Propelling Growth Of Your IT Staffing Firm Through M&A: A Buyer’s Playbook
TechServe Alliance convened an expert panel to share their ‘playbook’ about the buy-side considerations for M&A for the first time buyer in IT staffing. The panel members agreed that before going to market, potential buyers first have to understand their criteria.
Are you interested in growing and expanding your IT staffing firm? While organic growth is a good thing, it can be a slow and a difficult process. Acquisition – while also challenging – is a more certain path to growth. In addition to simply adding more assets and increasing revenue, acquisition can also expand your geographic territory, add supplemental services to your firm’s offerings, and give you quick access to experienced and proven talent.
Given the current economic uncertainties, you might be wondering whether acquisition is right for you (particularly if you’ve never bought before), and if now is the right time. To help, TechServe Alliance convened an expert panel to share their “playbook” about the buy-side considerations for M&A in IT staffing. The panel was led by Martin Borosko, Staffing Practice Leader with Becker LLC. Borosko was joined by John Larson, Principal Consultant with TechServe Alliance M&A Marketplace and Jeremy Falendysz, Partner & Managing Director with UHY Corporate Finance.
The panelists agreed: mergers and acquisitions can be a key tool in your arsenal to help grow your staffing firm. You have to determine if this tool is right for you.
Is now the right time to buy?
The answer to that question is the epitome of a moving target. “You could do this webinar every month or so and it would be a different theme and story,” Falendysz noted.
However, the market is still hot “There’s still a lot of activity in IT, and good acquisition activity taking place. I still see plenty of buyers out there, plenty of sellers,” said Larson who is Principal Consultant of TechServe’s M&A Marketplace.
What about the talk of recession?
“There’s more uncertainty in the marketplace, but we’re still seeing solid enterprise value. I am noticing a change in the terms,” Larson added. “The buyers in any transaction want to mitigate their risk as much as possible.”
One concrete example is in the balance between cash on close and earn-out payments. While Falendysz noted that some recent deals in the heated market have finished with 90%, even 100% cash on close, with eager buyers competing on that ratio, transactions are returning to the more typical 50-60% range.
This is good news for buyers who have felt shut out of an overly competitive marketplace.
“The shift is similar to housing,” Falendysz says. “It’s been very difficult to be a buyer in this market because you have to compete on value, plus you have to compete with aggressive deal terms to win these deals. And that puts buyers in a tough position.”
With all that considered, only you can determine whether now is the right time for your firm to grow through acquisition. With tips for both experienced buyers and new buyers alike, the panel shared their advice for the buy-side of the process, gained through years of combined M&A experience in the staffing sector.
Step 1: Determine your acquisition criteria
The panel members agreed that before going to market, potential buyers first have to understand their criteria.
The first question is fundamental: why are you going to acquire? What are the immediate objectives of the acquisition, and what do you see as your ultimate outcome?
“The reason folks make acquisitions is to drive up the value of their company,” Borosko said. “At some point, it’s hard to continue to grow organically. And you can help accelerate or stimulate that through making acquisitions.”
But that growth can take many forms.
“If you’re thinking about embarking on an acquisition strategy, one of my recommendations is to invest in the criteria identification process,” Falendysz advised. “Get some input into this from your team. What geographies do we want to enter? Which do we want to avoid? Are we okay if the management and ownership team move on, or do we need somebody that’s going to stick around for the next three years? What are the must-haves and what are the nice-to-haves? How easy is it to fly from my current location to this location? Is there a two hour drive time off the airport?”
For some buyers, the primary motivation is to reduce the number of ‘eggs in one basket’ – mitigating against a concentration of one kind of client. And some acquisitions today are about talent. “As some buyers are looking to acquire,” Larson said, “they’re looking at the team just as hard as the financials.”
Once you fully understand the rationale for the acquisition, you can then begin to develop an evaluation scorecard. This scorecard will help you determine whether a potential target will achieve the outcomes you’ve set out.
Setting your criteria is the first important step. Larson pointed out that as the acquisition process continues, sticking to those parameters is important. “Once you set your criteria, have the discipline to follow through.”
Step 2: Identify acquisition targets
After your criteria for an acquisition are clear, the next step is to find prospects to evaluate against those criteria. The best strategy is to cast a wide net, since you will typically evaluate a lot of prospects before successfully identifying a target.
As Larson said, “I think consistency is a big part of it. As a new buyer, you’re going to kiss a lot of frogs to find the prince.”
Larson also has advice for finding those initial prospects. “The TechServe Alliance M&A Marketplace is a great place to look for opportunities. We have over 80 buyer profiles so far, with more being added all the time. As a buyer, you just fill out a simple profile, with what you’re looking for.”
“There are numerous brokers that deal in the staffing industry and provide a very solid service,” Larson added. “They’re usually on the sell side, so they’re looking for good buyers. Sometimes investment bankers are dealing with the larger opportunities, but at the same time, they run across opportunities that may not be a fit for them.”
Larson noted that although these M&A-specific resources are helpful, buyers shouldn’t discount the value of networking and in-person connections. “Use your peer groups, the CEO roundtables that you’re a member of, maybe the national meetings that you attend, like the TechServe Alliance conferences. There’s a lot of discussion that takes place in the corridors and in the coffee shops.”
Step 3: Evaluate and analyze targets against your criteria
Experienced buyers know that the acquisition team is key.
“It’s very important that you do not go alone,” Larson cautioned. You need good legal counsel on the front end; somebody with M&A experience who understands that process.”
Legal and accounting expertise is critical, but there’s another functional area Falendysz considers critical, particularly in terms of systems integration. “Get someone on your M&A team who can represent the IT function of the business.”
As a first step, evaluating the target’s financials will give you a sense for the viability of the potential acquisition, but the evaluation should go beyond the financial.
“There’s always two aspects to it,” Borosko said. “There’s the financial scorecard and the intangible scorecard. The financial scorecard will evaluate the target’s financials and see if it fits into the criteria. Are their margins the same or are they a lot lower, and how are we dealing with that? So there’s a financial analysis of the target, and there’s the analysis of the combination when the acquisition is rolled in.”
Larson pointed out that a perfect target isn’t always what it seems. “The tendency is to look for another company to acquire that looks just like us. And that may be appropriate, but I’d caution you to be a little more open on that opportunity. If my business profile is the traditional face-to-face customer and I’m looking at a target that has VMS or MSP business, we may put it on our scorecard.”
Even objective financial data can be interpreted in different ways. “A business may look like a poor prospect because it’s a lower margin company,” Larson said. “But can I accrue that revenue and reduce my overall cost? In the services that I’m providing internally, maybe I already have the infrastructure set up that I can integrate additional transactional volume into my business with no increase in cost.”
Borosko agreed. “There are things that you can pick up from your seller’s processes, talents, and people that are better than yours, so be open to that.”
Talent is becoming a more prominent focus for buyers. The caliber of the team that’s in place, and whether the established culture is one that will be complementary to, or clash with, your existing culture. This can be a source of problems, Borosko pointed out. “Some buyers don’t really understand their culture. Then when they acquire, they don’t evaluate the culture of the other company, and whether or not that’ll be a fit.”
Does a low evaluation score on the scorecard necessarily mean that an acquisition is the wrong one? Not necessarily, according to Falendysz. “On your scorecard, whether it’s financial, quantitative or qualitative areas, some categories are going to rate very well. Others rate lower. For every aspect where it’s a five or below out of ten, really dig in and figure out if it’s a deal killer. Can we create a solution easily, or will it take a year and a lot of hard work? And if that’s the case, how do we de-risk that?”
When all the numbers appear to make sense, it’s time to take the next steps in moving the deal forward.
Step 4: Close the deal … quickly
As the old saying goes, time kills deals. The panel unanimously agreed that a timely process with forward momentum is best, and it starts early. “Getting to a proposal quickly is really important,” Falendysz advised. “If a business is worth six times EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) and they say the business is worth ten, we want to find that out right away. You don’t want to spend three months doing due diligence only to find out that you should have asked the question early on.”
Getting and keeping the lines of communication open is key, according to Falendysz. “As soon as you sign that letter of intent, I highly recommend having a kickoff call with the seller’s management team. Get everyone on the phone, come up with a timeline-driven, milestone-driven process. Everyone hears it, it’s a date on the calendar.”
Falendysz reminded buyers that although the acquisition process is a practical business one, with objective financial aspects, it’s also an emotional one. “At the end of the day, there’s another human being on the other side of the deal. Particularly for smaller, family owned companies. Oftentimes, deals are 80% emotion and only about 20% financial.”
Larson agreed. “Really listen to that seller. What are the keys? What lights them up?”
Communication and trust are important, too, Falendysz said. “You want to create good lines of communication, building trust, because there are emotional pieces of deals that can kill a deal at the 11th hour.”
Considerations and cautions for buyers
For new buyers especially, the panel has some final tips.
- Falendysz offers advice for buyers looking for a bit less competition in a hot market. “Identify potential sellers who are not running as competitive a process. Maybe they have other critical points to them, like the treatment of the team post-close. Try to find opportunities where you’re competing not just on value.”
- In Larson’s experience, buyers don’t always plan ahead for the time and effort required for an acquisition process. “One of the challenges, especially for a new buyer, is to set aside the internal time or personnel. You have to have the discipline to continue the pursuit. If you’re a first time buyer, whose responsibility is that? Is it the CEO? Do you have a business development person, a VP of sales or COO?”
- Borosko added, “All of the firms that are very successful at this, they build it in as part of their operations.” He pointed out that it’s not often a one-time event. “With an acquisition strategy, it’s the old saying, you’re in for a penny, you’re in for a pound. Most folks are going to make multiple acquisitions. It takes multiple acquisitions to accomplish your strategy. Be ready to stay with it.”
- For Falendysz, one important element for buyers to take into account is the emotional rollercoaster the process can be. “In a competitive deal market, if you’re losing deals, sometimes that’s the best thing for your business.” He pointed out that the risks are real, especially late in the game. “The point in the deal where it’s easiest to lose discipline is at the 11th hour. Both the buyer and the seller are thinking, ‘I’ve invested all this time, energy, effort, and resources,’ and they’re not willing to walk away. Even when they should.”
- Additionally, Borosko pointed out that buyers must remain realistic and objective. “There has to be a skeptic on the team. You need that skeptic who’s going to say, ‘What about this? I don’t think that assumption is right. I don’t think we can meet that. If we don’t meet that, look at what this looks like.’ That person has to be part of the team.”
Is an acquisition the right move for your firm?
Acquisition can be a powerful tool for growth, and despite economic uncertainties, the market is a favorable one for buyers. Borosko, Larson and Falendysz have a wealth of experience helping firms develop and execute their M&A strategies. Their discussion was far-reaching, and the entire presentation was recorded. We encourage you to watch the full recording here, and to visit the TechServe Alliance M&A Marketplace as a first step in your acquisition journey.