Its more than just the multiple.
Tune in to find out about the key factors for the valuation of a staffing firm.
James is directly from the investment banking and gives deep insights.
Valuing a company today involves much more than simply discounting future cash flows
Find out which non-financial related factors play an important role.
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Mark Roberts: Welcome to our session, M&A and perspective what drives value. My name is Mark Roberts. I'm CEO of TECHSERVE ALLIANCE with the it and engineering staffing trade association in the United States. And, uh, the M&A issue has been one that is talked about, and we've featured sessions at our conferences and webinars for years.
It's one that always draws great interests as folks want to ultimately understand what does it take to drive value for those that are still in the planning stages of an exit, and then ultimately when you decide to exit uh, what are the factors involved in valuation? So, I'm really pleased to have two phenomenal speakers on this topic and individuals, I, both of who might know.
Deeply, deeply experienced in the it and engineering staffing industry as well as investment banking, industry analysts. So first is John Larson. He's the founder and principal consultant of keen insight associates. John has been a successful operator executive owner. Who's bought and sold companies.
And so he has a really unique perspective and he's taken on a new venture involved in the M&A space and consulting in that regard. And he'll tell you more about that. And then second, I have James Janesky who senior advisor of the corporate advisory group at PEAPACK PRIVATE INVESTMENT BANKING. And, uh, uh, you know, Jim is just a phenomenally knowledgeable individual.
That's been around the industry for a very long time, both as an analyst as investment banker. And so, um, I'm not sure. I, I think we're yep. There we go. Yeah, that was served a little technical glitch, but Jim is just a phenomenally experienced in the area of M&A, uh, with a deep experience in a variety of staffing verticals.
So, yeah, if you could advance the next slide. So really what, you know, in the short time we have together really going to be providing Uh, for how the value of staffing firms. Next slide please. And the question and as CEO of national trade association, I always get is, uh, uh, you know, what is the multiple and then if you, if you could advance the slide, please it seems to be the question that everyone is interested in.
And,uh, but as we'll discuss, it's more than just answering that question. There's so much more that goes into valuing staffing firms than just answering that question. And so, we're going to take up a number of those factors in the course, you know, time is limited. If you'd advance the next slide, really gonna discuss six buckets of factors.
The first one is financial. If you could just advance a slide second your particular clients you know, the industries they're in and their profile, your business profile owners and the team understanding, both of the owners currently in intentions later. And then the team that will remain what your office is, look like.
Um, and, uh, we're going to have some discussion of terms of the deal, and we're also going to discuss the general climate for it and engineering staffing, as well as staffing broadly in terms of the market for M&A. So with that I'm really pleased to turn it over to John who will take us through the first three sets of those valuation criteria, John.
John Larson: I'm going to take a look at the financial piece. We'll break that down naturally. That is the one area that everyone is interested in. As we look at valuations naturally we're, we're looking at more than just financials, but it's usually the, the foundation, for a potential transaction.
As mark said previously, everybody wants to know, okay, what is the range et cetera. And it all depends upon, you know, what is the multiple, it depends upon the many, many factors of which financials one. And I want to preface this a little bit by saying my over 20 years of experiences really in the, it staffing realm. So many of the numbers and percentages that I use are predicated on that. I realized that there are many folks on the, on the call that are not necessarily an it other types of specialties, staffing practices, or general practices, or maybe some combination thereof. So a little bit of a caveat based upon my personal experience from a revenue standpoint, size matters.
And I think, As importantly, maybe more importantly when you look at your revenue or a potential buyer is looking at your revenue. What they want to see is growth, you know, is there an upward trajectory? You know, to your firm. I mean, you may be a small firm growing very fast. You may be a little bit larger.
And when I talk about size and so forth generally speaking, we see the, I'll say the very smaller firms and the I'll say the 5 million maybe 7 million. Size range. Then you get into that 7, 10, 7 to 15 million. So most of what I'm saying on a small firm is less than 15 million. And then when you get to that stage, then it's a midsize firm.
You know, it's not one of the giants naturally. So revenue, revenue growth is a key element. And also the consistency of that revenue, you know, is it, like I said, as an upward trajectory, are you bouncing up and down each year? You know, what is causing that to happen? So revenue's a critical component. You're a SG&A, you know, as you take a look at that really that's a determiner of how efficient you are as an organization.
You know, how are you able to turn or run your operation effectively and efficiently so that the majority of that ends up down in the, down on the bottom line And the SGNA also is an indicator of your discipline in running your organization, you know, are you consistent, do you have good controls in place and is money being spent in the business or on the business that is going to provide your return?
Or is there, are there funds being used for, I'll say personal allocations, especially in the smaller firms that have an impact. Everyone was interested in gross margins. And we see gross margins anywhere from the high teens to the low thirties. Naturally a higher gross margin is better than a lower gross margin in general.
Here's the caveat on that or the big, but, and I see a number of firms that have lower gross margins. And it may be that they're focused in the VMS world. But guess what? They have an efficient SGNA or they have an efficient operation. And so their engine still delivers, you know, a good profitability.
So the fact that you may have lower margin, gross margin percentages in your business you can still be running a very, very good business. I oftentimes see in, in that, I'll say the VMO VMS MSP work. You know, those margins are going to be in the, I'll say the 18 to 22 low 20% range. And with a, you know, a retail business, it can be in the high twenties, low thirties as a general rule.
The other thing is trying to make a difference potentially is your mix of business, which I'll talk about in a little bit. So just kind of a takeaway. If you look at you know, the average today is somewhere in the mid twenties, 25, 26, 20 7% is, uh, is a good gross margin then comes profitability.
Many many firms struggle when it comes to profitability and it has to do with the top three items. Naturally. If you look at profitability, most companies are going to look or most buyers are going to look at your EBITDA. What are, what are your earnings before interest taxes, depreciation? You might think about it.
In a simpler way, just what's my net operating profit, you know, before I do any of that, what does it take to run my operation? What's my profitability. You're your best of breed firms are going to have profitability at 10%. Plus I see many, many firms I'll say in the, you know, three to five to 6% range.
And you know, very, very common to see that the top core tile of firms that TechServe Alliance tracks, you know, they're going to be up in that nine, 10, 11% operating profit number. So it's you know, it's important that you understand the elements that can impact and just a small item. If you think about your SG&A and your efficiency for your operation.
Read an article or saw a blog a couple of days ago somebody had changed their insurance program and it was going to save them, you know, like $30,000. It was a lot of work, but that $30,000 it drops right, right through to profitability. So those are things you should be thinking about in the financial picture.
There are others that take place. One item kind of on, on the total financial picture, you need to make sure that your books are in order. You're going to need at least three years and some buyers can be asked for five years. Not only looking back, but also, do you have a forward look on your business?
Do you forecast what your business is going to be doing in 2021 or 2022? And it's important if you do forecast. That. Okay. Are you meeting those objectives? Are you meeting that forecast? So I think that's about it on financials as a snapshot. Let's go to the next slide.
Your clients were kind of off the, you know, the nonfinancial items, but your clients definitely have an impact on your value and the valuation of your organization. One item to look at is the depth of relationship. You know, what length of time have you been working with, with a client, you know, is it a direct relationship or is it hands-off, you know, are you operating in some type of VMS world?
And naturally I think the, not only the depth of relationship and the length of time, but who's been on that account, you know, have you had a turnover on, you know, account executives or sales reps on that account? You know, is it primarily service through your recruiting organization or, or client care organization separate from your salespeople?
That's institutional knowledge. That is important. I know of one situation. I talked to a sales rep account executive yesterday. He's been on an account for 10 years now. And that no matter what you say that has value he knows the people, he knows the processes, he knows the industry. And as a result, he's creating value for his organization in that process.
And I might, I might just comment that That company has been through two or three ownerships. So even the ownership's change, as far as the face, the relationship to the client it's remained the same level of client concentration. This is always an issue or a challenge, especially with the smaller organizations.
So if you look at at an organization, just, uh, I'll say. I hate to use absolutes, but if you have more than 50% of your revenue coming from a single client, you have client concentration and it could go either way. It could be 30% or 6% depending upon the potential buyer. I do see many, smaller organizations that are in the 60 to 70% range of a single client.
Maybe a very large client. But it's still a client concentration, which which creates risk. I mentioned, I mentioned risk. Also I should've mentioned that back in the financial, because if somebody takes a look at your company, one thing that they're doing is okay, as they evaluate your financials, as they evaluate your clients, what is the risk profile of your organization?
You know, are the financial stable, as I said, are your clients stable? You know, do those relationships, you know, is there risk in maintaining, retaining or potential turnover of a client? So that treating client concentration is, is very, very important and something, they look at closely industry vertical serve, and it, it may be that I would say.
It's not as much that you should be in specific industry verticals, as it is understanding and knowing, and having, you know, very specific content knowledge around that. And if you've been, if you've had a client for many years, you should know their process. You know what their industry is about, you know, why you're providing, you know, consultants to that particular client into that particular industry.
So that's gonna add value to to your organization. Let's go to the next slide.
Business profile, really looking at your lines of business, you know, is it mostly contract, you have statement of work? Is it a direct tire? Do you have a retained search practice? All of those are going to have an impact and then kind of the, one of the large ones that can be divided many, many different ways as the retail versus the VMS MSP.
In your lines of business, generally speaking, a buyer's going to be looking for the contract business. They're going to be looking for contract business. And I think it's preferable in general, if those consultants are your W2 employees, as opposed to 10 90 nines as an example. So a buyer's going to look at that and say, okay, They've got a good book of contract business in the it business, generally speaking, it has some runway, you know, whether it's, you know, an average engagement, six months, nine months, whatever it happens to be.
So there's some continuity to that revenue, which goes back to the comments on the financial and the, and the rest. I do see a number of organizations that are doing more statement work. It's an area that a lot of people try and I think there's some permutations on statement of work today in the marketplace.
I see some situations where there are transactions where maybe it's staffing delivered, but it's for a team of individuals. So it's not necessarily a project. You know, it's, it's different than, okay, I'm going to build X, Y, Z, and deliver that at the end of the day, as you would in a traditional, you know, software development or hardware development environment.
So it may be a business process that is being supported by the staffing company, direct hire. As many people know, most people know that are owner operators, your direct hire. It's good business when it's there. And it drops to the bottom line at a much higher percentage than your contract does.
But it can also disappear very quickly. So while, while it's good currently, I think buyers are going to take a look at the percentage of contract versus the direct tire. You know, what is the combination? And oftentimes I have seen a discount on direct hire business, especially if there's large fluctuations.
You know, some years are better than others. Some organizations, you know, you, you, you get a, you know, unique situation and it's kind of a bouncy income stream where if it's a okay, last three years and it's been 5% or 10% of your business, and that's, that's quite different. And then there are a few firms that have a retained search, or there are some firms that are just pure retained search firm.
Very different than the direct tire that we traditionally see in the in the traditional staffing marketplace. So they're in, there's usually a blend of at least two days, if not, if not three of them. The retail versus VMs slash MSP. And I could add other acronyms on that, you know, the BMOs of the world and, and you got a lot of new ones coming on stream nowadays, but in general, you're either a, you know, a retail provider you provide your clients with I'll say a retail, a direct relationship working with hiring managers whatever.
Or you're working with some type of uh, VMs tool or MSP provider. And I think the real key there, in my opinion is looking at your business profile and how are you set up as an organism? I do not see many if any organizations, well, there's some very large ones, but in the smaller midsize market, you do retail very well where you do VMs real well.
It's not necessarily a one is better than the other. You can be successful. I have friends very successful in the VMs world. They've set their organization up to deliver. In that space and have done it very, very successfully. I see many firms, the smaller firms, especially that, you know, they've been a retail operation for 10, 15, 20 years, and one of their clients goes to VMs.
So they try and do the VMs also and treat that like retail. Okay. I got more requirements come in, but the infrastructure is the same. Selling's the same support system. Generally speaking that is not a way to add the value to your organization and you're going to be, you're going to be probably better off from a valuation standpoint and creating value by focused on one or the other, or, you know, some new hybrid that's that's coming on stream.
One last comment on here, and that is the one I'm seeing many new things out there. So this is fairly traditional. I would encourage you to look at some of the, you know, total talent management thoughts out there. And uh, I think we're going to see more movement relative to the, you know, the offline or remote worker fractional work or whatever the case may be that we've heard a lot about earlier today.
So with that, I'd like Jim, why don't you cover the next few slides?
James Janesky: Yeah. Could we, uh, go slightly? Yeah, there we go. Thank you. Yeah. Thanks John. I'm James Janesky. I run the business services practice at as mark mentioned, PEAPACK private investment banking. We're part of Peapack Gladstone bank based in, in Northern New Jersey in Bedminster. And we do. M&A advisory.
We do capital raising both in the public markets and the private markets. We have a balance sheet where we could do cashflow financing as well. We do south side M&A primarily, but we also do some buy-side eminent. I mean, I do focus on the entire spectrum of the human capital market, whether it's brick and mortar, light, industrial staffing companies, all the way up to HR technology companies.
So some of the comments that I'll make, am I not on screen?
Mark Roberts: Can't see you.
James Janesky: Really. I don't know how to, I turned on the I turned on the
Mark Roberts: There's a camera at the bottom.
James Janesky: Yeah. Can you see me now? Yes. Okay. But then we'd lost the slides Jakob are you there? We apologize. Okay. Yeah. So I said, we focus on on the entire human capital spectrum and I'll be, you know, kind of referring to that specifically at certain points during the presentation.
But, you know, as mark mentioned in the beginning, that's the first question I get as a, as an advisor. Okay, how much can I sell my company for oftentimes, without even telling me your revenues or your EBITDA. So, you know, that, that, as John explained, as mark explained, I'll explain, it's just not all about the multiple.
There's a lot of other things involved that you should be aware, aware of. So the first one is the level of involvement by owners, both pre and post sale. Okay. And I would say the first thing, even before you get ready to sell John alluded to to this is that you have a really solid accounting. And if you can even get your books audited that makes a difference in the valuation to the buyer.
If you have a one man operation and you're a tiny company, that that's fine, but as you get into the 15, 10, 15 million plus range, make sure you have a, you know, a good mid-sized firm, at least And you should look at a sale, not call up and say, okay, I want to sell my company tomorrow. You should have conversations with folks about it.
You know, up to a year, two years, three years ahead of time. And the first point that I'll make is that the level of involvement depends upon the approach to the process. All right. So if you go. With an advisor such as such as we are at at Peapack. The, the, the level of involvement is going to be less than if you tried to do it all on your own or, or, or with the an accounting firm or a legal firm, what you're going to need to bring in anyway, as part of that, as part of the process, and generally the heavy lifting is done.
And end of the process. So in the beginning of the process and what I'm going to talk about the process in a couple of slides more specifically, but in the beginning of the process, we have to gather data from you. We have to get understanding of your competitive situation. We put, uh, a large confidential memorandum together as well as a one-page teaser. So there there's the heavy lifting in the beginning. And then we do the heavy lifting as your advisor to reach out to buyers that we approved through you. And then at the end of the process, you're going to have to do management meetings.
You know, those used to be in person. Now they're generally done over zoom and then the second point is. Key personnel who, you know, who, who should you bring on board? Only bring those on board necessarily necessary to facilitate a sale. That's a decision you should make with you, your, your advisor whatever, because this process can lead to turnover.
If folks find out within your organization that they're being sold, it's disruptive to the business. A lot of water cooler talk. Sometimes it can put pressure on your, on your top line. And then in the end, the deal might not get done. And so you've disrupted the business, potentially caused some turnover. It might hurt your growth trajectory.
So only bring those on board and in the beginning, it's, it's, it's definitely going to be your CFL because they're going to have to communicate with an advisor such as us about the numbers of the company. Next slide, please.
Next is, you know, what is the office footprint that buyers look for? Okay. And first It's virtual versus physical virtual is generally easier to integrate. Yeah. And certainly has become more important post COVID. What you're doing if you're buying a virtual company and this happens a lot in the tech and engineering world that John was talking about you know, they were already set up in many areas as well as I would say next would be finance and accounting vertical.
They were already set up pre COVID to work virtually. So. There the, the, the, the revenue pressure on those two industries has been less than it has on other industries where, you know, by their very nature, light, industrial is in person. Okay. You're in a manufacturing facility, a warehouse or something. So virtual is easier to integrate.
What you're basically doing is buying a customer list. You're buying the recruiters and you're buying the salespeople some buyers, however, do want that physical office because they want to expand their geographic footprint and. With respect to a geographic footprint, all else equal multiple geographies are more attractive and indicative of a larger company, larger companies, larger companies um, you know, generally get a better multiple it's lower risk.
If you have operations in the Northeast and operations in the Southwest, should one be under pressure for whatever reason you might be able to make it up in your other geography. The, uh, larger company will have a immediate impact on the bottom line results of a, of a company that buys him. They're generally more buttoned up with respect to their with respect to their financials which makes them easier to integrate and, and then find.
I will, uh, add that a larger company is actually easier to acquire than a small company or less risky to acquire because you're doing almost the same amount of work and certainly taking on more risks, whether it be from client concentration uh, Uh, recruiter, concentration for smaller companies.
So it's actually less risky and a higher multiple what's one of the reasons why larger companies get a higher multiple next slide please.
All right. So terms of the deal. Post COVID buyers are asking sellers to take on more risk. And when I say more risk, that is staffing companies by their very nature are by their very nature are, do not have, have very limited visibility to their revenues, especially on the direct hire side. Okay. So the visibility to those revenues.
Has even become worse. May I say post COVID? That's why you should really spend time before you go to market. As John mentioned with putting together a projection of your company, a three to five year, even projection on your company. Well thought out, how can you do coming out of COVID but the buyers are asking sellers to take on more risk.
What is that risk first? It's the amount of cash at close. It's always negotiable, but deal terms have changed. So without making a, an absolute statement, if a certain vertical generally required, or the general principles were that. It was 20% down or, or I'm sorry, 20% in an earn-out now that's moving to 30.
30 is moving more like two to, to uh, 40 or 50%. So earn-outs are now whether when they once were one year for an earn-out now they're two to three to even more here. And they're so they're longer. And there are, as I just mentioned, a higher percent of the deal post COVID, that should kind of, go back to normal probably with over the next year.
But what's really important. What we always try to do for our clients is you negotiate upside to the earn-out. That means you could, if you are on a good growth trajectory are confident in your business, you and your advisors should negotiate with the buyer upside to the earn-out. So the value of your company potentially even goes higher.
Than what you thought you were going to get based upon the initial cash and then the earn-out. So, and what's good about upside to an earn-out in this environment, is it works best when you're coming out of a slow period, such as a recession, even though the recession was short-lived, but certainly the effect on revenues across the board has been pretty dramatic if you're coming out of that and you're going to have an acceleration of your revenues over the next few years the upside could be quite lucrative. Next slide please.
So what's, what's a, what's a typical M&A engagement. Okay. If we can go to the next slide, please.
Okay, this might be hard to see. I think I saw that uh, this presentation will be made available, but there's generally three different ways to approach it. A preemptive targeted auction and abroad auction. And I'm not going to go through every box on here. I'm just going to point out some of the, key points.
Okay. So, the preemptive is generally one to five and those buyers might have already approached you. And even with the targeted auction and abroad auction. You may have been approached by preemptive buyers as well. So the, the, the, the advantages of a prenup EMT is the buyers are generally more serious.
Okay. And, uh, you know, if you're working with an advisor, you should be able to get fair value for your company, but it does have high execution risk, and it is the shortest in terms of timing to get. A targeted auction is where we go out and we approach maybe five to 10 buyers at I know in the market where you would be a good fit both profitability-wise cultural, vertical served, et cetera.
So sometimes these are good for smaller company. Where we do a targeted auction of maybe five to 10. And you know, that generally will re, could get you a better multiple, because you are going out to, to, you know, more than just one buyer. What maximizes shareholder value the most though is a broad auction.
And you know, those are generally for companies depending upon the EBITDA levels of certainly 10 million or more in revenues, more likely 15 million, more or more in revenues. We reach out to 25. Sometimes I've reached out to upwards of 60 to 70. That's a 90 different buyers. It is most disruptive because it does take up more of your time in the beginning and the end of the process.
But, uh, this generally gets you the best multiple, especially if there are, if there are multiple bidders on your company, next slide, please.
This is the tailored process or the, or the broad auction that I discussed in the last slide. Okay. So phase one generally takes a month to two months. You're building the foundation, putting together the book, putting together as selling memorandum. Cause that's what it is to attract different buyers.
And, we'll then, open up a data room for you so that when buyers become serious, after they put in a letter of intent, they get access to that data room. Then there's, the targeted auction. Where we contact buyers or investors. So there's going to be private equity buyers. And strategic buyers such as other staffing companies.
And we reach out to them. It generally takes another two to three months in the process to, to get every to, to start initial conversations, follow up conversations and then management meetings and finally to solicit and negotiate letters of intent. Phase three is, is, is closing the deal. And that's where you select the party, execute the LOI and sign and close the deal.
If you, uh, so I, let me go back for a second. So that, that is how long it takes to close the deal for a more targeted auction. I should say, with the tailored process it's going to take more like five to eight months. Okay. So the first one is going to take anywhere from, you know, 3 3, 4, maybe five months.
This one's going to take five to eight months and that's what we're going to reach out to the 25 plus buyers, similar to how we do in a targeted auction, but it's a much broader group to attract a much better audience and hopefully get you a better valuation and terms of the dealer just important as the valuation as well are especially with respect to private equity.
Next slide please.
So what is the current M and a market? Here's where we are. Here's where we talk about multiples. Okay. So generally. The M and a market in staffing has rebounded in the United States from pre COVID levels. Again, with buyers asking sellers to take on more risk. So generally if you're a light industrial company, it's anywhere from two to five times EBITDA, if you're a professional company, it healthcare engineering.
More in the five to seven range. And then that seven plus range is really reserved for uh, for the, those really special companies that John alluded to low customer concentration, bigger than 15 million. Great revenue trajectory over past several years and looking forward, great profitability that has the opportunity to expand over time, especially as part of another organization which verticals do you serve et cetera, which gods geography that you serve.
So that will all depend upon a number of different factors. In the United States there, we've gone back to an environment where there's more buyers than sellers. The market did take a pause in the kind of summer, the fall timeframe picked up and get the end of the year and is become very active as we enter 2021.
Us multiples have rebounded to the levels that they, I just explained access to financing is, is still very good. At low rates. So if you're a strategic buyer, you're a even before COVID the economy was the, the economic expansion was getting long in the tooth, right. We, it was the longest expansion in the history of the country.
Through other means private equity firms. The worst thing that they can do for their investors is keep their money in cash and not put it to use in investments. Then there's still plenty out there. So there, there, there, there would be there's there's always would it, there would be depending upon the Again, the, the, the, your company and, and what vertical you're in, et cetera.
I think there would be a lot of interested parties and there are a lot of interested parties when we go to market with the company in the international market, I would say. They're probably one to two quarters behind the U S in terms of growth. You know, you asked God PPP loans that really helped the distressed market for staffing companies.
In the beginning, as we were going through the PPP process I thought that there would be more distressed companies, but PPP really helped. And now there's a second round that just opened up this week. So, Well, the, in the, in the international market distressed companies are still more the focus there.
But that should rebound as well over the next couple of quarters. Thanks.
John Larson: All right. Let's continue on. Let's go. The next slide. I'll do the next couple of slides before I turn it back over to Mark. Yeah, we've got about 15 minutes or less left here, marks we'll move through this pretty quickly. In disclosure, I am on the board of directors of tech serve Alliance, where mark serves as a CEO and a tech serve has created a new service offering at a mergers and acquisition marketplace.
And it's really a different approach for buyers and sellers of firms under 15 million in revenue. So this is designed I'll say for the smaller firm that that may not be in a situation where they could avail themselves of all the services that Jim previously mentioned. So it may be a, it's just a, kind of a different process and the objective of the offering.
Is to have that smaller firms. Jim said, they're more buyers out there than there are sellers. And the, a small firm. This is probably their only time or first time they've looked at selling their company. And so they really have there's, uh, many unknowns in that process because it can become very, very complex.
Yeah, let's go to the next slide and kind of tells why. Tech serve created this. It really creates a marketplace where one doesn't exist your larger strategic firms and definitely private equity. The small organizations and small companies in the staffing industry. Quite frankly, they can't move the needle.
The fundamental financials aren't large enough, whether it's the revenue or whether it's. You know, the amount, uh, is just not large enough to provide the return somebody is looking for. And Jim made the comment and he's, he's correct. In that it takes as much effort to do a big deal or a small deal as it does a big deal.
It may not be a hundred percent, but it sure isn't relative to size. $5 million company, 10 million, a hundred million is not 10% of the effort. You still have to go through the due diligence. And so really this is created an opportunity for those smaller organizations that have a difficult time getting to market retains their ability to maintain confidentiality by working with tech serve in this situation.
Now we see the small firm, if they want to go market. They may talk to an advisor, but oftentimes it's okay. Who do they know who they met at a, at a local function of some sort. And so it's very difficult for them to, to expand the potential buyers for their businesses. Jim mentioned earlier. Usually it's just, okay, it's one or maybe it's two, but how do they, how do they attract five buyers or 10 buyers or, or more So it provides them an opportunity to kind of test the waters, maintain confidentiality, which is very, very critical in the early stages.
As Jim mentioned earlier, you know, who is aware of this tech serve also believes that overcome some of the challenges of both the buyer and the seller. Because in the market today let's take the seller side of it. Sellers are unsure. I said earlier, they don't necessarily know what they don't know.
Naturally I want to sell my business. I'm looking for, you know, what's the multiple back to the original question, you know, nearly an hour ago, what's the multiple and then I'll figure out, well, I have seen numerous situations where they engage. And they may go through, you know, a month or two months of work and then figure out, you know, I really don't want to sell.
I'm able to just keep doing what I'm doing. I've been doing it for 15 years and I'm making a good living and I'm going to do that. So as a result, you know, they've invested time and energy and the potential buyer has invested time and energy at which it all comes from or not. And the seller. Now in this new offering, the texture has a, they're asking the seller to go through a process under NDA, to look at the valuation of their company and to look at the business operations of the company.
And really it's nearly up to a, I won't call it a due diligence, but it really a deep dive into their business operations. Because we know what a buyer's going to be looking for. So we want to be able to say to the buyer, community tech services, okay. To the buyer community, here's a small company. They've been vetted.
Here's what's been done up to this stage. We know they want to sell. Et cetera, et cetera, their financials in order they have a good awareness of what's going to be required from a due diligence standpoint, you know? Uh they've they've got a lot of that stuff ready to go. Now we realize that the buyer's going to have specifics and they're doing their own due diligence and everything else.
So we totally understand that, but at least the buyer has a level of confidence in okay. When I talked to this small company, they're going to be ready to go. They've already made that decision that I'm going to go into the marketplace and I'm going to entertain a viable offer. So tech serve believes that it reduces the risk for both the buyer and the seller in going through that.
And potentially there's a, there's a potentially a transaction costs may be somewhat less. So that varies across the board, but there's an investment required, whether it's in a, in a traditional go to market process, or even with it's with tech serve, you know, there's an investment that individuals have to make to say, okay, I am serious about moving forward.
With a potential transaction. So there are many more specifics behind that. There's a full program that a tech serve has. So, feel free to, to contact TECHSERVE or mark or myself. We'll be glad to go through any of the details that you need. So with that we're turn it back over to you, Mark. That's as far as complete for now.
Mark Roberts: Great. Thank you so much, John and Doug. So up on this slide, you have uh, my contact information, Johns and Jim's. And so certainly if you have follow up questions you know, so we're happy to take a few questions. We have a few minutes. I thought, ah, Jim. And John did a great job tackling a complex topic in a brief period of time.
So feel free to post a question in the chat. As a matter of fact, there was one question, Jim, I don't know if you want to take a shot at someone was asking what's the multiple. So, you know, that, that very question we asked upfront for, uh, mainly uh, a small company. I don't see if you see that chat.
You want to weigh in on that?
James Janesky: I, yeah, there's so many chats coming through. I didn't see a small company. Did they say, did they see the revenues or EBITDA?
Mark Roberts: The small company? But client concentration 60%, what would call it seven minutes?
James Janesky: It depends. Right? That's the classic investment banker.
Mark Roberts: And my joke is the only person who says it depends more than lawyers or investment bankers uh, you know, in true to form generally delivered
James Janesky: 60% customer concentration is, is only natural for a smaller company, right? I mean, do we lose mark? But, uh, uh, 60% is very high and general. It, depending upon what industry you're in. You're going to get the lower end of the ranges that I explained. Certainly you know, John might've mentioned 50% customer concentration. We like to see less than 25%, but understand that with smaller companies that is going to be,
John Larson: Hey, Jim, I'm going to take a stab at this. Cause I, I, that I get the question all the time, just like mark.
You know, what is the multiple and in this situation, the comment was made, it's a $7 million company revenue wise, I'm sure. And a 6% client concentration. And my personal opinion is that's probably not known what the bottom line looks like. That that does have a bearing on it, but I'm going to be, I'd be somewhere in the three to five times, multiple naturally a lot of different aspects to that.
But it's going to be on the, on the, on the lower range.
James Janesky: That's in IT, John, but if you're a light industrial company, it's more like two,
John Larson: I would agree with it. Yes. Yeah, yeah.
James Janesky: Yeah. I agree with, I agree with you for, for IT and engineering companies. Sure.
Mark Roberts: So, uh, and I got back in, but so there were a few other questions and certainly feel free to add some questions to the chat, but maybe, um, if, uh, Jim and John, if you take a stab at this, how have you thought that valuations have been impacted by the pandemic, Jim, you alluded to it you think we're back, is that, is that your, your capable.
James Janesky: Yeah. I mean, in the staffing industry, there was more like a freeze than a decline. Okay. There, there was a freeze because buyers, weren't sure what they should pay for a business that might be is my business going to go down 20% during COVID is going to go down 50% and with the lack of visibility. With respect to revenues in general, as I mentioned in the staffing industry it took more of a freeze than absolute pressure and those multiples have come back to the ranges that John and I discussed for good, for good quality companies, Mark.
Mark Roberts: Okay. And John, what's your take?
John Larson: I, I think there's been some impact, but I think it's shorter. Longer term, I would probably agree with, with Jim and th the multiples are kind of back. Maybe they just took a, a pause many staffing companies out there are growing this year. You know, they may have had one or two quarters but you can absolutely explain that.
And part of that goes back to the financial picture and the risk analysis and the quality of earnings, you know, that's what it comes down to take a look at. And if I'm down a quarter, okay. Wow. You know, can I explain that? Or I'm down two quarters and I'm back up. So I would agree with Jim that, that the fundamentals of the financials and the business operation are still going to be the driving force behind that.
And I don't think it's moved the multiples in a downward fashion at all.
James Janesky: And, and, you know, John and Mark, when you look at the publicly traded staffing human or human capital companies overall, you know, the stock market is four to six months forward. And it's telling us through the, I mean, th their stocks took a hit like the rest of the market and have come back very nicely since then.
And they're doing deals as well for cash and stock uh, in, in, in the market. So the market's telling us through the staffing stocks that the next year or so six months to a year is going to be pretty good for the staffing industry.
Mark Roberts: So here's a question. What, what impact does the profitability of the customer base have? You know, if they're a highly profitable customer base john, you want to take that?
John Larson: I'm never quite understand when they say high profitability, is that from a consulting standpoint?
Mark Roberts: No, I think such their customers are highly profitable
John Larson: versus I don't know if that has a bearing on it, unless it translates into my bottom line as a, as a staffing provider for that organization.
The fact that they may be highly profitable. Can I convert that or some portion of that, you know, to my, you know, gross margin percentage and eventually my EBITDA.
James Janesky: Well, yeah, larger I, on the other hand larger, that's a great point, John. I don't think it really matters one way or the other. It's what you do with it.
But you know, larger companies, more profitable companies generally have more sophisticated uh, you know, ways of, or go through VMs or MSPs. Right. And so, I th there, there's a kind of a double-edged sword there, but it really shouldn't matter to you. It's, like you said, what do you do with it?
Mark Roberts: So, uh, what's your take on whether we're seeing a consolidation within the staffing industry? You know, that's, that's always a hard one to measure because there's always entrance and those that are leaving, but
what your take on this.
James Janesky: It's been, it's been consolidating for years, Mark, and it will continue to consolidate.
And you know, I am talking to owners, CEOs who are, you know, we're maybe not thinking of selling pre COVID, but are now just sick of it. And it's, and, and are just waiting for their, their revenue trajectory to recover in a more consistent basis in their profitability. And so I think we're going to see increased consolidation throughout 2021 and beyond.
John Larson: Yeah, I would agree with Abbott. Another view of that Mark is that there used to be, and still, maybe today there's a low barrier of entry to start a staffing company. I think that's going to increase. I think the sophistication of even the small organizations is going to have to be enhanced to provide, you know, more value added service services, you know, in order to really support their clients going forward.
We're seeing so many new tools and opportunities out there. I think the staffing industry is going to continue to morph. Will that create some consolidation? Yes. I don't think we'll have those many coming in on the bottom end is okay. I'm a great salesperson. I go out with a great recruiter and I start a staffing organization.
Like you could. You know, 15, 20 years ago. So just to another view there
Mark Roberts: Great perspective. Well, I know we're nearing the end of our time. There were a few questions we didn't get uh, get to. But, uh, first I just wanted to thank uh, Gustav, Jan, Jakob for hosting us and Jim and John. Thanks for doing a great job on an important topic.
You have everyone's contact information. If we didn't get your question. I know both Jim and John would be happy. To field questions as would I, so, um, really enjoy everyone. Thank you for everyone who participated and I'll look forward to speaking with you again soon.
John Larson: Thank you. Thanks John.
Appreciate it. Thanks Jim.
James Janesky: Bye bye.