Selling Your Staffing Agency? Do You Know What Your Agency is Worth?
Selling your staffing agency can be a great way to cash in on your years of success. As the economy booms, there’s a high demand for qualified, vetted workers and, thus, more demand for staffing agencies. So, if you’re planning to put up your staffing agency for sale, it’s natural to wonder, “What is my staffing agency worth?”
When selling your staffing company, you’ll be looking for the best possible valuation. What you need to keep in mind is that the value of your staffing firm depends on its perceived health as measured by several key performance indicators, which constitute both internal and external factors.
Factors That Determine a Staffing Agency’s Worth
Buyers looking to acquire a staffing agency often consider specific metrics and the agency’s operational health. This is especially true for larger firms that want to expand into new areas, increase their offerings, and boost their strategic positioning.
The value of a staffing agency for sale is impacted by and dependent on various factors that are specific to each agency.
Some of these factors are:
Location
A staffing agency operating in an economically healthy, fast-growing area is poised to be more profitable and appealing, fetching a higher valuation than one in a slower-growing area.
An agency located in an area with lots of healthy economic activity is likely to have a wide range of industries that play a role in the economy rather than being reliant on one industry, which also tends to make it more attractive to potential buyers. As such, you want to find a reliable local broker to assess the fair market value of your business.
Number of Verticals and Industries Served
As mentioned, buyers are attracted to an agency that presents as little business risk as possible. Staffing multiple industries represents more business opportunities and indicates lessened risk.
A staffing agency limited to serving just one or two industries has a less diversified client portfolio. This makes it less valuable in the eyes of potential buyers. In addition, agencies serving certain industries like hospitality, IT, and healthcare may be poised to achieve higher valuations.
Training and Professional Development
Offering job seekers and employees training and professional development opportunities can become a key differentiator that attracts judicious buyers. Training programs can lead to high-quality referrals to employers.
Type and Number of Recruits
Buyers find more value in agencies that recruit large numbers of workers on a consistent basis. Agencies that take on more workers for temporary positions also tend to fetch higher valuations compared to those that recruit more full-time workers.
Potential buyers aren’t buying your client relationships; they want a company with solid revenue streams. Contract staffing is the best way to drive revenue, improve cash flow consistency, and help your agency adapt to any job market. In other words, contract staffing sets your agency up for further success. When compared to temporary staffing, that is.
How to Value a Staffing Agency
To determine the worth of a staffing agency for sale, brokers employ several methods. These measure metrics such as sellers’ discretionary earnings, cash profit, and total cost of ownership. Your broker will use several formulas to calculate the value of your staffing agency and figure out possible sale prices.
Here are several valuation methods for staffing agencies:
Multiple of EBITDA
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. This formula adds back expenses to total earnings, showing the cash profit generated by a company’s operations. EBITDA can be used to analyze and compare the profitability of staffing firms and industries by eliminating the effects of varying tax environments, financing, and accounting decisions. The tax obligations of a staffing agency operating in Florida, for example, will be different than those of a similar agency serving Arkansas.
EBITDA is calculated as:
Operating Profit + Interest + Taxes + Depreciation + Amortization
To arrive at a value for the business, brokers apply a multiple to EBITDA. In most cases, staffing companies often sell at a multiple of between 2x and 4x. For example, if EBITDA is $3 million and a buyer uses a multiple of 3x, the value attributed to the agency is $9 million.
EBITDA is typically used for larger firms with over $1 million in gross annual sales.
SDE for the Valuation
Another method used to determine the worth of a staffing agency for sale is the Seller’s Discretionary Earnings (SDE). It is defined as the earnings of a business prior to depreciation, income tax, interest, amortization, non-recurring income and expenses, non-operating income and expenses, and the owner’s entire compensation.
SDE Formula:
Pre-tax net income + depreciation expense + interest expense + amortization expenses + discretionary expenses + owner’s salary and perks
SDE measures the total cash flow available to a buyer. This business valuation method is typically used for small firms with less than $1 million in gross revenue. It adds business expenses to the owner’s personal benefits, such as a yearly salary and charitable donations.
Investors and brokers will value your staffing agency based on a multiple of the agreed-upon SDE. The small guy can get a multiple closer to 2x, while the larger guy gets a 4x multiple offer. To sum it up, the basic formula for valuing an agency based on SDE is:
Value = (Multiple X SDE) + Good Inventory
The Market Approach for Your Staffing Company for Sale
The market approach is a valuation method used by staffing agency brokers to determine the appraisal value of a business, business ownership interest, security, or intangible asset based on the market prices of comparable businesses and assets within the area. This usually involves the use of price-related indicators like book values, sales, and price-to-earnings.
Talk to an Experienced Business Valuation Expert
Do you need help preparing your staffing agency for sale and getting the best price for it? Call Lonnie Veasley today. Lonnie will be glad to sit down with you to discuss the value of your staffing agency. His team will appraise your business and assets, look for buyers, and create a customized plan to ensure you have a smooth transaction.
