Staffing and Human Resource Companies
A number of years ago I engaged with an owner of a Staffing Company in northern Wisconsin. He wanted to sell and said he had started the business back in 1977 and has operated it and grew it to a Corporate Office and 7 branches with an emphasis on Light Industrial clients. He was 73 years old at the time and was ready to exit, but wanted to stay on with the new owner with an employment agreement for a few years to enhance his income.
We executed the contract and started our valuation and marketing process. The Staffing industry at the time was very fragmented and there was a climate that presented a lot of opportunities for consolidation. Translation; there were many qualified buyers out there.
Quickly, I learned my Client’s business was operating with an antiquated philosophy and inefficient tools. The good news was, savvy buyers saw the business and the inefficiencies and correctly identified how to modernize the business and increase the bottom line inserting those measures. We went through many conference calls with interested Buyers. One particular Buyer submitted a reasonable “Letter of Intent” and we started the due diligence process.
Now note, that in my initial conversations with my Seller, I asked if there were any skeletons in the closet that would negatively impact the value of the company in the eyes of potential Buyers. The response was no, so very good…clean bill of health.
The aforementioned Buyer in his due diligence, found a sizable Federal & State Tax Lien to the tune of over $900,000. This threw up a big red flag. Trust and credibility were all but lost. Needless to say there was interest, but that issue needed to be addressed before a successful transition could occur.
I asked my Client how and when this happened? During the lean years the company did not pay their Federal and State withholding taxes and the fines and interest were mounting every day. My Client was lucky the Feds didn’t close him down.
My Client was stubborn and hired an Accountant to submit an appeal to reduce the amount due to just the unpaid taxes. If anyone has worked with the IRS you soon learn that speed and efficiency is not in their job description. The process dragged out. We continued to market the company believing the appeal would be granted.
There were many interested parties that came and went, because the problem was not being resolved.
A year and a half later the appeal was denied and my Client was getting desperate and weary, for he needed the money from the sale for his retirement.
Another buyer comes along and gets to know our Client and his business and recognizes all the efficiencies he can apply with his system. We negotiate a deal with good structure that not only pays off the IRS but allows him enough money to live with the help of an employment agreement to stay on as a part time consultant.
We closed and our Client was relieved that this chapter in his life was over and he came out OK.
A year later the new owner was able to increase sales and profitability by 25%, by implementing his more efficient process and incentivizing his employees increasing their productivity and boosting their commitment to the company.
My Client stayed on as a part time employee for another two years and realized his full earn out. He is now happily retired, spending more time with his grandchildren and going fishing.
I have been in correspondence with many Staffing Company owners for years, joined their organizations and got to know them and their respective businesses.
One day, out of the blue, Carol Ann Schneider calls me and asks if I can help her market and sell her medical staffing company, Guardian HealthStaff. I asked, why do you want to sell? Carol responded by saying that she wanted to focus on her core business and wanted to sell Guardian. We get into the discovery phase of her company and I quickly realized that this woman after 40 some years in the industry ran a very profitable and very well organized operation with a great staff that largely ran the company with little oversight on Carol’s part.
Needless to say, the business attracted numerous qualified buyers and we got the deal done in quick fashion and at full asking price. The new owner is now asking me to secure new acquisitions for him.
This particular company originally approached me on a Staffing company I had listed for sale. They were located in Wisconsin & Illinois and just opened an office in Kentucky and were looking to expand. The company they were looking at was a great add on to their existing business. One thing lead to another and eventually their deal structure they were proposing was not what my Client wanted.
Two months later, I get a call from the Buyer in Illinois. He says he wants to sell. He said, I liked working with you and you seem to be effective with what you do and can we work together to sell my company?
Of course, I said thank you and yes, I was interested. We did a valuation on the company and we came up with an EBITDA of $1.5 million and marketed it at $6 million. This company had revenues of $25 million and was poised to grow with the right buyer looking to add on some great Midwest territory.
As the weeks went on we fielded many inquiries from Private Equity Firms and larger Staffing Companies. There were scores of inquiries and I am now building quite a database of qualified buyers from all over the country. We went through a number of LOIs, but not the right philosophy, culture or offer.
We were approached by a team with an investment company that was looking for a staffing company to be a platform for a “Reverse IPO” or “PIPE” (Private Investment in Public Equity). This would be a publicly traded entity and the buyer was offering a ground floor opportunity to manage the company as they acquired more Staffing Companies.
This was a new page in my experience and for my Client too. We had to do some quick study to fully understand the impact of the opportunity…. risks and rewards,
mostly risks. The team flew out from New York and we met for a couple of days getting to know one another and them explaining their position and their opportunity, assuring us along the way that they had the contacts and the expertise to execute this PIPE successfully.
The deal structure would entail cash down, a note and stock in the new company and if successful my Client would reap many millions over time as the acquisitions took place, the collective companies’ revenues and profits increased, boosting the value of the stock.
Everyone was very intrigued at the opportunity, but would it work? My Client had an accountant from a very reputable firm that had been with him for years. My Client greatly respected his expertise and advice. When we presented the proposal of the PIPE, he said an emphatic “No, those things always fail!!!” I was devastated, would he at least look at the details, their deal structure and their professional backgrounds. The accountant said he’d look at it only if my Buyer got all cash at the closing. No stock, no management contract going into the future, just cash and $5.7 million at that!!!!!!
Our buyers were very disappointed, to say the least. They felt very strongly that this company had the skills to be the platform company to make this PIPE work. The buyer was in a pinch. They had no other prospects on the near horizon to be the platform company. They wanted to move forward. With much thought and trepidation they offered $5.7 million cash the Seller demanded. WOW, we have a deal!!!!
Another hurtle. Because this was going to be a public entity, a SEC audit was mandatory. Only a few companies were certified to do it on the short time frame the buyer was setting. The cost was to be incurred by the Seller and the fee was going to be over $100,000. My Client didn’t like that and again his accountant advised my Client to get out and walk away.
That was the message we had to deliver to the Buyer. We all had long faces and thought the deal was dead. The Buyer had eager investors in the wings and the Buyers now had a lot of egg on their faces. They deliberated for a couple of days and came back offering to incur the audit fees themselves. Oh great, we’re back on!!!
Again, my Client’s accountant said “No!” So my Client walked away and told me he no longer wanted me to market his company.
Long story short, my ex Client sold his company to his sons and they had no idea how to run the company and in three years they were out of business. The PIPE was successful and is now called Staffing 360 Solutions. They have been written up in many industry publications and are to date, very successful. I still stay in touch with the principals.