NAPEO
As we head into the midpoint of 2022, wage and goods inflation continues to be a hot topic because it continues to negatively affect the vast majority of industries, as well as the people working within them. How has the PEO industry managed to, in large part, avoid a phenomenon that has had such high-cost implications? It’s all relative. Literally.
All PEOs start somewhere and create systems that work for them. Eventually, if the goal is to grow, scalable systems and operations need to be in place to sustain the PEO’s growth, along with the right people who can manage and execute these operations. Scaling can create many benefits for the PEO: ongoing client satisfaction, a great employee experience for team members, hitting growth targets, and ensuring profitability over the long-term. This is hard work, and it’s not for the faint of heart. Therefore, I hope to put together a practical guide to give you a roadmap for scalability.
Multi-state expansion for most PEOs can be planned or unplanned. This article will provide insight for small and middle market PEOs that are dealing with the operational aspects of multi-state expansion due to one-off employee hirings by clients in states where they are not currently licensed or registered.
Last year, a brand-new client learned a difficult but important lesson about the value of the PEO partnership. The client was a tech start-up in an aggressive growth mode. The owners were hiring remote workers in multiple states, including employee-friendly states, without anyone with HR expertise to guide them. The PEO model was attractive to them because they knew they were not able to grow quickly while keeping up with HR and payroll compliance. However, right after the client signed the PEO agreement, it terminated an employee based in California without reaching out to us. It turns out that the terminated employee was more versed in California law than the client. Eight days later, the client called us in a panic.
There have been many lessons learned over the last two years as we faced the pandemic and the new world of work. When the shutdowns were announced in March of 2020, ESC immediately put an action plan together that included how we could best assist our clients and what would be most helpful for them during that challenging time. Some clients were nimble and employees began working from home with little interruption, while others did not know where to start. We assisted them through the transition to work from home, and then many of them came back to the office. Currently, the majority of our clients are either working on-site or in a hybrid model, while a few made the decision to be fully remote. We wanted to share best practices and lessons learned as our team of HR business partners and clients worked together to navigate this new world of work.
Many issues stem from the current labor shortage crisis. Many long-term employees who are great at their specific skill sets have their eyes set on retirement. These employees are consistent, yet some are stagnant and slow to embrace change. This may pose a challenge for contribution to forward-thinking strategies. Leaders need to push long-term employees from becoming stagnant, which is especially important when these workers are in charge of hiring and training.
As the needs of clients evolve and change over time, it is important for PEOs to offer solutions that meet those needs. Sounds simple, right? We have all seen clients that initially onboarded with 10 employees that now have 200 employees and just hired a new CFO and HR director. Their needs have obviously changed.
It’s year end and everyone within the walls of a PEO is heads-down, preparing clients for “the push:” the end-of-year payroll, benefits renewal, W-2s, and annual tax filings. This is also a natural time to reflect and chart a path forward, maybe even make a resolution or two. If diversity, equity, and inclusion (DEI) isn’t in your review mirror or your windshield looking forward, you’re leaving your organization and your clients behind. The truth is, DEI is good for business—yours and your clients.’
The new year is a time to reflect on the past, plan for the upcoming year, and set goals and determine how to achieve them. At this time, all PEO departments should have processes to address these initiatives. Financially, among other things, budgets will be created, forecasts reworked, and tax rates reviewed and updated. The sales team will be assessing its pipeline, addressing what strategies did or did not work in the past year, and evaluating potential selling channels. Marketing might be updating social media accounts and finding new ways to create a buzz. But what areas should PEOs address operationally? The choices are limitless, but there are a few key operational areas that should be at the forefront for annual assessment.
An entrepreneur selling his or her business represents years of hard work, sacrifice, and financial and emotional investment, which can be a stressful and daunting task for any business owner. For a large proportion of owners, this is the first time they or their teams have been through an exit process. Anxiety and fear are common emotions when contemplating an exit, but most of this unease can be eliminated through educating yourself about the exit process. Even more important is preparing your company to both maximize the value at exit and minimize the chances of a false start or failed transaction.
Investors interested in the PEO industry commonly want an overview of the risks facing PEOs. While it is impossible to cover every material risk for every possible transaction in 1,000 words, we accept the challenge and will attempt to cover common risk themes as in-depth as possible.
The M&A landscape in the PEO industry has been in a state of consolidation for more than 10 years. The COVID pandemic put a temporary halt on many transactions in early- to mid-2020. In Q3 of 2020, deal flow began to rebound, and as of 2021, many deal multiples appear to be at or above pre-2020 levels. The market is very active with a combination of industry veterans and new entrants.
The past 18 months have been interesting for the world, the United States, and the PEO industry. Almost everyone has felt the results of the COVID pandemic both personally and professionally. We hope we have felt and seen the worst of it and we can return to some level of normal shortly. It should be no surprise, then, that the PEO industry, as well as mergers and acquisitions (M&A) and consolidation, have also been through a significant amount of change. In this article, we will explore some of the recent trends in acquisitions and the current state of affairs, and look forward at what we might see happening in the next two to three years.
Buying another PEO is an expensive and time-consuming proposition. It can also be disruptive to both the buyer and the seller, and to their employees and clients. It’s imperative that both sides do their due diligence, make sure there is a fit beyond the economics of the deal, and that the post transaction integration is completed with minimal hiccups.
Investment bankers sell companies by running a “sales process.” This process includes becoming knowledgeable about a company’s business, finances, and operations followed by analyzing that information, preparing marketing information, evaluating and contacting the buyer market, reviewing and negotiating offers, conducting due diligence, and negotiating the transaction documents. And then the transaction closes.
