NAPEO
The PEO M&A landscape is evolving. Deal flow remains healthy, but the drivers of value are shifting. As the cycle enters its later stages, platform operators must justify every dollar they spend to their boards and shareholders.
Deliver value early, refine as you go, and never let the pursuit of perfection delay progress. For clients, that approach means seeing tangible improvements (including faster support, better reporting, stronger compliance) while the larger systems continue to evolve behind the scenes.
Replacing a departed employee can cost between 50% and 200% of that individual’s annual salary when you factor in recruiting, onboarding, and the productivity ramp-up period.
For me, the exit process from conception to closing was not a straight line and it was not fast. In fact, making the decision to merge with another company took over ten years and multiple conversations with potential acquirers.
Shared vision and aligned values between parties are paramount. When choosing who to partner with, buyers and sellers should first define what they hope to accomplish through the transaction.
You don’t have to be ready to sell today to prepare for an M&A transaction. In fact, the best outcomes happen when owners prepare well before they’re ready to make a move.
Looking beneath the surface, PEO M&A continues to be led by larger acquirors in the space, with the majority of targets being on the smaller side, or regional PEOs.
Without a plan, succession defaults to crisis management. Decisions stall, clients get nervous, and employees start looking elsewhere.
As the demand for PEO services continues to grow, so too will the need for trusted advisors who can help businesses make informed decisions.
The PEP structure offers employers a high degree of fiduciary outsourcing, pricing scale achieved through asset aggregation, and administrative simplicity.
Access to robust claims data and analytics empowers PEOs to optimize plan performance, proactively manage health risks and improve employee well-being for clients.
A close-to-the-vest approach may not be the best strategy, as it limits a PEO’s ability to fully tap into the relationships between trusted advisors and their clients. Without the value-added relationship, channel partner clients may regard PEOs as a commodity, reducing the differentiating factor to the price.
From kickoff to first production workflow, the rollout took about six weeks—covering the analytics dashboard plus the payroll automation. The very first automation now saves 25% of the payroll team’s time on a weekly basis.
AI can provide personalized learning paths for career development, tailor benefits packages based on location and varying family needs. Emerging AI models even have the ability to predict employee burnout before it occurs.
Ultimately, the most successful PEOs are those who understand their core strengths, weigh the total cost of ownership, and align their AI approach with business priorities.
The question isn’t whether AI will transform your PEO—it’s whether you’ll guide it strategically or let it happen haphazardly, with biased decisions and unrealized value following.
With the new tariff policies dominating headlines, proactively managing risk is essential. Businesses must stay ahead of the turbulence by monitoring cash flow and acting decisively to protect the bottom line and customer relationships. Taking strategic action now may not fully insulate your business from the changing environment but may help mitigate some of the worst impacts and position you to respond effectively.
The most important step when facing uncertainty is to assess and protect your cash position. Tariff related disruptions, inventory purchases, or reshoring investments can quickly strain working capital. Without adequate liquidity the best laid plans are doomed to fail. That’s why one of the first things turnaround consultants do in a crisis is implement a 13-week cash flow model. This tool is just as valuable for healthy businesses navigating uncertainty as it is for distressed ones.
A 13-week cash flow provides a rolling, short-term forecast of your business’s inflows and outflows. It allows you to see when and where cash might get tight and helps guide decision-making around expenses, vendor payments, and customer collections. This visibility is crucial if you’re preparing for unpredictable cost fluctuations or shifts in revenue due to market turbulence. There are many resources online discussing the methods of preparing these, but you are essentially detailing out your expected cash inflows and outflows on a weekly basis.
After gaining some visibility into the short-term forecast, start evaluating opportunities to free up working capital. Things like:
When cash is tight it’s easy to be reactive, but in the current turbulence you may need to act strategically, with confidence. Gaining visibility into your current and future cash position will help you make smart decisions for the long term.
Build Inventory Buffers. The first step that businesses should take when facing new tariffs is to build inventory buffers. Tariffs, particularly those resulting from political disagreements, may be resolved with new trade agreements and negotiations. By increasing your inventory of critical goods now, you can weather a temporary storm without immediately passing costs onto your customers. This buys you valuable time to implement longer-term strategies like nearshoring and reshoring, as well as time to communicate thoughtfully with your customers about necessary changes. Watch your cash position when building an inventory buffer and make sure you don’t over-extend yourself. Often, the cash flow can be a smaller cost compared to losing customers over sudden price hikes or missed deliveries.
Explore Nearshoring and Reshoring. If your business relies heavily on China or other regions subject to punitive tariffs, consider nearshoring to countries exempted from those heavier tariffs.
For businesses with resources and scale, bringing manufacturing back home may be even more attractive. While costs may initially seem higher, efficiencies in transportation, easier oversight, and a reduced risk profile can create long-term savings and customer goodwill. As you explore reshoring options, look for synergies in transportation, warehousing, and overhead that can make a domestic operation more viable.
Pursue Local Incentives. Don’t navigate these challenges alone, there are many other local businesses in the same boat. Use your local associations and industry groups to lobby state and local governments for tax breaks, infrastructure support and other subsidies that can reduce the costs of domestic production or offset increased costs from tariffs. Many localities are eager to support job-creating reshoring efforts.
Pick Up the Phone. Whenever possible, call your key customers directly. Email announcements can feel cold and transactional. Phone calls show that you respect the relationship and are willing to invest time into a conversation. A call allows you to explain the situation with a personal touch.
It goes beyond communication. It’s a real opportunity to build trust and deepen the relationship. Customers appreciate transparency, and hearing your voice reinforces trust far more effectively than a mass email ever could.
Everyone’s Feeling It. Your customers are likely navigating the same pressures, from rising supplier costs to labor and logistics challenges. A little empathy can go a long way. Acknowledging this reality openly can defuse tension. Frame the conversation around shared challenges and mutual resilience.
Consider Business Process Outsourcing. For roles that don’t require a physical presence, consider offshore BPO for flexibility and cost savings. Flexibility is a major advantage of BPO. As your business adjusts to volatile market conditions outsourcing gives you the ability to scale staffing levels up or down without the commitments associated with hiring and training full-time employees. This agility can be invaluable when negotiating the uncertainty created by tariffs. BPO also offers substantial cost arbitrage; by tapping into global labor markets, you can often access skilled talent at a fraction of domestic costs. These directly offset tariff-related expenses on physical goods.
Scrutinize Discretionary Spending. Travel, software subscriptions, and entertainment add up quickly. Evaluate non-essential expenses to determine if each is delivering ROI or can be paused or renegotiated.
Be Intentional About Hiring. Hiring decisions matter more than ever during uncertainty. Before filling a vacancy or adding new roles, take a moment to pause and evaluate the real need. A simple mindset shift is to ask: Can we eliminate it? Can we offshore it? Can we automate it? If a role isn’t mission-critical, you may discover that existing staff can absorb the duties or that the task is no longer even necessary. In other cases, the role may be a candidate for BPO. Finally, with AI on the horizon, explore opportunities to streamline processes with automation or by leveraging LLMs.
Rapid change is always difficult to deal with, but it’s also an opportunity. Responding quickly and thoughtfully can turn disruption into an advantage. Stay agile by protecting your cash position, making data-driven decisions, and communicating clearly with your stakeholders.
Recently, I had an opportunity to speak at the NAPEO Operations Workshop, held in New Orleans on April 8, 2025, on the topic of Carve-Out arrangements. My co-presenter was Paul Hughes of Libertate Insurance, a leading expert in workers’ compensation insurance and PEOs.
I was pleased to see that we had standing room only for that presentation on the topic, since carve-out arrangements are so frequently used but often overlooked by the industry. It was the audience’s participation in that session that led to me to want to write this article since the audience members were trying to help other PEOs by openly discussing their own client service agreement challenges. That discussion was a profound reminder of what an amazing industry we work in when competitors volunteer insights to help each other. It was clear from that conference and from several cases that I have been retained on that our industry has some fixable problems with carve-out arrangements that we need to address.
As background, for those who may not be familiar with the term carve-out arrangement, this is a term of art used to describe a PEO-client relationship in which the client maintains their own workers’ compensation insurance policy. It is also frequently referred to as a client-based policy arrangement.
Although it seems simple, one of the most frequent issues that I have encountered is that many PEOs do not have a carve-out specific client service agreement. That means that the PEO is typically using a standard client service agreement, which, in most instances, indicates that the workers’ compensation insurance coverage is through the PEO’s policy, not the onsite client employer’s policy of coverage. As a rule, when contracting with a client that will have its own workers’ compensation insurance policy, there must be a client service arrangement that makes it clear that it is a carve-out arrangement. That client service agreement must clearly state that coverage is with the client and its carrier and not the PEO. A failure to have that specific carve-out language in a client service agreement can result in multiple issues. For instance, I have encountered cases where the onsite client’s carrier has demanded to see the client service agreement between the PEO and their insured. When that carrier determines that the workers’ compensation insurance coverage is listed in that agreement as being through the PEO’s carrier, they quickly deny coverage on the claim. While that is a problem, the larger problem happens when the PEO’s insurance carrier is presented with that denial and then declines coverage on the accident since the onsite client location was not reported to the carrier or referenced in the policy. That is not a situation that any PEO wants to be in. When that happens, the PEO better have excellent relationships with its insurance carrier, broker, and the onsite client company owner, because getting the problem fixed will rely heavily on their cooperation.
Many PEOs’ sales and risk teams believe that once the client has secured their policy of coverage in a carve-out arrangement, then that is the end of their worries. Unfortunately, that is not the case, especially when the PEO usually does not have any involvement with that policy. In those instances, the client pays for the workers’ compensation policy directly and deals with their carrier and/or broker directly. That may initially sound great to the PEO as it is one less thing to monitor. What happens, though, when the onsite client fails to make the payments on that policy, or if it gets cancelled? In this real-life scenario, the PEO can only hope that it will get notice of that cancellation, even in the best of relationships with the client. Without any notice of the cancellation, the PEO would continue to provide services while unknowingly doing so while bearing all of the risk should a workplace accident occur.
When possible, PEOs will want to get endorsed on the client’s policy for extension of coverage. That would also create an avenue for notice of the cancellation of that policy. Unfortunately, that is not often practical since most insurance carriers are fearful that doing that opens the door to the risk of the entire PEO rather than just the worksite employees. The liabilities of carve-out arrangements can be complicated and is a subject that I have previously addressed in PEO Insider.
Surprisingly, another issue of great importance deals with all client service agreements. Remarkably, especially in this age of the availability of so much technology to copy and preserve documents, an issue that I have frequently encountered is that many PEOs have lost their client service agreements. I know that many readers will read that and believe that it cannot happen to their company. I am just telling you that it can and that it does happen at PEOs of all sizes and sophistication. In a complex litigated case or one with high exposure, the loss of the client service agreement creates multiple challenges for your legal team, especially when your counsel is trying to get the PEO out of that exposure. The client service agreement is the foundation of the PEO/client relationship and is essential in any effort to get the PEO extricated from litigation. When that client service agreement doesn’t exist anymore, it creates significant logistical challenges to the PEO’s legal team.
Another issue I have encountered that is just as troubling occurs when one party signs the client service agreement but not the other, or the Agreement has not been signed at all. I was surprised how many hands went up at the Operations Workshop when I asked the audience if they had that issue with their agreements. It is surprising how frequently this happens. An agreement that is not fully signed is just a piece of paper, and it makes it easy for an attorney or carrier to argue that there was never any contract between the PEO and the client. Making sure that the client service agreement is signed and dated by both parties is vital. Accordingly, when client service agreements are reviewed, and any agreement is not fully signed, then the missing signature(s) should be secured. In addition, those agreements should also be electronically scanned and protected in your database in a manner that allows you to easily access those documents. This will also make it easier for your company at the time of any renewal.
As you can see, most of the issues discussed above can be avoided with a simple process in place. If your company does not have these processes in place, I would encourage you to do so.
The market for PEOs is more competitive than ever, as numerous providers offer similar services and benefits while attempting to differentiate themselves.
Currently, focusing on employee engagement is key to helping clients build strong and motivated teams. According to Gallup’s 2025 State of the Global Workplace report, global employee engagement has dropped for only the second time since 2009—a clear signal that PEOs must rethink how they support their clients’ teams.
PEOs are uniquely positioned to help clients win at employee engagement by offering benefits that are not only attractive to employees but also deliver measurable business value.
In August 2024, we surveyed over 300 employees across several industries and generations, spanning Gen Z to Baby Boomers, for our report on the most in-demand voluntary benefits and perks. The survey respondents comprise a mix of hourly and salaried employees, representing remote, hybrid, and in-person workers from every region in the United States. This article highlights key findings from that research and explores today’s most sought-after voluntary benefits—and how they solve problems and create ROI for PEOs and their clients alike.
Voluntary or fringe benefits go beyond the basics of healthcare, dental, and 401(k) plans. They are customizable, cost-efficient options that offer employees flexibility, enhance their quality of life, and build loyalty. For some employees, a benefits package is a more significant deciding factor than compensation when accepting a job offer.
91% of surveyed employees said that benefits are important or very important in their decision to accept a job. 47.4% of employees said they would consider taking a pay cut at a new job for better benefits.
For PEOs, these benefits are a powerful way to differentiate service offerings, meet the needs of diverse client sets, and attract and retain new clients in a competitive market.
Your clients are probably struggling with employee burnout and retention, given the global drop in employee engagement. According to our research, PTO and hybrid/remote work options were the top two most valued voluntary benefits, each chosen by 25.4% of the surveyed employees.
PTO and flexible work arrangements directly support work-life balance. For PEO clients, enabling better time-off policies or location flexibility can lead to higher morale and reduced burnout—factors that decrease turnover and absenteeism. Start small if needed—even seasonal flexibility, such as “Summer Fridays,” can go a long way toward helping employees achieve a work-life balance.
For PEOs, creating ready-to-launch flexible work policies for clients can position your services as a powerful asset in the war for talent.
A drop in employee engagement can be attributed to many factors, but poor mental health continues to impact productivity. The Gallup 2022 Well-Being Index found that missed work due to unplanned mental health leave cost the economy $47.6 billion.
With 85% of surveyed employees rating mental health benefits important, it’s clear that offerings like mental health days, mindfulness apps, and company-wide wellness initiatives would support the workforce—while also positively impacting company profitability.
Mental health support can look different based on different clients, but PEOs can offer: free or subsidized access to mindfulness apps like Calm or Headspace, training for managers to spot the signs of burnout and anxiety in their teams, and increased access to or financial support for therapy and counselling sessions.
Promoting mental wellness isn’t just good for employees—it fosters a more resilient and focused workforce, ultimately leading to improved performance. PEOs who champion mental wellness will not only build stronger client relationships—they’ll create workplaces where employees can thrive, innovate, and stay longer.
Wellness-related benefits are in high demand among today’s employees, who are increasingly concerned about their holistic well-being. Businesses that demonstrate care will stand out.
Consider offerings such as:
Subsidizing or offering benefits that support employees’ physical and mental well-being shows a company’s commitment to holistic employee well-being. For PEOs, this could also lower long-term healthcare costs and promote higher engagement and productivity, which, in turn, improves client loyalty.
In ZayZoon’s State of Employee Financial Wellness report, over half of employees reported daily financial stress. The stress is primarily coming from the pressure to cover necessities—73% of respondents stated that covering bills, rent, and groceries is their primary financial stressor.
Financial stress doesn’t clock out when employees clock in for work—it stays with them and impacts productivity and engagement. 43% of employees say financial stress impacts their focus at work. PEOs can offer financial wellness benefits that support employees’ short and long-term financial goals
In our survey, financial wellness benefits ranked as the fourth most valuable benefit for today’s employees.
Here is what financial wellness benefits can look like.
Financial education programs: Provide employees with the necessary skills and coaching to navigate tricky topics like budgeting and saving, student loan payments, retirement planning, and more.
Earned wage access (EWA): Allows employees to access already-earned wages ahead of payday, privately and without needing to involve a manager. 63% of workplaces report increased productivity after offering EWA, and 74% of employees said that having EWA available to them has improved their overall financial well-being and level of stress.
Bundled perks and discounts: Offering access to savings on everyday expenses, such as groceries, gas, or medications, helps employees access essential items with ease.
By helping companies invest in their employees’ financial health, PEOs can stand out to clients as forward-thinking and creative, especially as many of these benefits, like earned wage access, come at no cost to business owners.
Recognition programs can be an important part of workplace engagement, with Gallup finding that employees who receive recognition are 5x as likely to be engaged at work.
Recognition, such as peer-to-peer platforms, service anniversary awards, employee awards, or even personalized thank-yous from leadership, increases employee engagement and satisfaction.
In order to create a lasting impact, recognition needs to be baked into an organization’s everyday culture. PEOs can foster this culture by providing businesses with the tools and support necessary to integrate recognition into work life.
By offering benefits that make recognition frequent and embedding it into existing workflows, PEOs can offer a low-cost, high-impact solution that is proven to increase employee engagement and foster loyalty and enthusiasm across the board.
The modern workforce is evolving, and benefit expectations are evolving with it. The usual health, dental, and 401(k) are no longer enough to attract, motivate, and engage top talent.
For PEOs looking to stay competitive and drive results in a time of employee disengagement, voluntary benefits are more than employee perks. They’re strategic investments in talent and profitability.
By adopting the top voluntary benefits and perks and keeping their offerings agile, PEOs can solidify their role as indispensable partners in business success.
In today’s competitive labor market, PEOs are increasingly asked to help client companies do more than run payroll—they’re being asked to help attract and retain talent, especially in high-turnover industries. One of the most urgent trends shaping this conversation: real-time payroll.
As workers expect faster access to their earnings, the traditional two-week pay cycle feels increasingly outdated. Employers, particularly those in industries like healthcare, hospitality, and staffing, are under pressure to offer earned wage access (EWA) and same-day pay options. Large payroll platforms have already taken steps in this direction, and PEOs will need to consider how they can respond—not in theory, but in infrastructure.
CHANGING EXPECTATIONS, TANGIBLE PRESSURE
The desire for faster pay isn’t just a convenience, it’s often a necessity. According to recent data from the Federal Reserve, a significant portion of U.S. adults would struggle to cover a small emergency expense. Many turn to short-term credit or payday loans to bridge the gap between work and payday.
Offering real-time or early wage access provides employees with greater control over their finances and can significantly reduce financial stress. Many employers see it as a loyalty-building tool: workers who know they can get paid quickly are more likely to stay longer and show up consistently.
This shift is why real-time payroll is gaining momentum—not just as a trend, but as a competitive necessity for employers and a potential differentiator for the PEOs that support them.
THE TECHNOLOGY THAT MAKES IT POSSIBLE
Real-time payroll is powered by two key innovations in U.S. banking: the RTP® network, run by The Clearing House, and FedNow®, the instant payment rail launched by the Federal Reserve in 2023. These systems allow funds to move between institutions within seconds, 24/7/365—including nights, weekends, and holidays.
The number of participating financial institutions is growing rapidly, enabling broader access to real-time payments across the workforce. However, this new capability requires more than just access to fast rails—it also demands new processes for liquidity, payroll logic, and settlement timing.
PEOs considering real-time payroll will need to plan carefully, or they risk building a system that adds complexity without delivering value.
WHAT PEOS SHOULD CONSIDER
Offering real-time pay involves more than just flipping a switch. While the benefits are clear, the implementation requires careful planning across multiple dimensions.
Funding Models. Real-time payments must be pre-funded. PEOs need a reliable mechanism to ensure payroll liquidity is available before initiating payments. Many experienced providers now offer wire-based pre-funding, where employers send funds ahead of payroll and reserve-based funding, where a retainer balance is maintained and auto-replenished once it dips below a defined threshold. The reserve-based funding approach reduces disruption while providing the reliability required for 24/7 wage disbursement.
Employee Eligibility. Not all employees can currently receive instant payments. Eligibility is based on whether an employee’s bank or credit union participates in RTP® or FedNow®. To manage this efficiently, some modern platforms include routing number intelligence that can automatically identify eligible employees and route others through fallback methods like Same-Day or Next-Day ACH. This logic ensures consistent, compliant pay delivery—without asking payroll teams to manually sort transactions.
Integration and Simplicity. Many PEOs hesitate to implement real-time pay due to concerns about complex file formats or workflow changes. But newer solutions allow PEOs to continue using their standard NACHA file, removing the need to build or support new file structures. For PEOs with proprietary software, API-based options allow for secure integration without overhauling the tech stack.
Working with a partner that prioritizes compatibility can significantly reduce rollout time and cost.
STRATEGIC ADVANTAGES FOR PEOS
Beyond employee satisfaction, real-time payroll offers measurable benefits for PEOs:
In other words, real-time pay can move the needle both financially and operationally.
Real-time payroll is becoming a competitive standard. But jumping in without a clear roadmap can create unintended consequences. PEOs should look for partners who not only provide access to RTP® and FedNow®, but who also understand the funding workflows, eligibility logic, security controls, and compliance requirements specific to the PEO model.
Whether through a native payroll integration or a platform overlay, it’s critical to choose a solution that minimizes disruption, uses existing file formats where possible, and scales with your client base.
The era of waiting for payday is ending. Real-time payroll is more than a feature—it’s becoming an expectation, especially in industries that rely on flexibility and speed to compete for workers.
For PEOs, now is the time to explore the infrastructure, processes, and partnerships needed to support this shift. Those who plan early and execute with the right tools will not only meet client expectations—but exceed them.
Every missed payroll, or bounced payment, doesn’t just hurt a client relationship, it threatens the stability of a PEO’s entire business. In an industry moving well over $300 billion a year, treasury operations are not just back-office tasks, they’re front-line drivers of profit and scale. Payroll providers are often hindered by two key workflows: manual, error-prone bank payment processes and limited fraud and security protections.
While payroll software for PEOs continues to evolve, most payroll solutions still lack direct bank connectivity or the ability to support faster payment rails like RTP and FedNow.
As a result, treasury teams lose valuable time toggling between bank portals, software, and spreadsheets, keying in data and uploading files manually. A similarly disparate and error-prone process is used to monitor payment statuses, handle errors and returns, and manage reconciliation. This has a domino effect—client service suffers when processors don’t promptly communicate issues.
The bulk of payroll runs via wire/reverse wire and ACH—the former can be costly, complicated, and failure-prone, while the latter entails potential returns for up to 60 days after a payment settles.
In addition to risk introduced by the aforementioned payment workflows, many PEOs are unable to comprehensively underwrite new clients because of the time and resources required. Thorough verifications—including EIN business verifications, account verifications, and watch-list checks for every client—simply aren’t feasible.
As a result, smaller PEOs may fail to attain access to ACH and wire systems via banks because of an inability to prove sufficient compliance with NACHA and the Bank Secrecy Act.
Further, when PEOs can’t easily tell which clients might bounce a payroll or submit late wires, teams are likely holding too much cash “just in case,” losing hours to manual verifications, or getting hit with last-minute surprises that drive churn and lending covenants.
Bank redundancy is another concern. As the Cachet Financial and SVB crises also proved, over-reliance on a single financial institution can mean people don’t get paid. As more PEOs pursue bank redundancy, widely differing bank processes and requirements make manual payroll more susceptible to errors and that much more challenging to secure.
In tandem, manual payment operations and risk assessment challenges stifle growth for PEOs—quite simply, payroll management practices threaten security, squander resources, and negatively impact client experience across the customer lifecycle for PEOs.
Luckily, with the right partners, processes, and technology in place, PEOs can unlock massive scale without adding overhead or taking on unnecessary risk. Centralized, automated payroll saves massive amounts of time and money, increasing speed and profitability, and shoring up security to enable growth via M&A.
Here are the top considerations for leaders looking to modernize their treasury function:
1. Choose the Right Banks
Quality bank partners should possess the infrastructure to support labor compliance and automation. What may seem like basic requirements—accepting HCM files, timely payment status visibility, late end of day cut-off, bill by wire processing etc.—are not offered by most banks.
At the very least, you’ll want the ability to approve payments without making a required phone call, and post cash without checking a portal.
2. Explore Integrations
Selecting the right bank can not only help you meet client service terms but also open the door to increased revenue. Access to instant payment APIs and reporting can increase retention via features like last-minute payroll and faster, self-driven payroll corrections. Transaction-level reporting can shave over 90% off staff time dedicated to daily closing practices.
Access to banking APIs is instrumental for unifying payroll data and processes. The seamless flow of data through these integrations can give PEOs a centralized view of key metrics across banks—and sync without manual data entry into your payroll, tax, accounting, ERP, and CRM systems.
3. Automate Risk Detection
PEO treasury teams should approach security in a preventative—rather than reactive—way. This requires an automated engine that flags risk by client as soon as behavior changes, without manual review or spreadsheet exports. Teams should look to:
4. Optimize Payment Routing
When PEOs route every payroll the same way, regardless of the client or timing, money and control are left on the table. Smarter payment routing is one of the easiest ways to reduce payroll costs and increase reliability.
To improve payment processes, PEOs should begin by assessing and tagging each client with a payment risk profile. If a client often wires late, for example, use reverse wire and only release payroll once funds arrive. If a client is consistently reliable, release their ACH on schedule and take advantage of the float.
If a new prospect has several liens or a company recently doubled in size, each deserves a change in tag. These tags can be automated through the above-mentioned risk engine—with technical resources you might stand this up in-house or choose an expert partner.
5. Explore Faster Payments
With an estimated 67% of Americans living paycheck to paycheck, the significance of RTP and FedNow cannot be overstated. When PEOs can support a client’s request for emergency payments, as an example, or same-day payouts to gig workers, client experience skyrockets.
While faster payroll can clearly benefit end recipients, payment originators also stand to gain. Like wires and wire drawdowns, RTP and FedNow cannot be reversed or returned, offering an attractive alternative to ACH. These rails also operate 24/7/365.
With non-stop service and greater real-time insight into cash balances, faster payrolls allow PEOs to strategically approach cash flow, maximizing interest or float. Faster payments, however, reinforce the need for real-time bank data and alerts via APIs, since fraud and security risks also happen faster when payroll moves instantly and irrevocably.
As we approach Independence Day, most Americans find themselves gravitating toward the familiar. Few things in life are more American than freedom, mom’s apple pie, baseball, and the haunting feeling when you ask yourself: “did that payroll go out on Thursday since Friday is a holiday”?
As a baseball coach and father of young players, I find myself in many discussions over the rules of baseball; a game in which there are as many interpretations as there are rules. As the game evolves and grows, the rules change to suit the demands of its stakeholder base. This includes owners, players, staff, and fans. Throughout its rich history, the rules governing the game have increased in number and complexity to cover a variety of situations. The same can be said about the relationship a PEO has with its bank as the number of worksite employees (WSE) increases and banking regulations change with the times.
An evolving labor market has caused the risk landscape to shift for PEOs, and it has never been more difficult to manage. PEO practitioners need to be able to focus on solving their client’s needs without having to worry about the complexity of banking regulations and what seems like an endless battery of questions. Grappling with these requirements is simplified when the “why” behind all the questions becomes clear.
When opening a bank account, most questions from your banker should be meant to ensure the needs of the PEO are being met. Others stem from the regulatory environment and an attempt to reduce financial crime. You will be asked for information about your business, its ownership structure, who will have authority over the account, where your business is registered, and verification of all this information. Additionally, your bank will want to understand the type of accounts you will need, the projected activity, financial profile, how you want the money to move, and how the confirmation of the money movement is communicated.
All banks are subject to intense regulatory scrutiny due to the ripple effects of a bank failure across the financial system. However, banks vary significantly based on asset size, business models, services offered, funding sources, and risk appetite. As a result, regulatory requirements are tailored to the specific institution. Asset size is a key driver of the regulatory framework. Certain regulatory exemptions and heightened expectations come into play as banks cross specific asset thresholds. Additionally, audit activity and enforcement actions can significantly influence a bank’s governance, compliance practices, third-party oversight, capital planning, and risk management. The cost of facing an enforcement action—or alternatively, building a compliance program strong enough to prevent one—can disproportionately impact smaller institutions. This reality shapes what your bank expects to see when evaluating your business. The governance structure they require will reflect their own risk appetite, the strength of their internal governance program, and the expectations placed on them by regulators.
As banks grow, so do the regulatory expectations placed upon them, which helps to support improved risk management, enhanced customer protection, and greater safety and soundness. Effective governance not only strengthens the individual bank but also the broader banking system—and, by extension, your business. When your bank requests incorporation documents, policies and procedures, audit reports, or other documentation, they are assessing how well your business aligns with regulatory expectations. Meeting these expectations strengthens your business and positions it as a vital contributor to the soundness of the payments ecosystem. As you grow, consider your bank’s capacity and willingness to grow with you—and anticipate how regulatory rules, expectations, and controls will evolve as you both scale.
The same trends in the PEO space which are driving risk complexity in other areas can also lead to increased fraud attempts and require enhanced banking controls. Credential based attacks (i.e., stolen/compromised credentials and business email compromise attacks) continue to be on the rise and are taking longer to identify and contain. Fraud is a leading cause of financial loss and banks need to ask questions to help prevent it and other financial crimes. Answers to questions such as who will have access to your accounts, how will you access your accounts, what fraud prevention controls are in place, and whether there is a culture of awareness at your organization will have an impact on how fraud risk is mitigated.
Traditional payment methods have various and sometimes recurring instances of attempted fraud. Partnering with your bank to understand the risks in your payments flow and implementing the latest technologies and practices will go a long way to help your PEO stay ahead of the fraudsters. Multi-Factor Authentication, separation of duties, encryption, fraud detection software, appropriate ACH limits, positive pay and many other tools will help to mitigate the risk of your PEO getting bogged down in a lengthy fraud resolution process. It is important that the PEO and the bank understand one another’s role in the effort to help prevent fraud and financial crime.
Trying to play baseball without clearly understanding the rules and the purposes they serve would lead to a lot of frustration and a game that is not very much fun at all. Banks ask questions to ensure your business needs are met, satisfy regulatory expectations, aid in fraud prevention, and facilitate information gathering. Questions lead to meaningful conversations. Hopefully, your bank understands the PEO business model, has the capability to arm your business with payment technology that enables your PEO to thrive, and helps you manage the inherent risks of high-volume payment origination. A bank that understands the industry can have the same impact that PEOs have on their clients, which is to empower the PEO to focus more on its core and less on regulations. It promotes a safe and sound PEO industry and overall payments ecosystem. In short, it allows us all to do what we love…PLAY BALL!
As one PEO operator put it, “In this world, you have to be ready for anything — because when opportunity arises, you want to seize the day.” And yet, many PEOs still treat valuation as something that only matters if M&A is on the table. In our view, that’s a mistake.
Valuation readiness is not about chasing the highest number; it’s about creating strategic options: the ability to raise capital, partner ambitiously, scale with confidence, and eventually, exit on your own terms. The most resilient PEOs are not reacting to the market, they create the opportune move when the moment is right.
You can think of valuation readiness like a seasoned pilot preparing for takeoff. Even on a clear day, you run the checklists, plan for contingencies, and stay ready for a change in destination. You may not hit turbulence, but you are always prepared for the unexpected. You don’t wait for a storm to get ready, and neither should your business.
Picture yourself at the negotiation table with a strategic buyer. They point to a decision in your financials and ask, “Why did you do that?” Would you have a clear, consistent answer?
It’s easy to get caught up in the day-to-day of running payroll, onboarding new clients, managing benefits, and delivering exceptional client service. And these are critical. After all, client service is at the heart of every great PEO. Alongside operational excellence, however, there is another layer of leadership: thinking like an owner who is preparing for an exit.
Operating with an exit strategy in mind does not mean you are planning to sell. It means you make decisions that you, your board, your investors, or your buyer will thank you for in the future. Structure client service agreements (CSAs) with clarity, set administrative fees with transparency, and track cost centers like your business depends on it.
The hard part is often doing the simple things consistently. And just like our pilot, skipping that discipline now can create complexity later, especially if turbulence arises. One-off decisions can pile up, and cleanup becomes an operating expense.
Here’s the mindset shift: Run your PEO like your dream buyer is watching. Ask yourself, “What would my board think?” Then act accordingly.
As the legendary investor Warren Buffett put it, “Price is what you pay. Value is what you get.” Buyers will validate a high multiple only when they can see and trust the value beneath the surface. We recognize there are many ways to assess value in a PEO. In our experience, these are five key performance indicators (KPIs) every PEO should track to stay valuation ready:
Gross Margin Percentage. Formula: (Gross Profit ÷ Revenue) x 100. Buyers scrutinize margin structure first. It is the clearest signal of whether your PEO is profitable or just busy.
Gross Profit per Worksite Employee (WSE). Formula: Gross Profit ÷ Total Worksite Employees. This metric cuts through topline revenue and illustrates meaningful unit economics. Buyers want to see how much true profit is created for every worksite employee you service.
Client Retention and Churn. Formula (Churn Rate): (Clients Lost During Period ÷ Total Clients at Start of Period) x 100. Recurring revenue is only valuable if it recurs. Client retention and churn directly impact revenue projections and buyer-perceived stability.
Revenue by Service Line. Approach: Segment total revenue into: Administrative Fees, Insurance Commissions, Consulting, Technology, & Other. As PEOs diversify their offerings, buyers crave visibility into what’s driving growth. Breaking out revenue by service line clarifies margin quality, cross-sell strength, and pricing strategies. It also highlights over dependence on low-margin offerings or underutilized profit centers.
Client Concentration. Formula: Revenue from Top Client(s) ÷ Total Revenue. In the eyes of a buyer, revenue concentration is a risk multiplier. Even the “stickiest” of clients can pose a threat if they make up too large a share of your top line.
Bonus: Industry Mix Matters Too. Industry mix matters: buyers favor exposure to sectors that weather economic uncertainty without major churn.
Tracking KPIs is not just for buyers. Focusing on the same metrics they do won’t just improve your readiness, it will strengthen your operation from the inside out. KPIs like these can inform your internal dashboard, giving you a navigation system for clear skies or stormy weather alike.
Bottom line: clean financial hygiene leads to valuation clarity. Tracking the right KPIs will sharpen your decision-making and keep you ahead of potential pitfalls long before due diligence arrives.
But valuation readiness is not just a checklist, it’s a mindset, a culture shift that starts with leadership and reaches through every layer of an organization. From how you structure client service agreements, price your services, and allocate costs, to how you report, forecast, and grow — valuation readiness drives long-term stability.
While this article focuses on key financial metrics, we also encourage PEOs to consider broader readiness disciplines, including a well-defined client service model, proactive vendor oversight, consistent tax strategies, and operational systems built to scale. These are the silent, compounding factors that set top-tier PEOs apart.
Wherever you are on your journey, we hope you lead with heart, build with clarity, and as always — fly safe. May the wind be at your back.
We’ve all been there. It’s year end and we are stressed. Along with the other issues, regulatory deadlines for financial audits are right at the top of the list in importance. Nothing feels better when you can tackle the year-end audit, and everything runs like a well-oiled machine. So how do you get to that point? Here are my top tips for not only making year-end a breeze but also making you audit ready all year long which, let’s face it, gives leaders like us more confidence in the numbers we present and the future planning which results from them.
Most importantly, this list should include all the essentials (bank recs, AR and AP schedules, depreciation schedules, etc.) but don’t forget the places where things hide. Don’t forget those pesky liability accounts. Additionally, a good checklist should include not just the completion of these items but also reviews by the appropriate people. You need to catch the items that carry over in the balance sheet such as old outstanding checks, miss-recorded entries, or old A/R that was accidentally not collected. Monthly review gives you awareness, but also the chance to remedy the problem quickly resulting in less financial risk.
Auditors care about that and so should we! Create a process for reviewing financials as well as the underlying numbers. Use technology to make this efficient and consistent and adjust the criteria as needed. Finally, think about how someone from the outside can verify that this was done and if you can explain why you are doing it that way. This will give you and your auditors confidence in you, your team, and the company.
Sure they’re done, but are they right? Set up a process which forces you to know the schedules not only tie to the balance sheet, but that they are correct. Typos and Excel spreadsheet formula issues can be problems and then come year-end you have to do an entry to add another $30,000 in expenses that were pulled to a schedule. A simple review by a second person, or better yet, using technology to help you, can prevent an unexpected entry leaving you to explain the new numbers and why your process was not sufficient.
Review YOY and MOM. Compare plan to actual and review margins. Identify large variances and potential issues and dive into the details. If your team is really good, you kick it to the team to review and get back to you. Don’t hold it at the top and expect to have time. You won’t!
Have current process documentation that matches the process of getting completed in real life. Don’t just check the box. If you can count on the processes, you will be in a much better position internally and with your auditors.
Identify significant changes as you go through the year. Examples include changes in leadership, new software, expanding into a new market, etc. Be able to explain these changes including intent, strategy and actual and expected impact.
Think of your next audit after completing your current audit. I know it’s not easy when we’ve been working nonstop, but it pays off. Identify what did not go well, what was surprising, and develop a plan to correct it. Most importantly, execute the change while it’s fresh in your mind and you will be thankful you did.
It’s not easy sometimes but this is critical for making everything above happen. Hire well and terminate quickly! Good teams can participate in the audit. It makes the audit process a lot less stressful. Don’t hold it all at the top!
In conclusion, it’s not rocket science and most of us know what needs to be done. Measure progress and delegate well. Make it a team effort. If this list is overwhelming, then start with the most important and impactful and focus on that. Do the next right step and each year it will get easier and easier. Before you know it, you will be ready for an audit any time of year.
