02/15/2007
Top Five Strategic Ideas That Build Value in Your Staffing Business
By Jim Childs, Partner, Childs Company
I have been involved with the staffing industry both as an investment banker and as a CEO for 13 years. During this time, I have worked on well over $2 billion in transactions involving staffing firms, including the sale of my own firm in 2004. This perspective has allowed me to see dozens of different companies in the industry and draw some conclusions about strategies that create value for staffing firm owners.
"In essence, a buyer pays a premium for something he or she wants but cannot easily replicate. This concept is important for staffing firm owners as they develop strategies for maximizing value."
Jim Childs, Partner, Childs Company
First, there is a caveat to this theme: the fact that there are no silver bullets. The art of creating value is certainly in the details and execution of everyday actions that you as an owner take. However, there are some strategic ideas that may provide you with a framework to help build even greater value in your business.
Second, the simple mathematical formula of value in your business involves multiplying your annual earnings by a multiplier. Thus, the game is to increase earnings through revenue growth and margins and to increase the multiplier through being a desirable target to someone else. In essence, a buyer pays a premium for something he or she wants but cannot easily replicate. This concept is important for staffing firm owners as they develop strategies for maximizing value.
The top five strategic ideas that I believe create value in your business are:
1. Niche Leadership is Huge
Niche companies are always more valuable than generalist companies, especially when they can become leaders in their chosen segment. From an acquirers perspective the top reason to acquire a company is to gain access to skills or customers. A niche model also allows for a clear marketing pitch and most times, the niche is far wider than people think; thus, there is usually ample opportunity for a player in that space. A good example of this may be Robert Half. RHI emerged as the Finance & Accounting (F&A) staffing leader long ago and has built around this niche successfully into IT, legal and even solutions business. As the market matures, I think we will see an increasing amount of vertical focus to go along with specialty skill focus. For example, companies focusing primarily on IT staffing for healthcare companies.
2. Specialty and Higher Gross Margin Focus
The worlds largest traditional staffing companies have publicly announced that they need to transform themselves into higher margin organizations by getting into professional and/or specialty staffing. This signals additional competition on one hand, but it also validates that the professional staffing segments of IT, F&A, legal and other specialties represent clear growth opportunities at better margins than the traditional clerical business. There are several specialty areas that may not be typical professional markets such as pharmacists, truck drivers, scientific positions and others. These specialty areas may be less competitive and have better margins. EmployBridge is a good example of a specialty staffing firm that has stayed away from the very competitive professional staffing segments.
Gross margin is an important driver of value as public companies are often valued based on their gross profit margins. The worlds largest staffing companies operate at around 18 percent gross profit while the specialty players such as MPS, kforce and Robert Half can have gross margins well over 30 percent due to their specialty focus and their mix of permanent placement revenue.
3. Avoid Customer Concentration
One of the biggest detractors of value for small staffing companies is customer concentration. If a single customer accounts for a large portion of your overall business, most buyers will shy away from the company as an acquisition target or pay a significant discount. Because the company owner is often making money and the organization is ringing the bell, it feels good internally when you can have significant growth at an account and it is indeed a high-class problem to have. The trick is to create urgency in the organization to build around this anchor account. Not only does it protect you as the owner from the downside of the large account, but it adds tremendous value to your business.
4. Having a Deep Management Team
Another large detractor of value for smaller companies is that the management team, and often the sales force, is composed of one or two people which often includes the owner. Again, a buyer is risking too much if that key salesperson leaves the organization or the owner checks out after making some money. It is in your best interest as an owner to build a deep management team that can drive the business and is not overly dependent on one person, including you. This also gives you, the owner, significantly more flexibility at the time of exit. Owners of owner-dependent businesses will almost always have a significant earn out and long-term employment agreement when they sell.
5. Real Client Relationships are Key!
Many staffing firms will do "indirect business." It often makes good cash flow sense for the owner to do indirect business. However, you should realize that the indirect business is simply present cash flow and represents no future equity value in the company. Using the cash flow to build an organization that builds long-term relationships with customers is very smart. Over time, your model needs to have deep, long-term client relationships to really get a premium in the marketplace.
About Jim Childs
Jim has spent his career leading and advising high growth organizations. He has executed over $2 billion in transactions as an advisor and has led over $500 million in deals as a principal. Prior to joining Childs Company, Jim was CEO of Impact Innovations, a $100 million IT services provider. As CEO, Jim led the company in raising over $30 million in 1998 and led its growth to over 700 employees nationwide prior to its sale in 2004. Along the way, the company was named Atlantas 4th fastest growing company and one of the top places to work in Atlanta. Backed by Cravey, Green and Wahlen and Allied Capital, the company became a premier IT services firm in the southeast serving both federal and commercial clients.
About VCG
VCG provides comprehensive staffing and recruiting solutions that power success. Since 1976, VCG has helped hundreds of companies and more than 14,000 professionals worldwide achieve operational excellence by streamlining their unique business processes and accelerating finding and placing the people most likely to thrive. VCG, C-PAS, StaffSuite, TempWare-V, WebPAS, StaffSuite WorldLink and WebPAS WorldLink are registered trademarks of VCG, Inc.