Follow the signs
Livonius didn’t happen upon Resources On Call by chance.
The company was one of a handful of opportunities that would
expand Nursefinders’ ability to tap into the growing allied
staffing industry, which includes every health care professional except doctors and nurses.
“The need is so great that we can add a second brand, and
we’re not going to overlap anything,” he says.
What separated Resources On Call from the other allied
staffing providers were certain characteristics shared by all
great acquisitions. Livonius says there are four key attributes
in all, including financial dynamics, business concentration,
turnover rates and senior management tenure.
The first sign to look for when vetting potential acquisitions
is a positive financial dynamic within various indicators, such
as growth rates, revenue, gross margins and expenses.
“The trends for these are key indicators when you compare
them to the industry,” Livonius says. “If the industry’s growing
at 10 percent and this company’s growing at 15, that’s a very
good sign. Obviously, the reverse would not [be a good sign.] If
margins are lower than the average in the industry or if
expenses are higher, those are all very key factors to look at.”
Livonius says it’s also important to compare these indicators
historically. Has the company’s revenue grown at a steady pace
for the past five years, or has it increased dramatically one
year but fell the other four years?
“That’s often a warning sign,” he says. “They’ll say we had a
one-time write-down for insurance or a lawsuit or a one-time
problem with our health insurance. Oftentimes, these are
appropriate adjustments. But they really need to be investigated to determine if they really are part of the ongoing cost of
business, but they put them into a one-time cost instead of
appropriately spreading them over the course of the business
so that they really are a normal cost.”
The second sign of a great acquisition is what Livonius refers
to as concentration of business.
“(Business) needs to be spread across a large customer base
where there are multiple years of sales to those clients,” he
says. “This indicates that their client retention is high.”
On the flip side, Livonius says to be wary of companies that
receive a bulk of their business from one or two clients.
“One of the warning signs would be more than 20 percent of
your business concentrated into one client or more than 50
percent in the top five to 10,” he says. “That’s a warning sign
that says perhaps you’ve got one really good contract that’s
driving a lot of profitability, and you need to understand what
the certainty of getting that contract again and again and again
as opposed to getting a lot of different contracts that have a lot
of tenure.”
The third sign you should be on the lookout for is low
turnover rates. While it’s certainly important to include key
executives in this assessment, Livonius says you should also
look at the front-line employees.
“Oftentimes, people say, ‘How long has the senior management been in place?’” he says. “That’s important, but what’s
really important is, ‘Do you have a 50 percent turnover of the
people who are actually in the desk working and filling out the
orders, or do you have 10 percent?’ It depends on the industry,
but for example, if we saw turnover rates in excess of 30 percent a year, we’d think there’s a real problem there.”
Finally, the last sign of a great acquisition is a management staff that intends to
serve through and after the acquisition.
“It’s key to know what they want to do
as part of this transaction,” he says. “It’s
obviously better if they want to stay, and
you think they’re good, but oftentimes,
the situation is that the management is
leaving after a transaction, and they’re
planning on selling and retiring. What is
the backup plan? Do they have a successor in place? Has that successor been in
place long enough? Are you going to
have to bring somebody else in?”
Just as important as gauging key executives’ future plans is looking at their
history of employment.
“One of the key signs is that if there was
a management team that was brought in
in the last 12 to 20 months and then
they’re ready to sell the company,”
Livonius says. “Oftentimes, that means that
that was probably a transition management team or a turnaround management
team that was brought in to cut costs
and get the company ready for sale. It’s a
warning sign if they cut too much in
order to get their price better because
their profits are a little bit better. When I
take over, will I have to add back
expenses that they cut out? Or will I
have to restructure some contract they
might have put in play?”
