Strategic Add On - IT & Tech Staffing

 

After acquiring an add-on business with us two years prior, the owner / partners of a well established IT & Engineering staffing business were ready to sell their business.  

Founded in 1988, the business was now in second generation ownership and privately held.  Started as an information technology staffing business supporting a Fortune 200 public company, the business had grown and expanded over thirty years to a multi-state staffing business exceeding $5 million in sales.  This key customer had awarded the business as it’s top vendor the year prior - quite an accomplishment for a thirty year business relationship.  At the time of the decision to sell, the business revenue was over $3,000,000 in gross sales annually.

The objective of the majority shareholder of this business was to find a strategic buyer for the business that would:

•Preserve the business established by his father.

•Value the customer base relationships and honor existing contracts.

•Offer employment to the current key employees.

While we advertised the business locally and on the Transworld network, most of our serious interest came through direct marketing.  We directly contacted the executive teams and development officers at Midwest staffing companies on behalf of our client.  Our team pitched our client’s business to over 200 competing staffing firms and reviewed the memorandum with over 30 interested potential buyers who completed NDAs.

Our marketing of this company lasted for over 12 months.  While we received interest and informal offers, the accepted offer in the 12th month came from an IT consulting & staffing company that we had spoken with in the 1st month.

Following completion of the sale and transition, the acquiring company hired the selling CEO in a part time business development role.   And the acquisition made some local headlines: https://www.insideindianabusiness.com/articles/sondhi-solutions-buys-staffing-agency

Middle Market - Private Equity - Digital Analytics

 

This Middle Market process is unique to Transworld Business Advisors of Indiana allowing Indiana business owners access to the national Private Equity market.  This is a possibility for some businesses with in excess of $1 million in net income to attract the attention of PE firms.

For companies headquartered in the Midwest, the multiples aren’t what they are on the coasts where multiples can be dramatically higher than here in Indiana.  In Indiana, a business may be conservatively valued at 2.5X to 4X and everyone locally - bankers, CPAs, and private equity will all agree with that valuation.

But on the coasts, there are PE firms sitting on piles of cash and they are willing to pay higher multiples to buy undervalued Midwest companies.

How do you reach them?  How do you get your business’ memorandum in front of a PE Analyst who says your business should get a 5X or 8X multiple?

Transworld’s marketing platform is ideal for reaching the national PE market.  Our process allow us to reach multiple buyers in a short period of time and managing multiple potential offers for our client.  Advertising a business for sale requires confidentiality so to not damage the business.  Maintaining client company confidentiality of identity and information is the greatest value that Transworld Advisors offer their clients. 

The next greatest values, especially to Middle Market corporate clients, would be negotiating the right deal structure and leveraging the best sale price.  

Here is an example of our Middle Market Marketing Process leveraging the national private equity community for an Indianapolis digital marketing company in 2022.

Phase One - Preparing the Business for Sale (January - February)

•Complete valuation assessment & report

•Business & Financial Data Gathering

•Develop marketing package 

Phase Two - Middle Market Marketing Process (March - May)

•Target marketing to 4,000 private equity firms in US

•Confidential memorandum review with 50+ NDA respondents

•Indication Of Interest (IOI) Schedule & Deadline

•Offer & Terms Selection

Phase Three - Due Diligence & Closing (June - July)

•Schedule and Plan 

•Virtual Data Room for Business & Financial Data

•Purchase Agreement

•Close

For this client, we had Transworld’s Fort Lauderdale headquarters send out initial inquiries to over 4,000 private equity firms in the US in mid February.

Over 50 respondents completed a Non-Disclosure Agreement and received the confidential information memorandum about the business.  Those respondents were given an Indication Of Interest (IOI) schedule for Q&A and deadline for a letter outlining basic details of an offer & proposed purchase price.

We received IOIs ranging in proposed purchase price from below our valuation to more than 100% above our valuation “list price”.   After reviewing IOIs, we advised our client to move forward with an East coast private equity buyer with an extensive background in our client’s industry at a sale price 40% above our “list price”.

Through our negotiation of the deal structure with the private equity firm, we were able to reach an agreement for 85% of the sale price to be paid at closing.

Early Stage M&A - Strategic Buyer - Logistics Staffing

  I’m going to start by telling you that we sold this business in four months.

A few years ago, Transworld Business Advisors of Indiana was called in to solve a problem for the owners of a high growth staffing firm.  The staffing business had been started as a separate division of a regional security business.  

When we met with the owners, we learned that the business was only five months old.  Yes, you read that correctly …. FIVE MONTHS OLD.  

At this point in the meeting, Transworld’s Indiana President, Mike Berry, gave me a look like he was rolling his eyes without actually rolling them and might have made a slight move toward the door.

But, we stayed and listened to the owners’ story.   They had grown and sold a regional security business to a national security corporation, closing that sale a couple months before we met them.  The corporate buyer had left the staffing division out of the sale.  The owners knew very little about a staffing business and were worried the business would fail before they could sell it.

The staffing business had been started to support the larger business they had sold.  The staffing business had one major client, representing 90% of their total revenue with no written contract.  

Mike was ready to leave.

Mike is a seasoned M&A professional.  He had worked in corporate M&A for 25 years, doing deals up to $100 million.  And while he’d made the decision to start up the Indiana franchise for Transworld focusing on small businesses, he didn’t want to waste time on deals that couldn’t be done.

Okay, let’s outline the reasons Mike was ready to go.

1. Start up business
2. One client 
3. No contracts

Start up business fail.  It’s a fact.  Banks usually want a small start up business to prove they can last for 24 months before even considering giving them a credit card.  A start up business, if it has internal financial statements (P&L and balance sheet) will not have a tax return until it’s been in business for 12 months.  CPAs and valuation consultants need tax returns and good financial statements to develop a valuation on a business.  This business had none.

One client representing more than 90% of the business’ revenue is a deal killer.  Customer concentration is one of the primary reasons buyers walk away after reviewing a confidential memorandum.  Buyers get concerned when a key customer of a business represents 20 or 30 percent of revenue.  This staffing business had one major client and the percentage of revenue was increasing toward 95%.

No contract with this major client meant they could stop using this staffing vendor at anytime.  The revenue would be shut off and the whole business would fold.  There are actually plenty of small businesses that operate successfully for years without written customer contracts.  It’s not impossible to sell this type of business to a buyer but it affects the business’ value.  And it’s a big risk to the buyer who might have to assume losing fifty percent or more of the customer base in the first year after a transition in ownership.

There were two reasons that we thought we could sell this business.

1. The major account, Foxconn, was continuing to increase hiring at a double digit rate.  The local leadership team had been given responsible to open a new $1 billion operation in Milwaukee.  They wanted our client to provide staffing for the new location while continuing to support the Indianapolis location near the airport.
2. Transworld Business Advisors of Indiana had an experienced Advisor who understood the Staffing Industry.  Me.  I had owned and operated a related recruiting business for over twenty years.

Mike said it was my decision.  He’d support me but the responsibility for the client would all be on me.

We developed a pro forma projection for the staffing business’ growth based upon only the Indianapolis office’s business.  And we requested that the owners get a written agreement in place with all their customers, especially Foxconn.

Our memorandum for this staffing business was a projection for a start up business.  When we advertise the business for sale on Transworld’s national platform as a “high growth staffing firm” the requests for the memo came in like wild fire.  We were getting 3-5 signed NDAs per day for three months.  Most of these potential buyers weren’t happy to find out this was a start up business with a projection for financials.  Ninety percent of the inquirers threw the memo in the trash moments after receiving it.  But shockingly, there were a few interested potential buyers.

As we analyzed the potential buyer feedback, we realized several high interest inquiries from Chicago headquartered staffing companies.  In our research of these Chicago strategic buyers, we found that several had offices in Wisconsin.  This would be an added value to any strategic buyer since Foxconn needed staffing support in the Milwaukee area.  And it could protect a buyer’s investment in a highly risky acquisition.

Our first Chicago staffing CEO came to Indianapolis to meet the owners.  We met in the conference room of a bank.  I swear that if I hadn’t been sitting in front of the conference room door, he would have walked out.  But he stayed, listened, woke up in a hotel they next morning and told us he was driving back to Chicago.  No offer.

Our second Chicago staffing CEO came to Indianapolis to meet the owners a few days later.  His business had 17 or so offices throughout Chicagoland and including 2-3 in the Milwaukee area.  He was growing and had a client expanding in Indianapolis too.

We made it clear that we had lined up multiple potential buyers.  He was our second potential suitor.  And we were very honest with him even before he drove down about the significant risks of the business.  But he wanted an Indianapolis office and the Foxconn development near his existing Wisconsin offices sealed it for him.  He made an offer.

The offer was 1/3 in cash and the rest in a 24 month earn out.  Our clients were ecstatic.  They were so petrified they would lose this business that any offer would have made them happy.  But Transworld was able to structure a deal that gave them some cash at close and an opportunity to earn more if the business performed as we had predicted in the pro forma.

Attorneys formalized the deal structure protecting our clients’ payout.  This was very important.  Unbeknownst to us, the buyer needed this strategic acquisition to take his business to the private equity market.  Our buyer had sold the entire combined business within the next year and paid our clients out early.

From listing / marketing agreement to close, we sold this business in four months.  Most experienced M&A advisors would have walked away from representing this client.  But our expertise in the Staffing Industry gave us confidence to help the client meet their goals.  And the record setting high buyer activity certainly helped our team sort through buyer inquiries to analyze and identify the best potential buyers.

Strategic Add On - Acquiring Complimentary Business Services

 Although I’ve lived in Fishers for over twenty years and worked from an office downtown Indianapolis for thirty, I went to Shelbyville High School.  In 2014, my dad was on Shelbyville City Council, several other boards (Library, Tax, probably others I didn’t know about), and the Shelbyville Airport Board (he had been a helicopter pilot in Vietnam).  One of his fellow Airport Board members was John Huber.

One day while talking with my dad, he said John Huber wants to talk to you.  He wants to sell his business. Huber Bros, Inc was actually headquartered at the airport in an old industrial building.  When I met with John, he said that he didn’t really know if the business was worth anything but he’d like to try to sell it.

John has a degree in Chemistry.  He and his two brothers founded Huber Bros Inc in Shelbyville in 1970.  The business grew to three divisions - one painted semi tractor trailers, another painted manufactured parts, and the mainstay was commercial painting & industrial coatings.  But over time, Huber Bros got out of the part painting business and the semi painting business.  And, John’s brothers retired from the business.

John was particularly skilled and knowledgeable in industrial painting and coating.  His expertise in selecting chemicals that could bond to various materials made him a preferred vendor to Engineering departments at industrial and manufacturing facilities across Central Indiana.  John was also skilled in knowing how to spec & quote very challenging applications for painting and coating.  Huber Bros was known for being able to spec and apply paint and coatings to industrial machinery and piping.  Many competitors would not even attempt to quote these jobs.

In addition to being a profitable business, Huber Bros had this specialization in industrial applications, skilled staff, and 40 year customer relationships. It was a valuable business even though John had been running the business as if planning to phase into retirement for a few years.

We took this all into consideration in preparing a financial valuation of the business.  The gross sales had rebounded after the Great Recession to nearly double their nadir in 2010-2011.  And because John was running the business very lean, the business’ net income had rebounded to a health margin for a small business.  All the business equipment was owned & paid off and inventory was ordered per project.

Surprisingly when we listed the business for sale on Transworld’s national platform, we had an inquiry from Columbus, Indiana but the business’ owner lived near me in Fishers.  The buyer was a corporate IT & staffing firm that worked with many industrial customers in Central Indiana.  The owner was looking to add a complimentary business service that was also marketed to similar industrial customers.

After an offer and drafting of an asset purchase agreement by seasoned Shelbyville attorney Peter DePrez, the sale was completed as an all cash transaction.  And S&R Resources, Inc of Columbus became the owner of the assets of Huber Bros.  

Now in 2023, Huber Painting Services continues to serve customers throughout Central Indiana.  Logan Wood, son of one of the S&R Resources owners, Greg Wood, runs the day to day of Huber.  

Machine Tool Design & Manufacturer - $5 million revenue - Build Mgmt Team & Strategic Buyer Search

 

A few years ago, I met with a German engineer who had built a small, global machine tool manufacturing business just South of Indianapolis.  He was an excellent engineer who loved to design new machines, large custom rotary tables, and pallet systems for industry.  But after leading and growing the business for forty years, he was thinking more about fishing with his grandson than building business.

He had decided it was time to sell his business.  And, he was wise enough to realize that he’d need help.

While an excellent designer and engineer, he was fairly distrustful of salespeople.  And as an excellent engineer, he was reluctant to promote his senior design engineer who had been with the business for 25 years.  He had trusted staff for accounting, billing, and administration.  But, he was very hands-on in running most critical aspects of the business.

I had to reason with him that no one could buy his business as long as he held so much critical responsibility himself.

So working together, we devised an organizational plan and chart.  I advised that a new owner of his business would want to know that the business would continue to run without him - it’s owner / founder / chief engineer / head of sales / CEO.  

The first step was to convince him to hire an experienced, competent machine tool sales director.  This was critical to showing a potential new owner that new sales and new business would continue to come in the doors while the founder/owner transitioned to retirement.  Over a three month period, we evaluated several experienced machine tool sales professionals and were successful in hiring a former National Sales Manager from a major international machine tool manufacturer who happened to be between jobs.

The new Sales Director was quite effective in establishing a multi-million dollar pipeline of quotes that over time would turn into new orders.  He also built a new web site for the business and established some social media marketing channels.

Next was to promote the long time senior design engineer to VP Engineering.  Surprisingly, this individual was a little reluctant to take the title even though a very accomplished Purdue ME.  But he did agree and took on more responsibility for interacting with key customers.

Finally, the Executive team for this $5 million manufacturer included a CEO/President who would retire, a VP Operations who had been there 20 years and would continue, an experienced and tenured VP Engineering, and a 20 year experienced Sales Director.  The longtime Controller would be part of the Exec team but planned to retire with the CEO following the transition to a new owner.

After meeting with several dozen potential buyers, corporate, PE, and individuals, we were able to meet with an executive who had been the VP Finance for one of the company’s customers.  He was very familiar with the company’s product, applications, pricing, materials, etc.  It ended up being an excellent sale and transition for all parties.