Is my PEO appropriately positioned to be sold? What doe that process look like and how do I best prepare in order to achieve my best possible payout?
I’m thinking about selling my PEO
This question may have entered your mind over the years. First off, congratulations on building and growing your PEO. As you are well aware, a PEO has a plethora of moving parts which can add or detract from net profit. Many of these profit variables, to a degree, are dependent on your clientele. That factor increases the importance of your PEO being run tightly to mitigate current and future liability. So the question remains, is now a good time to sell my PEO?
My company, Business Resource Center, Inc. works with Private Equity and PEO buyers to identify potential PEO acquisitions. We often perform industry expertise due diligence in the M&A process and are able to assist with strategy to drive increased EBITDA growth post acquisition.
What I have noticed over time is that many PEOs are not appropriately equipped to enter into a potential sale opportunity. Lack of knowledge or preparation can, and most likely will, detrimentally impact the purchase price and ultimately cost you money.
While most PEO owners are focused daily on growing their business, when it comes time to dip your toe into the potential selling pool, many question may race to your mind.
Are we positioned appropriately? What can I expect in this process? Are we going to get top dollar for our PEO? Are our financials appropriately in order for this process? How much time will the due diligence process detract from our day to day operations? Whom within my organization is appropriate to be under the umbrella and have knowledge of a potential sale? What EBITDA multiples are currently in the market? What type of earn out can I expect? Do I walk away from the business post acquisition or am I contractually obligated to remain for 3+ years? What happens to my workforce and clientele once we sell? Is the market timing good to sell? Do we have any legal liabilities that could impact the sale? Do we have accurate actuarial information to convey our insurance trending and liability? How many buyers should we engage in this process? Should we lean towards the private equity buyer, the PEO buyer or simultaneously entertain both?
These are all valid questions and as a potential seller, you should have insight into the answers prior to stepping foot into the boardroom. There is a lot of white space in the PEO market with best expert estimates stating that the PEO market penetration rate is hovering between 5% and 7%. Even if the market penetration rate was 10%, that still leaves 90% of white space. That is exciting for the investment community and so is the residual income models of a PEO. What is not exciting to investors is the variable liabilities that surround a PEO model. Insurance liabilities are a major point of focus, whether it be for workers’ compensation, health benefits or EPLI. To be competitive in the PEO space, you cannot be risk adverse. However, you cannot be foolish with your protocol either or your tail can destroy your profitability and marketability.
Another question to honestly ask yourself is whether or not your company is positioned appropriately to scale. Is your tech platform enticing and pliable? Are there economies of scale that your buyer can leverage (assuming they are a PEO or own other PEOs)? Does that help drive future EBITDA for the purchaser and make you a more enticing buy?
While my company most often works on the buyer’s side of the table, I felt compelled to write this article for the PEO owners. Perhaps this short article has given you some thought provoking ideas to discuss or contemplate. Honestly, we want you to succeed. We want you to come to the table prepared. Having a solid business model with a successful track record of performance helps drive the process of M&A forward and reduces liability fears.
We are in a market of consolidation where the larger private and public PEOs are scooping up the smaller and regional players. A well run PEO that removes doubt and concern from the buyer by illustrating a legit business model poised for growth while controlling liabilities is a company that can drive higher EBITDA multiples.
If you have questions about the market and whether or not your PEO is positioned appropriately to sell, we are happy to dialog with you to gain information and provide insight. Ultimately, if you are not positioned appropriately, we’ll share information on how to do so. If you are, we’ll confidentially discuss market conditions and our portfolio of buyers to identify if further conversations make sense.
Ultimately, it doesn’t hurt to explore your options. If and when you are ready to enter the market, we’re happy to be a resource along the way. With our large portfolio of vetted and well-funded buyers, we’ll likely have a buyer solution that will meet your specific needs. If this isn’t your first rodeo with the M&A market, we’re happy to dialog about any specific requests you may have prior to selling your PEO to ensure we align your company with the right suitors.
Rob Comeau is the CEO of Business Resource Center, Inc. a management consulting firm to the PEO space. BRCI represents a portfolio of Private Equities and large PEOs looking to make acquisitions in the PEO market. For confidential inquiries, please contact us at: rob.comeau@biz-rc.com I (949) 510-1126 I www.biz-rc.com