, low bill rate temp-staffing company and can go up to 7-10 x for larger companies (often publicly traded) with high bill rates, geographic diversification, 8%+ EBITDA margins, high growth expectations, strong leadership teams in place and have recurring clients.

While some risk factors such as size, strong EBITDA growth, deeper management teams, etc. affect companies in all industries, there are some primary value drivers that are specific to valuing companies in the staffing industry, such as gross margins (over 30% ideally), bill rate (higher the better), and time to fill positions.

What is Adjusted EBITDA and How Does it Affect Business Valuation?

to come up with a companies true profitability, an M&A advisor or investment banker will take the company’s non-recurring expenses (one-time legal expenses, buying out an old business partner, etc.) and add them back into the EBITDA figure.

Additionally, if the staffing company owner is serving as CEO of the firm and is taking more compensation than the future owner will need to pay their CEO, that is added back into the bottom line as well to show the true earnings that are available to the business owner.

Note that the term “Seller’s discretionary earnings” is often used as a synonym for Adjusted EBITDA.

Finding the Appropriate EBITDA Multiple for a Staffing Firm

As mentioned, the multiple is applied to TTM Adj. EBITDA to arrive at the actual staffing company valuation and likely purchase price. However, finding TTM EBITDA is a fairly straightforward equation.

After performing due diligence, staffing company buyers and sellers can typically reach an agreement on what that number is. Coming up with appropriate EBITDA multiples to use for staffing companies, however, is more art than science.

The More Desirable Your Business is to an Investor, the Higher the Multiple Investors Will Pay

At a high level, staffing company valuations are simple. However, multiples differ greatly based on the fact that different buyers will find different industries and business traits appealing. Some will like a niche industry with as few competitors in it as possible. Others will favor a staffing companies in larger industries where there may be more of a growth opportunity, even if it means they will have to invest more in technology to stay ahead of their many competitors.

However, there are some other factors here that are seen as highly desirable across the board. We’ll go into further detail on these below.

Related Content

We put together another article on the process of selling a staffing firm that we think you may like.

The Factors That Make Staffing Firms More/Less Valuable:

  1. Highly technical end market (biotech, asset management, engineering, etc.)

  2. High-growth (both revenue growth and EBITDA growth ideally)

  3. Scale, potentially $10m EBITDA plus (larger firms will typically get a higher multiple from investors)

  4. Straightforward business operations with a strong management team in place

  5. A large total addressable market or the ability to expand into adjacent ones

  6. High margin (indicative of a high level of automation (lights off facility) and differentiation from competitors

  7. Recurring customer base without customer concentration. (Having too much of your revenue coming from a few customers can drastically decrease your multiple)

  8. Clean, well organized financial statements. (most manufacturing companies use outsourced CFOs or have an internal CFO).

  9. Long term contracts.

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

  11.  

Multiple Variance in Different Staffing Sub-sectors

Valuation multiples can vary significantly across different, staffing industry sectors due to variations in industry dynamics high customer concentration, growth prospects, and market conditions.

Understanding these sector-specific differences is crucial when assessing the value and growth expectations of staffing companies. Let’s explore some key sectors and the factors that contribute to their valuation multiples.

  1. Staff Augmentation:

    Staff aug consulting typically goes hand-in-hand with cross-selling various other human capital services. Staffing Companies that offer staff aug will typically have a narrow industry focus (finance, for instance) or a narrow skill-set focus (sales) that they provide to their clients. Staff augmentation by itself, however, is typically not an easy business to sell as it is often-times very owner reliant based on the owner’s skill set and relationship. At scale, they can make great businesses and if they have a diverse customer base with long-term contracts, their valuation multiples figures will likely range from 4-6 for companies with $2m+ EBITDA that appeal to financial buyers.

  2. Temp-staffing companies:

    The largest segment of the staffing market, the high-revenue, low margin nature of the temp-staffing business has historically made investors shy away from the market. Would-be investors in these companies are typically heavily influenced by the narrow EBITDA Margins and high customer churn.

    For tem staffing firms that are able to continually attract new customers and retain older ones, investors could show interest at mid-single-digit multiples. Like other segments of the staffing market, having a high bill rate and a low time to fill in various positions is crucial to driving higher market values for the staffing firm.

  3. Direct Hiring and Search Firms:

    Valuation multiples for executive search and direct hiring staffing companies are typically lower than with their industry constituents. This is largely due to the transactional nature of their work. Private equity investors and other strategic buyers such as publicly traded recruiting firms are typically looking for longer contract length and more recurring clientele than search firms or direct hiring firms have.

    For this reason, valuations are lower for staffing firms who have a large portion of their staffing company made up of direct hiring.

It’s important to note that these are just a few examples of industry constituents, and valuation multiples can vary within each sector based on firm-specific factors. Potential driving factors such as growth rates, market positioning, competitive dynamics, and regulatory environments also play a significant role in determining valuation multiples.

When assessing valuation multiples for human capital and labor companies, it is crucial to consider a comprehensive set of factors, such as financial performance, growth prospects, competitive advantages, industry trends, and broader economic conditions.

By conducting a thorough analysis of many factors, investors and stakeholders can make informed decisions when valuing staffing companies in various sectors and identify opportunities for potential investment.

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.

Who Buys Staffing Companies?

While potential buyers are trying to get your staffing business for the lowest price they can, if your business is desirable enough to sell and you’re working with a quality business broker like Raincatcher, you’ll likely get multiple prospective buyers making offers for your staffing company. This is important as it helps give us (and our clients) negotiating leverage with the buyer and helps get the highest value of your staffing company.

Generally speaking, if your business is over $2m in profit, we’ll get 5+ offers for it from private equity groups and strategic buyers alike. A private equity group is a team of investment professionals who manage money for outside investors (typically this is high net-worth individuals or pension funds). They will look to buy all or a portion of the staffing company on behalf of their investors.

Strategic buyers are companies who have a strategic affinity in buying your business. This means they could be a similar staffing firm. Or, they may be a service business that sells to the same end market as your staffing company does. While they are few and further between, strategic buyers can typically pay a higher price for staffing firms than a private equity buyer.

Staffing business

How To Increase the Valuation of Your Staffing Agency

In addition to increasing the appeal of your staffing company in the various areas mentioned above, buyers of most companies would like you to stick around with the business for a reasonable transition period post-close. This will not only help them get comfortable with the basic concepts and operations of the company post-close, it helps assure that leaders in key departments will remain in place for the buyer.

Additionally, if you have a clear plan on how to help the buyer increase the company’s future earnings, the potential acquirers would be excited to see this and may be willing to pay a slightly better multiple being as though you are helping them realize future growth and mitigats associated risk factors with the transfer of ownership.

Other Valuation Methodologies Occasionally Used When Selling a Staffing Business

While a staffing business’ valuation can be made as simple as taking earnings before interest taxes and multiplying it by the appropriate valuation, there are several other more academic approaches that are used by wall street to asses a staffing firm’s worth.

Discounted Cash Flow Analysis Valuation

This is projecting the future net income and earnings of a staffing company, applying a discount rate to them (for time and perceived risk) and trying to come up with a company value based on the present value of the future cash flow.

Publicly Traded Recruiting Company Comps

There are a dozen plus publicly traded recruiting companies with market capitalization anywhere from a couple hundred million to $10 billion plus. Many of these public comps will trade on revenue multiples rather than EBITDA multiples like they do in the private markets.

However, by doing more in-depth analysis on the business you’ll see that staffing businesses that trade on revenue multiples typically do-so because they are investing back into growth and are therefore either not profitable (have negative EBITDA) or very thin EBITDA margins.

Potential buyers may look to wall street analysts forecasts for these companies to see the consensus forecasts for the industry, but they are really not meaningful market comps due to public companies trading on higher revenue multiples than privately held smaller companies.

Request a Consultation

If you are looking to sell your staffing company we invite you to reach out to get introduced. We’d be happy to discuss our auction process and how we help staffing company owners and other lower middle market business owners achieve maximum value with our proprietary auction process.