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.
- Start up business
- One client
- 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.
- 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.
- 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.
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