IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family businesses. The following blog article has been provided by Wendy Leibowitz of Wendy’s Real Estate (https://wendysrealestate.com/):

How Staffing Challenges Impact Business Valuation When Selling A Mid-sized Company

Even in the best of times, mid-sized companies can have staffing issues. While that can impact day-to-day operations, those issues can really cause difficulties when it comes to possible sales to other companies. The main problem is the valuation, since it could wind up meaning the seller gets a LOT less money when all is said and done.

If you’re in this situation, it’s important to be aware of those potential pitfalls. While Healthcare Staffing Professionals can work to help mitigate those staffing challenges, there are things that can still affect that sale. Keep your eyes open for these things:

How the Core Valuation Is Impacted

A company will have a main valuation that is usually based on the best-case scenario. That number will surely trend downward as these staffing challenges keep raising their ugly heads. They include:

• Key Person Risk – Is there someone at the company who is far too invaluable to lose … like the founder? If there is even a remote chance that the person could leave, then that could make the buyer risk-averse. As a result, that could make the deal a thing of the past.
• EBITDA Multiple Compression – Buyers like stable companies. A company with high turnover could see valuation multiples drop by 0.5-1.5x EBITDA, which could have the same impact as a powerful torpedo hitting a battleship. It would sink the deal, in other words.
• Reduced Profitability – A company with a lot of issues would likely be spending more money trying to fix things than bringing in more cash flow. Their focus is going to be on the wrong places. That means their valuation could sink.
• Possible Reduced Revenue Streams – Having a chronically understaffed office is going to make it extremely hard to scale or meet market demand. That’s going to be a significant growth drag.

Possible Red Flags For Buyers

Smart buyers will be looking at the metrics of the mid-sized company well before they even make an offer. While they may see that there are parts that could fit well in their own business, they want to make sure that they aren’t going to have to be working too hard to fill holes. Otherwise, they could wind up taking on a sinking ship that brings them down as well.

• High Turnover Rates – The new owners of the business are going to want to hit the ground running. They don’t want to have to spend too much time plugging in new roles. If they see that there’s a revolving door of workers, then that might give them pause before going ahead with the sale at the current value. They will want to pay less for a potential headache. Plus, companies with high retention rates get higher valuations.
• Processes Not Documented – The last thing any potential buyer wants to hear is “This is the way we’ve always done it” when they ask how certain processes are done. These are business processes, not ancient texts passed down by word of mouth over centuries. Will the buyer want to cobble together a vague blueprint after the sale? Likely not.
• Low Morale and “Quiet Quitting” – Buyers likely know that they may have some disgruntled loyalists when they take over a company after a sale. They need to decide how large that percentage is, since if those loyal people aren’t bringing their best effort to the new company (aka “quiet quitting”), then things could get very messy indeed.
• Old HR Tech in Use – Buyers don’t like bringing a new company aboard that still uses old tech of any kind, but especially for human resources. If that’s the case, then trying to integrate things could be a nightmare that could rival any horror movie. They could either try to get the new tech up and running as quickly as possible, or just exit the deal.

How Sellers Can Mitigate Risks

Yes, these staffing challenges can pose quite a risk for potential buyers. That doesn’t mean that the seller should necessarily accept a lower valuation. There are ways that the seller can right the ship for them, including:

• Offer Bonuses For Staying – This can really help retention and keep buyers from having to pay for replacements for key positions. In other words, make them an offer that they can’t refuse. They don’t have to use Marlon Brando’s voice in “The Godfather” to do that, though.
• Cross-Training – The buyer might have some slightly different staffing needs than the seller. If the seller cross-trains staff in those things, then they can just slide in without there needing to be big changes. That will improve productivity.
• Better Benefits – The seller can keep employees by offering better benefits, which the buyer can then keep in place. That way, employee morale will still be high, which can help keep valuation higher.
• Use Formal Agreements – Remember those key people that we mentioned earlier? If the seller can lock down those people for a reasonable amount of time with these agreements, then the buyer might be happy to keep valuation where it is.

Business is a risky field. While one can do all they can, including the above ways of possibly mitigating the risks, there is still a possibility that the sale will be paused or even scuttled. Then the decision comes down to whether the valuation is worth taking on.

The end goal is to reach a deal that satisfies both parties, and not have one of them feel like they were constantly playing from behind when it came to valuation. If things stay at a good rate, then both will be happy when the paperwork is being done.

If you have questions relating to the content of this article, Wendy Leibowitz of Wendy’s Real Estate would welcome the opportunity to answer them.  Ms. Leibowitz can be reached at [email protected]. 

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.