ASA Central Network

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  • 1.  GUIDANCE ON SALE MULTIPLES

    Posted 11-16-2021 10:21
    Our company has never made an acquisition of another employment or staffing firm; however, we are currently analyzing a specialty direct placement medical firm. This company exclusively places medical doctors and highly skilled nurses, et.c. on a direct hire basis. The seller has proposed a sale price that appears to be 5 plus times her average net revenue for the last five years. Our guts tell us that a 3x or 4x multiple are more in line with a reasonable sale price. Can anyone provide some guidance on the established sale multiple for a boutique / medical placement firm?

    Thank You - ​

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    Martin Farrell
    President
    Infinity Resources Inc.
    Erie PA
    (814) 453-6571
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  • 2.  RE: GUIDANCE ON SALE MULTIPLES

    Posted 11-17-2021 08:57
    Edited by Jay Mattern 11-17-2021 11:25
    When you say "net revenue," are you referring to net income or EBITDA?

    I will assume you are looking at EBITDA. You need to make sure you are looking at the true cash earnings of the business and remove all of the non-cash items like amortization and depreciation. Along with that, be sure that you adjust the EBITDA for those items that are either one-offs or items that will no longer follow the sale. Also, be sure you are using the most recent EBITDA and not an average. 

    As for negotiating the deal, you can use the proposed terms to your advantage to influence the multiple. For instance, you can offer more cash upfront and offset that by reducing the multiple you pay. Or, you can provide a more lucrative earnout and/or a shorter earnout term, again, in exchange for a reduction in the multiple.

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    Jay Mattern
    CEO
    TerraFirma Marketing
    South Bend IN
    (574) 213-3855
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  • 3.  RE: GUIDANCE ON SALE MULTIPLES

    Posted 11-17-2021 09:28
    Martin,
    I agree with Jay on EBITDA etc. There are a couple key words to your question; Direct Hire Basis. We purchased two agencies in the last five years and have seen EBITDA multiples range from 3x for light industrial all the way to 10x for IT firms. However, the multiple general rules of thumb are more applicable to recurring revenue streams associated with temporary placements. I would suggest you reach out to a business broker that has experience with staffing agencies and pay them a consulting fee to get some insight into direct placement agency sales. I would suggest they sale for somewhere around 20% to 40% less than a similar firm focused on temporary staffing. Having said that, we have never purchased a direct placement firm and I am only guessing based on the 15 or so agencies we considered purchasing. Without seeing the details....I believe a 5x is too high.

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    Troy Joosten CSP
    President
    Tributary Staffing
    Salt Lake City UT
    (801) 366-4336
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  • 4.  RE: GUIDANCE ON SALE MULTIPLES

    Posted 11-18-2021 09:26
    Troy, 

    Thank you for your thoughtful response. We are nearly 90% industrial staffing in NE Ohio, Western PA, and Western NY serving very small towns where our services are valued as a 'big city amenity' brought to the local level ( read a little pricing power that you might not get in a major city ). About fifteen years ago, we partnered with an established HR Consultant who brought his book of business over to our firm. From that opportunity, we have rekindled our direct placement business and opened new doors for our industrial staffing business. Eighteen months ago, a retiring hospital CEO reached out to me asking if we wanted to start a medical staffing business. As I was about to say 'no' to home health aides, he qualified his idea saying that he wanted to recruit doctors and nurses for direct hire opportunities. This acquisition would really propel our medical placement business and the seller knows our key guy ( former hospital CEO ) and really wants to work with him. There are a lot of 'good fits' about this opportunity but the seller is asking for this five plus multiple. Our sense, like yours, is that 5x is too high. I joke that unless there is a uranium mine under the owner's desk that he has not told me about ... his wild-eyed multiple is a non starter. In the past, we have danced with a couple of the staffing brokerage firms. Our sense is that the activity in the sales of staffing companies is largely in the Carolinas, Georgia, Florida - and points south. This makes sense since business and population, at least on the East Coast, is drifting down to escape snow, high taxes, and bad government. Our hope is to keep extending our reach in PA, OH, NY, and perhaps someday, W VA. All by way of saying, I have been reticent to get too many professional brokerage firms excited about Infinity when we may not be ready to buy those southern firms that seem to populate their lists. 

    Again, thank you Troy. You are very thoughtful to assist. If we can return the favor, please just ask - 


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    Martin Farrell
    President
    Infinity Resources Inc.
    Erie PA
    (814) 453-6571
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  • 5.  RE: GUIDANCE ON SALE MULTIPLES

    Posted 11-17-2021 15:24
    Hi Martin, if the business is just direct hire/permanent placement with no temporary staffing (recurring revenue) basis, I would say 2x-3x Adjusted EBITDA is a more appropriate multiple for the business, provided they have consistent and longstanding customers and other positive business fundamentals.

    Traditionally perm businesses are 1-2x but with the market now it is probably slightly elevated. There is just a lot less value in these firms versus temporary staffing because of the lack of recurring revenue and very low barriers to entry.

    SIA puts out a lot of great information on staffing M&A. You should check that out and also reach out to an investment bank with expertise working with the staffing industry.

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    Sean Barber
    CEO
    Pluto Healthcare Staffing
    Columbus OH
    (513) 600-7331
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  • 6.  RE: GUIDANCE ON SALE MULTIPLES

    Posted 11-18-2021 09:38
    Sean, 

    Thank you for responding and for your very concise assessment. Since you are in the healthcare staffing space, your comments carry significant weight for me. We are primarily an industrial staffing service with sixteen small branch offices in Western NY, Western PA, and Northeastern Ohio. About fifteen years ago, we partnered with an HR Consultant who joined Infinity and brought over his book of business. Beyond his HR Consulting, he helped us to rekindle our direct placement business. Eighteen months ago, a retiring CEO of a local hospital called from out of the blue asking if we wanted to start a medical staffing business. Imagining that he was suggesting establishing a home health aide firm, I nearly said 'no' but fortunately, discussion refined the idea which was to place doctors and nurses on a direct placement basis ( no temp component so no malpractice heartburn for us ). We see plenty of good opportunities in acquiring and partnering with this seller and their firm. Like you, I am thinking five times multiple is too much. I joke here that unless the seller has a door under his desk to a uranium mine he failed to mention, his sky-high valuation ain't gonna fly. I am thinking in the present case, a 3 x or perhaps 4 x multiple would be in order with payment contingent on sales goals over the next three to four years. 

    You have been very kind in responding and we appreciate it. If there is anything that we can do for you, please just ask -

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    Martin Farrell
    President
    Infinity Resources Inc.
    Erie PA
    (814) 453-6571
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  • 7.  RE: GUIDANCE ON SALE MULTIPLES

    Posted 11-17-2021 15:34
    As a follow-up regarding the "right" multiple, the best answer I can give is that "it depends." Just a few factors that can influence the multiple (both what they are willing to ask and what you are willing to pay):

    • Customer concentration. Do they have one or two large clients that make up a significant portion of the total volume?
    • Financial performance. What has been the financial trend over the past three years?
    • Management talent. Do they have a strong leadership team?
    • Integration issues. How easy/hard will it be to integrate?
    • Blue Ribbon clients. Do they have some strong client brands that you can build on?
    • Technology. Do they have technology that you don't have and need?
    • Location. Does the location provide significant competitive upside?
    • Cost synergies. Can you capture some costs savings through deal synergies?

    Those are just a few of the key factors that could swing the multiple one way or the other. I was always willing to pay a bit more if the company contributed strategically to my growth plans. You should be too.

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    Jay Mattern
    CEO
    TerraFirma Marketing
    South Bend IN
    (574) 213-3855
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  • 8.  RE: GUIDANCE ON SALE MULTIPLES

    Posted 11-18-2021 09:12
    Jay, 

    Thank you so much for responding. You bring up very concise and important points in your response. We believe that this acquisition would bring value in a data base technology sense and in terms of our very nascent medical placement business collaborating with a very well established medical placement business. My sense is that a 3x or at most, 4x multiple of net would be the right approach but in the end, we have to make the seller happy if we really see value. BTW, our consulting division founder, Dave Stephany, is on his way to ND today for the game this weekend. Dave tailgates with an Erie "delegation" headed up by local legend Herb Down. If you are roaming around and want some good company, look them up. Neither Herb nor Dave are ND alums but you would never know it. Again, thank you for your thoughtful response. If there is any way that we can return the favor, please just ask.

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    Martin Farrell
    President
    Infinity Resources Inc.
    Erie PA
    (814) 453-6571
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  • 9.  RE: GUIDANCE ON SALE MULTIPLES

    Posted 11-18-2021 11:31
    Glad to be of help. I made quite a few small and large acquisitions, and each one had its own unique aspects and challenges. 

    PS - Tell Dave to bring his long underwear! The high temp on Saturday will be 46 degrees, and with the wind that blows through the stadium, it will feel at least 10 degrees less than that.

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    Jay Mattern
    CEO
    TerraFirma Marketing
    South Bend IN
    (574) 213-3855
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