When Ryan Clark co-founded the regional staffing firm PeopleShare in 2005, the focus was on organic growth.
“We couldn't acquire anybody. We had no money the first three years,” says Clark, the firm’s CEO. “We're not paying ourselves anything. We’re reinvesting everything back into the business just to double in size — just to go from one office to two offices. That's not a lot of offices, but it's 100 percent growth.”
When the company hit a comfortable revenue number, Clark began to wonder how big PeopleShare could get. That’s when acquisition became a real and viable option.
Clark spoke with Smart Business Dealmakers about the differences between the company’s first and most recent acquisitions, its recapitalization and the lessons learned along the way.
You don’t fail, you learn
The first acquisition opportunity in 2013 came through a personal relationship the company had with an investment banker. It was for one transaction that could bring three companies — Advance Personnel, ASAP Staffing Inc. and S&R Staffing — into PeopleShare’s fold. The targets had the potential to help PeopleShare expand geographically into Reading, Harrisburg and Pottsville.
Clark and his business partner, Dave Donald, hadn’t built a professional support network with M&A experience ahead of or for an acquisition. The two essentially navigated the deal themselves, save for some legal help. It was a confidential sale, and that put constraints on the evaluation process that prevented Clark and Donald from visiting any of the targets’ offices or meeting the employees.
“It really came down to a decision about the gross profit that this company was growing off, gross profit percentage and their workers’ comp rating,” Clark says. “It was really much more of a financial decision than it was a cultural match.”
Clark says that while culture is a term that’s hackneyed and overused into meaninglessness, it really is critical to a deal — arguably more important than a good debt, profit or gross margin position, especially in a service business. It’s a lesson he learned firsthand.
“When you acquire that company, the culture has really got to match,” Clark says. “And that's why we needed to do so much work when we acquired them in 2013.”
In the first few months of the integration, a lot of people from the acquired companies left. Clark says only two out of the 20 employees brought on in the deal are still with the company today. It was an expensive lesson; not only were there turnover costs and costs to hire replacements, there were also costs to replace customers that didn’t fit with PeopleShare’s business model or price point — some 60 percent of the acquired customers also left.
“When you talk about the cost to acquire a company versus the cost of customer acquisition, we really paid through the nose from that acquisition,” Clark says. “But, as people say, you don't fail, you learn.”
An anticlimactic recap
In 2015, two years after the first acquisition — which Clark says was a net benefit and he’d do again in heartbeat — revenue and the pace of growth again seemed to be nearing a ceiling. They wondered how much longer the strong post-recession recovery economy was going to last, which led them to take the company to market. This time they added the support of an investment banker.
The initial assumption was that they’d sell to a big publicly traded staffing company, but their margins were too high to generate interest from the bigger players. Then the investment banker introduced the idea of courting private equity. There, they found a lot of interest.
They evaluated their private equity options much the same way as they’d evaluate a potential new hire or vendor. They looked at past history and felt comfortable with Trivest, a private equity firm based in Coral Gables, Florida, that had a track record of successful outcomes.
Post-close, things didn’t look any different. In fact, it was a little anticlimactic, Clark says. Rather than popping bottles of champagne, Clark went back to making sales calls.
What did change with the involvement of Trivest was that its influence made the co-founders think more strategically and really dig into the finances. Now, the cofounders were analyzing the numbers because more was at stake. Revenue had doubled since their first acquisition and the company employed many more people. That meant they couldn’t just do things based on gut feeling.
From worst to best
The year following the acquisition, according to Clark, was, from a growth and profitability standpoint, PeopleShare’s worst ever in its more than 15-year history. Revenue flattened and EBITDA dropped significantly because the co-founders — the chief business development guys — had their heads down for eight months while taking the company to market and took their eyes off the business development ball. This time they had someone they had to answer to.
“We had some tough conversations, recognized that we didn't know everything, and they didn't know everything, either,” Clark says. “But through collaboration, we came up with a really good plan and had a really good 2017.”
The years that followed got progressively better, with 2019 being one of the company’s best. It was also the year it took another shot at acquisition — two, actually — which gave them a chance to revisit the process with a little help.
Having more professionals involved this time in the acquisition of Reliance Staffing and Best Practices Staffing meant there were no surprises. And learning from past experience, Clark and Donald got more into the weeds, meeting the targets’ customers and key management and generally doing much more due diligence.
Through the far more thorough process, they were able to better understand the targets’ customers and their employees, identify which employees wanted to stay and create incentives on the back end tied to performance. The process, from start to finish — informed by past missteps and more expert involvement — has led to better outcomes.
“It wasn't a coincidence that each company that we acquired was better than the last,” Clark says. “In a lot of ways, we've gotten better at acquisitions, but we acquired better companies.”