Staffing Industry Spotlight: Patrick Morin, Partner at Transact Capital

Staffing Industry Spotlight is an interview series of exceptional leaders in the staffing industry. The series is brought to you by Ascen, an all-in-one employer of record and back office platform for staffing agencies. In this installment, we spoke with Patrick Morin, Partner at Transact Capital, who talks about the M&A process for staffing agencies and what buyers look for in a staffing firm acquisition.

Francis Larson:

Patrick, thank you so much for being on the Staffing Spotlight series. The first thing we'd like to know is who are you and what do you do?

Patrick Morin:

Well, my name is Patrick Morin. I'm a partner with Transact Capital Partners. We are a lower middle market investment bank based out of Richmond, Virginia. Roughly about 18 professionals in the firm itself. And we do focus specifically on the staffing industry and doing M&A transactions specifically for anything in HCM. That would include perm, temp, RPO, PEO, HCM tech. Anything that touches the space, we're doing transactions in.

Francis Larson:

How did you end up getting into this space? Have you been in M&A for a long time?

Patrick Morin:

Yeah. After school, I actually went to work for General Electric during the Jack Welch days. So you get that pedigree, it kind of goes along with it. It really was a storied time and it was an amazing time. Left General Electric, went down to Wall Street. Loved the business, was not too thrilled with the firm with which I was. So I came down to Virginia. And when I came down here, went through a couple of businesses, including one of them was a REIT that we had grown to 30,000 apartments in five states, listed it on the New York. When we sold that in 2005, we did a couple of tech startups. I think you and I talked about it separately. One of them, interestingly enough, Francis, was measuring the beer that comes out of the tap against the money that goes into the till so we could tell which bartender was stealing.

Francis Larson:

Like a gas station as the gas comes out of the spigot.

Patrick Morin:

Exactly, exactly. So we grew those up, sold those as well. Started doing some turnarounds for private equity firms. And then in 2012, found my partner, who just retired actually, and began growing out the investment bank. And since I'd always loved doing transactions and we had been doing transactions basically for the last 30 years, it was really easy transitioning to come over, or I should say to return to investment banking full time. And then we specifically looked at industries where we wanted to make a presence and have an impact, and human capital management was one of them.

Francis Larson:

Does Transact only do HCM or does it do other industries as well?

Patrick Morin:

We do. We have four verticals that includes industrials, healthcare, staffing, and SaaS. We do a lot of work within software-as-a-service type companies. Staffing makes up the majority of the revenue of the firm. And I'm the practice leader of that particular vertical. But I've got other managing directors that are very, very smart that handle all the types of transactions. But if you needed us to sell a lawn care company, we're probably not your guys.

Francis Larson:

That makes sense. So selling staffing companies, doing M&A within staffing, that's obviously very different than selling SaaS companies. It's a service business, there's a low barrier to entry, so there's a lot of businesses to sort of weed through. How do you find great staffing companies that want to sell? Is it relationships?

Patrick Morin:

No, if you think about how fast it is, and one of the reasons why we came into this space to begin with. When we came in, there were over 19,000 staffing companies in the United States. If you think about staffing, the exciting part about it is it's like the mortar between the bricks of industry. Or if you think about it, it's almost like the insulator. It allows the expansion and contraction of other industries. So if you're in human capital management of any kind, staffing, perm, however you want to enter into the space, you get an insider's view of so many different industries. It could be aerospace, it could be agricultural, it could be almost anything. And so there were so many staffing firms that were servicing all of America's industries. We realized that there was a real opportunity there. And so a couple of things happened on it. And we looked at this mathematically, we really did, because we saw that the industry itself was underserved by investment banks. And we realized that a lot of these firms were in the hands of older individuals or people who were looking to transition in their lives and these transactions were going to happen.

And so our objective was to bring kind of a bigger investment bank mentality down into this particular space. And we had a couple of really early wins within the staffing industry, specifically in skilled trades and some of the light industrials. And from there, expanded out to the other avenues. And to answer your question most directly, we have a pretty strong presence in the industry through SIA, ASA, a lot of the regional staffing organizations. But frankly, we've really been blessed to have just referrals from most of our clients. And we have more than a handful of clients for whom we've sold more than one company. And so it's great whenever we pick up the telephone, it's like, "Hey, I just talked to Bob. You sold his company. Will you sell mine?" And that's pretty good. But we also, our presence throughout, if I give a speech at SIA or the Becker Buy-Side or something like that, people will always come up afterwards and say, I need help.

Francis Larson:

Our VP of finance used to work at Goldman Sachs as an investment banker for six years in their consumer practice. He says something really interesting about banking that sounds like similar to how you’re characterizing it. It's that you just spend a lot of time around the hoop. You spend a ton of time around the hoop and then eventually a deal comes by, bounces, and dunk. It's so referral-based. And then so that's interesting about banking is the deals find their way to you as long as you're kind of around it.

Patrick Morin:

I think that's true. And it's also my friend, Satya, I sell a lot of his companies. One time he referred to me as his enlightened investment banker. And I'm like, I don't even know what that means. I was like, I don't do yoga. What does that mean? And he goes, "You're one of the few investment bankers that I've ever talked to that would actually advise against his own self-interest." And I said, "What do you mean by that?" And he said, "You will actually speak truth to power and tell someone that if they shouldn't sell their company right now, they should hold onto it." He goes, "Most of the other ones kind of clamor over the thieves and try to get it."

And I think that says something, Francis, that is kind of discerning within the market, which is when you are looking at the economic interest and the best interest of the client, eventually that gets around the industry. And you talk to many of our clients, they actually become confidants and friends post-transaction and we have really good relationships with them. But the other thing is industry providers being plugged in and understanding who are the attorneys that are doing deals in the space, who are the accountants that are running the books, who are the insurance guys. And there's a whole host of people that support human capital management and being able to have that network certainly helps.

Francis Larson:

That makes sense. There's that phrase, and maybe this is not a phrase you want to use, but you are trying to be “long-term greedy” as opposed to “short-term greedy”.

Patrick Morin:

Let's change that to an enlightened self-interest.

Francis Larson:

Enlightened self-interest is better! That makes a lot of sense being a trusted advisor. These are huge transactions. It happens one time in somebody's life potentially. It's so important to them that if you do a great job, they're going to rave about you. They're going to talk to you about their friends. And they're going to be like, "Hey, guess what? This guy helped me, this firm, this guy, he helped me sell my company and you should definitely talk to them." And if they know that you're taking this unbiased approach, then a hundred percent you're going to continue to get business.

For staffing firms that are going to be reading this, what do you think makes a staffing company sellable? There has to be some kind of minimum barrier. You're not like a business broker where you're selling one-person shops. What are the kind of things you're looking for in a viable deal?

Patrick Morin:

It's such a great question and I appreciate the thoughtfulness of the question itself. And also if we can, because you just referred to something that's interesting, the difference between an investment banker and a business broker, because there are difference. The investment bankers are going to be licensed through FINRA and the SEC, and they usually do more complex transactions, bigger transactions and things like that. Whereas, you're right, on the business broker side, it's usually much smaller transactions. They look the same, but they're not really the same. So on that one, so what we typically tend to look for, I'll run it down. I'm very fortunate to be able to teach the M&A class to MBAs at the University of Richmond. And so it was really funny, we were just covering this last night. What makes a great client? So when you're taking a look at it, there is demarcation between the type of staffing firm that it is. A light industrial firm is going to sell differently than a tech staffing firm is going to sell differently than locum tenens.

But size is always one of those first things that jumps in and is going to be kind of the first metric. And that is what is the top line revenue? What are the margins that go along with that particular type of business? What are they dropping down to the bottom line in terms of EBITDA? And we'll talk about staffing firms in terms of EBITDA. So those are the first two things because it also kind of identifies what type of transaction is it going to be. Is it going to go to private equity as a tuck-in? Is it going to go to private equity as a platform type company? Is it going to go to a strategic as an add-on business? Those are kind of the questions. But start with that fundamental thing, which is what is revenue? What is EBITDA? And normally what does that look like over the past three years?

And you want to be able to see kind of that growth. You don't need hockey stick, but you do need to be able to see that growth. Or if you've had a dip like we did during COVID, then you're starting to go, okay, what's the reason and are you recovering? Now, then there's five typical things, Francis, that we can immediately go through to do a health check on the company and the salability of the company, besides the benchmark of the margins and things like that. The first one that everyone always asks for is about the team. What is the team behind the seller? Are they strong? Have they been there for a while? Are they running it? Or is the business dependent upon the CEO or dependent on the founder, dependent on seller? If we get that, that makes the transaction much harder. Second thing is going to be financials. Are the financials clean? Are they reviewed? Are they compiled? Are they audited? Do we have a whole lot of add backs that go to it? What are those financials? What kind of shape are they in?

Number three is looking at typically customer concentration issues and looking at customer dispersion, what those relationships typically tend to look like. Number four thing that we typically look at is does the company itself have a two-year growth plan outlook? Everybody always goes with these grandiose three to five-year plans. Nobody knows what's going to happen in three to five years. We didn't know it was going to happen with COVID in 2019. And so if the company continued to be owned by the founder or by the CEO, whoever's in charge of it now, did they have a plan for the company that we as investment bankers can sell to say, look, this is where it's going to go? And then lastly, what are the business systems that they have in place? Do they have systems in place that allow them to recruit people? What does their onboarding process look like? Because that tells the solidity of the company and really the scalability of the company. So the first one, EBITDA and revenue, and then those five risk factors tell us in a nutshell whether or not a company is sellable.

Francis Larson:

That makes a lot of sense. How many of your clients come in with rock-solid financials and rock-solid plans? Or are you really saying, “Your plans are bad, your finances are bad, here's what you need to do”?

Patrick Morin:

We call that concept speaking truth to power.

Francis Larson:

Truth to power. How often are you speaking truth to power?

Patrick Morin:

So let's tie two concepts together that we already talked about. And I'll answer the question. I would say probably about 40% of the firms out there have these things ticked and tied, and the balance, 60% of them usually need some sort of adjustment on them. This is one of the reasons why that we always advise the single best transactions that we get are when we are usually engaged a year, year and a half ahead of time.

Francis Larson:

Wow.

Patrick Morin:

Yeah. The earlier that you engage a banker, whether it's us or anybody else, it doesn't matter, just get somebody in early because it allows us to be able to look at the company, those factors, make those adjustments, and to be able to start building a story. What investment banking really is, it's telling a story and it's telling the story through marketing financials, through the leadership of the company, the strategy, and all of that. So if you come in ahead of time and we're able to make these adjustments and say, okay, if you tweak this, we're going to be able to get a bigger multiple. If you're able to tweak this, we're going to reduce risk and the deal is going to go faster. If we clean up your cap table, your capitalization table, then it's going to make the transaction go a little bit smoother. So the short answer is less than a majority come in with everything all ticked and tied and ready to go, but the majority, anybody who is doing this with a longer-term vision of a year out and have the chance to be able to not fire sale it and to do it, their returns are pretty significant on that investment of time.

Francis Larson:

So that's a very good point. People come to you 18 months before they want to sell. How much of that time that they spend with you is just prep? Is it prepping for 14 months, and then the last four months are the process? What does that process look like?

Patrick Morin:

No, so normally what will happen is we always do an initial valuation. This is putting the stake in the ground. This is what your company is.

Francis Larson:

Your pre-valuation.

Patrick Morin:

Yeah. Yeah, it's true. And we have a PhD in finance on staff that does all the valuations. We've got a team that does nothing but valuations. And we know the space so well that we can kind of pull it out. But you get that stake in the ground that is able to say, here's what the company currently is worth. Here's the risk factors that go along with this. Here's the market as it currently stands. This is where we think we're going to be able to land with this. But if you're able to do these things, then we're going to be able to get more, and here's what the timeframe is that's going to happen with that. But when you get to the actual process, when it's go time, we try to front load it as much as possible because we're trying to take pressure off the company. Any good investment bank is trying to take pressure off the founder and the CEO so they can focus in on growing the business. And that's the reason why you bring in a bank is specifically because you're doing the work behind you on representing the company when it eventually goes to market.

But the actual banking process is typically going to be five to six months, sometimes seven months. It frames from there. And those are the real go times. The first two months are putting together all the marketing materials and getting the financial analysis, the data room. The second two months are usually going to be in the marketing process, getting LOIs in, doing management presentations, getting the offers in and vetting them out. And then the last two months is usually going to be due diligence, writing the definitive agreement and things like that. So while it could be 18 months out, really the intensity starts when you start that process of selling in the final six months. Normally, when you're getting in earlier, it's check-in calls on a quarter-to-quarter basis just saying, here's something that... And they report enthusiastically. They're like, hey, look, I just hired a new chief operating officer and this is what they're doing.

Francis Larson:

They're a real company now.

Patrick Morin:

Yeah, yeah, yeah. Or we just added this tech to our service offering, or we just got these clients. Or here's a really good one. We had a customer concentration of 25 or 30% in this particular customer, but because we were able to sell away from the customer, we didn't tell them to go away, we sold other customers to reduce that percentage. That's a really healthy good thing. And the other wonderful thing about it is that when you start thinking about a transaction that far ahead of time, you're actually starting to see the movement in the markets where some things get very hot, like skilled trades right now, very, very hot. Everybody wants to be in skilled trades, so there's a lot of demand there. But you get to start to see the ebbs and flows of those desires.

Francis Larson:

Yeah. Speaking of concentration, what do you think is the maximum livable concentration for buyers? Maybe private equity and strategics are different. But what do you see? Is it 20%? Is it 10%?

Patrick Morin:

Yeah, and it's that old economics answer of it depends. I would say the answer depends. But you know me well enough to know that I actually have an opinion on things. So whether it's right or wrong, it's my opinion. Let's start with your premise of 20%. When we're looking at it as a risk factor, it's typically for us going to be 20% of revenue or 20% of EBITDA as it drifts down. When we see that number, we know that we have a customer concentration issue. And it doesn't mean that it's a derailing thing. It could be a good thing. But we just know that we want to flag it and we want to say, is there something that we can do about it? But now when you take a look at it, if you take a look at acquisitions from either the strategic lens or from the financial lens and you say perhaps that particular customer, when it is put into the ecosystem of a bigger unit, it's not customer concentration at all relative to the post-transaction event. Or it could be we really want to get into that customer. We haven't been able to get in for years. We're going to buy this company to be able to get into it. Again, it's not a risk profile. But if you're operating a company alone, the red flag for you is going to be about 20%.

Francis Larson:

Marketing the company, you talked about this intense six-month period. First, you're getting a data room ready, et cetera, then you're marketing the company out, and then you're doing diligence. What does that marketing process look like? Are you telling the entire marketplace of buyers? Or is it going to select partners? What does that actual deal-making process look like in that marketing stage?

Patrick Morin:

Sure. So I'm going to break it down into the three fundamental elements that you have. And the three are a broad auction, the second is a narrow auction, and the third is negotiated sale. And so in the context of how many do you go to and what does that look like, the one thing about all investment banks is we work under the auspices of anonymity and privacy and confidentiality. Super important in our space because most people are going to be paranoid that their competitors are going to know that they're for sale, and we have to be able to manage that. So this is not a broadcast from the perspective of, hey, I'm selling my car kind of thing. This is a very targeted event. And so on a broad auction, you're typically going to a hundred, 150 type buyers. They have been pre-vetted, and they fall into a couple of categories. They fall into strategics, they fall into private equity or private equity backed strategics.

And because we're in the space, we know it so deeply, we know typically who has the money in the checkbooks, who has surety of close, who has speed to close, who's going to be a good cultural fit. And so when we vet that list down, we've already started looking for elements that's going to make it a successful transaction. And then in that process, this is actually we're making phone calls, we're actually hitting emails, we're doing meetings. It is a hands-on touch the buyer type of thing. In a narrow auction, you're doing the same process, but it's a fewer number of players. It could be because there's specificity within what the staffing firm, what the HCM firm is doing. And they could be doing just winders for power generation, so they have a limited number of buyers that are going to go with that. Typically, that process goes a little faster.

And then finally in a negotiated sale, that's where you typically are going to have already identified a buyer and a seller and there's one to it. And a lot of times we'll see that in distressed situations where it is there's going to be one buyer and we have to move very quickly and we have to get to a deal fast. So in the first two, that outreach process looks very similar. In the third one, it's usually boom, we're just talking to them right now. Interestingly enough, in the staffing space right now, we have all three of those types of engagements going on actively.

Francis Larson:

For that third one with the negotiated sale, is that when you're talking about when you have an unsolicited bid? So somebody comes and they say, "Hey, I really want to buy your firm. You look great. Can we start negotiations?" And then they'd go like, "Patrick, help me. I have this unsolicited bid." Is that that situation or is that something different?

Patrick Morin:

Yeah, it's one of them. That is what we call a preemptive bid or preemptive offer. And anybody with any understanding of it was going to say, oh, of course you're going to pay a premium for that. Right? Because in general, a broader auction usually yields better results in all forms. Usually you're going to get better terms, usually you're going to get a bigger price. It's just better because you're able to play the buyers off of one another. In a negotiated sale, in our industry, we have an adage that says one buyer is no buyer because they have really all the leverage and they're coming to it. But looking at the way that you frame that up, if you talk to any staffing CEO or founder, Francis, you will find that they are getting five and 10 phone calls and emails a week. And the reason is multivariate.

The first one is that private equity groups hire business and corp dev guys to do nothing but outreach to try to find deals that they can buy without going through a broad auction because it's cheaper for them to go through it. The second thing is that the strategics are also doing something similar to that, and they're trying to find, okay, we can expand over here. And those are, a lot of founders don't know what to do with those. But interestingly enough, just yesterday, I actually had a founder call me and say, "I've got this company that they're pounding on me. Can you run interference?" And I picked up the phone, vetted out the buyer and said, "This is a real buyer, this can happen, and we can make this happen." But I also told the buyer, "Look, we were planning on going to process anyway," because we'd been engaged with the company for six, seven months. "We were planning on going to process anyway. If you want to take this company before we go to process, you need to understand that we're going to need a premium to be able to do that." And the buyer's reaction, "Yeah, we'll do that."

Francis Larson:

And you need to sign the LOI tonight!

Patrick Morin:

Your mouth to God's ear. Right?

Francis Larson:

So thinking of different types of buyers, strategics on the one hand, financial sponsors, private equity on the other hand, are they looking for different things? Is it a different sale? Is it different multiples? Are the strategics fundamentally different than private equity buyers?

Patrick Morin:

Yeah. What I'll tell you is that it has morphed over time, even in the last decade within this space. So before, you would always believe that a strategic would pay more because they're looking for the synergies. That's that buzzword that everybody throws around. They're saying, oh, we don't need two accounting departments, so we're going to nuke one and we're going to save that. We don't need two marketing departments. We're going to nuke that and we're going to do that. And oh, we're going to be able to cross-sell and get into these types of customers, so we're going to expand, so we are willing to pay a little bit more. That used to be the case. Private equity guys used to be extraordinarily disciplined, and they were like, no, this is the multiple. This is what we'll pay. And we got it. And what we're seeing now is this blend between the two and the parity over what private equity or private equity backed strategic, that parity with a pure strategic is really coming closer and closer together.

And so we are seeing in most of our management presentations, when we bring in the buyers, we're seeing the strategics and the private equity guys both really centering around a mean of total value. But what are they actually looking for? Typically, the strategics are going to be looking for market expansion or they're looking for a technological addition saying they've got a skillset that we would really like to be able to bring in. They could be looking for, sometimes there's a phrase that's thrown around, Francis, called an acqui-hire, and the acqui-hire is an acquisition hiring where they only are marginally interested in the company, but they really like some of the people there. They want those people, so they'll buy the company just to get the people. We see a lot of that in transactions. If you go jump over to the private equity side, just to keep the balance in the conversation on the private equity side, there's two types of transactions you usually see out of those guys.

The first one is a platform acquisition where they're trying to find a company big enough that it can stand on its own, and it could be the flagship for their investment thesis. And then the second thing is going to be what are called tuck-ins or add-ons. And these are the smaller companies that allow it to be able to grow. And in both of those cases, they are looking for some degree of synergies. You typically tend to see that more in the strategics than you do in the financial buyers, but effectively they are looking for very similar things. At the end of the day, what they really want is accretion. They want to be able to see that the total value of the company in the buy versus build model. Do we buy something and add it and we get into that market space faster or do we build it organically ourselves? That's the path they're trying to solve for.

Francis Larson:

So speaking about the platform versus the tuck-in, I have to believe that dealing with a platform buyer is a harder sell than dealing with a tuck-in buyer who's like, we do these things all day, we've been tucking these things in. Do you notice a difference in marketing the company or dealing with the platform buyers versus the tuck-ins?

Patrick Morin:

The marketing of the company doesn't really change because obviously they're on the buy side and they have their own reasons for what they're doing. If a private equity firm is going into buy a platform type company, the due diligence is usually they've got to make sure that that company is going to be the appropriate vehicle by which they can add on all these other elements, all these other little companies. And because what they don't want is to bring in a smaller company, tuck it in, and have this company be so unstable because it doesn't have business systems, it doesn't have leadership, it doesn't have good economics in terms of margin, that all of a sudden, adding on this acquisition over here kind of wrecks the whole thesis.

Strategics typically tend to really know the industry and the business. The financials do too. They have operating partners who are usually pretty educated about it. But the strategics are typically going to be looking at that and going, oh, yeah, if we were running the business, this is what it has. So they have a little bit more of, it's a little easier to speak the language with them. But in terms of it, you're still going to go through due diligence on either one. And the takeaway from this question is this, is that quality companies always sell easier than non-quality companies. It's just easier. And that's the reason for starting to do a look on this ahead of time.

Francis Larson:

You really cannot focus on the score. You can only focus on what you're doing and a score will take care of itself, to use a sports analogy.

Patrick Morin:

Well, to extend on the metaphor, I mean, you take a look at Moneyball, and I'm not talking about the movie, I'm actually talking about the book. That book is so profound. It's so profound that I think that most people just kind of blew it off. There are two books that I thought were really profound in history, just in business in general. The first is Moneyball because it's looking at the metrics that not everybody else is looking at. Moneyball is neither about baseball nor about money. It is about the metrics of a business and what ones matter that people typically don't look at, and how do they tie to things that do matter? What can you control through those metrics that are going to make the company more valuable? The second one is The Goal by Goldratt, and that's a manufacturing book, but it's talking about throughput through a system and efficiencies through a system. He was an Israeli physicist. And I think if people read those two books, they really start to get an understanding of the accretion factor and what they could be doing to make their companies more valuable.

Francis Larson:

Yeah. If you build a great company, in a way, the buyers will come, the bankers will come if you build a great company. So wrapping up, what do you think? You mentioned what makes a quality company. Final pieces of advice for staffing companies looking to think about selling. What should they be thinking about? Let's say they're doing a couple million dollars in revenue. What should they do right now? What's your best advice to these companies looking to eventually sell in a few years?

Patrick Morin:

So there's an energy level and there is a mentality that goes along with that, and especially at the lower middle market end of the market. A lot of times what we'll see is that as people get older and they've been in their businesses longer, they normally have a natural and understandable reaction of taking their foot off the gas. And that is completely the wrong answer. And that is they should continue, until I wire you the money, until we close the transaction, you should be able to keep your foot on the floor, keep going, keep building out the company, keep innovating, keep going. Because one of the worst things that people can do is they start to enter a transaction of any kind and it starts to tick down, the valuation, the buyers don't want to be catching a falling knife, and so it makes them question.

So the single best advice is review the things that we talked about at the top of this interview and then look at that and be committed that at least for the time period that you see in the foreseeable future that you're going to hold onto the company, do everything that you can to continue to build. The way that I say it to people is this. If you do for two years what most people won't, you could do for the rest of your life what most people can't. And when you are putting together a saleable positive company, it's not just about making our jobs easier, it is going to make your life as a seller much more easy.

Francis Larson:

Great advice from obviously a wise pro in this space. Patrick, thank you so much.