Some help with a biz plan for a new staffing agency, please!

I am starting a new company, making my business plan, and would like some advice from the pros on 2 things:

1. I am trying to get a good idea of how to value a small to medium sized staffing firm. The best suggestion I have received so far is that a staffing company is generally worth 5-6 times the EBIT.
Can anyone confirm or have another way of calculating?

2. I have heard that roughly 20% of revenue should go to bottom line for profit. Does this sound low, high, or about right?

Thanks!!!

▶ Reply to This

Replies to This Discussion

Permalink Reply by Jerry Albright on June 27, 2011 at 1:47pm

Hi Cody. Welcome!

I'd like to offer some suggestions here - as I'm sure many of us will - but we'll need some more info.

What is the purpose of the business plan? Is this for financing, etc.? Are you planning to hire some people right away? Are you starting out on your own? Do you have agency experience?

Regarding profit - I'm not quite sure where that 20% number came from. Your percentage of profit will be in direct relationship to how many placements you make and what it costs to keep your office open. At some point during the year every new placement will be nearly 100% profit.

▶ Reply

Permalink Reply by Sandra McCartt on June 27, 2011 at 2:32pm

Cody,

If you are starting a new company from the ground up with no track record your value at start date is simply your capital investment and furnture and fixtures less start up costs which is normally zero until you have a year or two to produce revenue. The rule of thumb is that until you have been in business for about five years showing a profit you are still a start up unless you knock it out of the park.

If you are doing a business plan for the bank to obtain funding for starting a business you are doing a projection of costs and earnings. If you are bringing clients with you from another business to start your own you can project some income based on past performance. A business plan for funding is a projection of earnings and expenses and not a valuation. A guesstimate at best or as the number crunchers call it a WAG (wild ass guess).

For a going concern the object is to show as little taxable profit as possible unless you are starting it for the purpose of building it and selling it. As Jerry indicates more information is needed before any of us can give you anything but a WAG. :)

▶ Reply

Permalink Reply by Sandra McCartt on June 27, 2011 at 2:35pm

As to value. Market value of anything is what a willing buyer and willing seller can agree on.

▶ Reply

Permalink Reply by cody voellinger on June 27, 2011 at 3:09pm

Thanks guys. I am starting form scratch, worked in agencies for 5 years, but scratch on my own. Looking to hire in the next 2-3 months and so I want to have an idea of the valuation formula for a couple reasons:

-if i am giving a % of the company to key hires, what is that likely to be worth if we are doing $Xmillion in revenue
-if i am considering selling in 5 years and want to achieve X, what revenue or EBIT is needed in order to do so, and is that realistic for me to achieve

Thanks!!

▶ Reply

Permalink Reply by Lilia Tereshchenko on June 27, 2011 at 3:15pm

Agree with Sandra. The value comes with time, experience on the market and additional value you'll receive from client's references. When and if the people start recommending you - then you can count your first value. Because not marketing brings you the most of clients -your reputation on the market and recommendations do it.

For the initial stage calculate your BP on usual "worst-best" scenario and forget about the valuation. After one year of operations you can start thinking about it.

Sandra McCartt said:

Cody,

If you are starting a new company from the ground up with no track record your value at start date is simply your capital investment and furnture and fixtures less start up costs which is normally zero until you have a year or two to produce revenue. The rule of thumb is that until you have been in business for about five years showing a profit you are still a start up unless you knock it out of the park.

If you are doing a business plan for the bank to obtain funding for starting a business you are doing a projection of costs and earnings. If you are bringing clients with you from another business to start your own you can project some income based on past performance. A business plan for funding is a projection of earnings and expenses and not a valuation. A guesstimate at best or as the number crunchers call it a WAG (wild ass guess).

For a going concern the object is to show as little taxable profit as possible unless you are starting it for the purpose of building it and selling it. As Jerry indicates more information is needed before any of us can give you anything but a WAG. :)

▶ Reply

Permalink Reply by Jerry Albright on June 27, 2011 at 3:16pm

Perhaps I'm just a bit "simple" when it comes to these things.

You don't need to worry about what your business "might" be worth down the road. I wouldn't worry about hiring anyone until you've gotten your first few (dozen) placements in the books.

All you need to worry about is one thing: Sendouts. Any other concern will only slow you down - and at this time in the program - that's the LAST thing you need.

If you're hiring anyone you should only hire experienced recruiters. Pay them a reasonable commission. Offer a bonus over a particular dollar amount. Do NOT hire people without experience. It will only dig into your valuable placement time.

This is only my perspective obviously. Adding recruiters is Phase 2. Phase 1 is: Send somebody an invoice. Until Phase 1 has been repeated many, many times - you don't need to worry about Phase 2.

▶ Reply

Permalink Reply by cody voellinger on June 27, 2011 at 3:25pm

Thanks everyone for all the input. This is definitely helpful as I get started, and I am sure I will have many more questions :-)

Has anyone actually explored buying or selling a staffing firm and know a general formula?? I know there are a lot of factors, but there must be a base assumption to start from...

▶ Reply

Permalink Reply by Jerry Albright on June 27, 2011 at 3:25pm

Here's a much simpler business plan:

Make a sendout today. Repeat tomorrow. Never stop.

You'd be surprised what will happen for anyone who follows this very basic "how to start an agency" approach.

Note: Cody - hopefully you are reading my advice with a middle-aged hillbilly from Indiana accent. We're all looking forward to seeing your success and are here to help. I sure wish there was a place like this when I struck out on my own. I worried about so many things - company name, brochure, where to bank, what kind of office space I needed, web site.....the list was gigantic.

And finally the guy who worked the desk right beside me many years ago said "Your company name doesn't matter if you're not talking to anybody and the only time you'll need a bank is when you've got a check in your hand."

Simple, but so very, very true.

▶ Reply

Permalink Reply by Jerry Albright on June 27, 2011 at 4:18pm

If Temp services are in the mix - and we're only guessing here - a factoring company would pick up that business in a heartbeat. No money needed.

▶ Reply

Permalink Reply by Sandra McCartt on June 27, 2011 at 4:19pm

Jerry is dead right. Plug in the phone and start making placements. If you are going to sit around and engage in mental masturbation without hope of orgasm about the value of anything that hasn't gotten off the ground yet you are just blowing smoke at yourself and anybody else who will listen.

When you start any kind of business you decide what you are willing to risk, how long you can go with what you have in the bank and how to pay the rent and feed yourself until you can bring in the clamshells.

In a service business which is what we are it takes a long track record of building reputation and clients before you can begin to value it. Then it can change overnight if you lose a client. Lose a key recruiter or if you are doing all the business yourself if you sell and walk out the door a ton of the value walks with you. That's why when a firm sells the seller normally agrees to stay for a protracted length of time to transistion clients. Recruiting firms have a lot of blue sky and it can get cloudy real fast.

▶ Reply

Permalink Reply by cody voellinger on June 27, 2011 at 4:24pm

ok, going slightly tangent now... back to the original post, can anyone answer these 2 questions with some actual numbers given the basic info provided?

1. I am trying to get a good idea of how to value a small to medium sized staffing firm. The best suggestion I have received so far is that a staffing company is generally worth 5-6 times the EBIT.
Can anyone confirm or have another way of calculating?

2. I have heard that roughly 20% of revenue should go to bottom line for profit. Does this sound low, high, or about right?