Growing Your PEO Market Share & Increasing the Bottom Line ---Organic Growth – Acquisition – or

Both?

Joel Duncan, CEO, Merit ResourcesMark Perlberg, President & CEO, Oasis OutsourcingDaniel S. McHenry, Business Group Practice Leader, McHenry ConsultingWanda J. Silva, President, Silva Capital Solutions

Growing Your PEO

Agenda

I. Review of ConceptsII. The Code to ProfitabilityIII. ROI – A Case for Organic GrowthIV. ROI – Considerations for Acquisition GrowthV. Questions & Answers

Grow your PEO

• What is “Bottom Line Growth?”

• An increase in net income/profitability while maintaining the integrity and quality of the service and products you provide

AND doing so on a consistent basis

• Larger PEOs Better efficiency Greater Profit

• > Revenue (payroll/wse’s) + same or < cost (SG&A)= Greater net income

Grow Your PEO

• Concepts – NOT MUTUALLY EXCLUSIVE

• Organic Growth – “Same Store” – Internal Growth– Includes filling lost business & adding new

• Acquisition Growth – Adding one very large client all at the same time!

• You cannot complete a successful acquisition if you have not proven you can manage internal growth

• Where is your commitment??

The Code to Profitability RevenuesOrganic GrowthStrategic acquisitionPricing

ExpensesProcess EfficiencyCost containment

= Greater Profitability

• Beyond the focus of new business there are potential locked-up profits in your business.

• Let’s examine a few simple components and an example of their impact on your income statement.

• What is the impact to the bottom line ?

– A 10% increase in productivity (labor)– A 10% increase in cost containment (expenses)– A 5% increase in pricing (best coupled with a new

service or product offering)

P&L for 1 WSE computed from

2012 NAPEORatios

10% Increase in Productivity

+ 10% Increase in

Cost Containment

+ 5% Fee Increase (1,200 x .05=$60 or .16% in crease

Gross Revenues 41,100 41,100 41,100 41,160

Payroll (34,900) (34,900) (34,900) 34,900

Net Revenues 6,200 6,200 6,200 6,260

Direct Costs (5,000) (5,000) (5,000) (5,000)

Gross Profit 1,200 1,200 1,200 1,260

Operating Exp

Labor Costs (550) (495) (495) (495)

Other (550) (550) (495) (495)

Operating Inc 100 155 210 270

• What are some other potential profitability considerations ?

Growing Your PEO Market Share and Increasing the

Bottom Line: Organic Growth vs. Acquisition

Joel Duncan, CEOMerit Resources, Inc. – Des Moines, IA

Introduction

1. Organic Growth: Not a decision of "if”2. A Case for Organic Investment 3. ROI: The Only Metric

Organic Growth: Not a decision of “if”

Available at SSRN: http://ssrn.com/abstract=977840 or http://dx.doi.org/10.2139/ssrn.977840

“

”

Organic growth, fostered by selective pursuit of winning operational and financial strategies along with prudent acquisitions that dovetail to its key strengths are the key pillars of a successful corporation. – Prakhar Vaish, Acquisitions Vs. Organic Growth - A Question of Corporate

Strategy (April 1, 2007).

Organic Growth: Not a decision of “if”

Some corporations even nurture an almost cult-like dedication on the part of senior management to promote acquisitions but many such dreams fail to flare up the company’s bottom line. Despite a booming M&A market, extensive research has repeatedly shown that majority of acquisitions result in negative to moderate returns. – Prakhar Vaish, Acquisitions Vs. Organic Growth - A Question of Corporate Strategy (April 1, 2007).

Available at SSRN: http://ssrn.com/abstract=977840 or http://dx.doi.org/10.2139/ssrn.977840

“

”

• but rather, a decision of application, commitment, and resources.

– Direct distribution vs. indirect– Client referral reliance and strategy– Marketing’s Role

• Lead generation strategy• Market awareness commitment and advertising• Niche industry strategies• Etc…….

Organic Growth: Not a decision of “if”

“”

Organic growth is as natural as eating right and exercising. It’s not! Organic growth strategies require an unwavering commitment, and a sustainable plan to achieve success…..Just like healthy living. – Joel Duncan

Organic Growth: Not a decision of “if”

A Case for Organic Investment: NAPEO Financial Ratio Survey 2012

• The Argument; Larger PEO’s….– Spend More on sales– Make More– Grow More– Pay More….to sales reps– Produce More…Per sale rep

All Firms (78)

Large Firms (24) Var % Inc.

Sales & Mkt Expense (% of GP) 15.60% 18.90% 3.30% 21.15%Net Profit Before Tax 9.30% 12.01% 2.71% 29.14%

Annual Rev. Growth Rate (Median) 8.40% 14.40% 6.00% 71.43%Sales Rep. Base Pay >50K 39.70% 50.00% 10.3% 25.94%

Sales Rep Production >240 WSEEs Per Yr. 13.00% 26.10% 13.1% 100.77%

“”

There are other measures for running a business; for example profit on sales, and penetration of the market, but they do not supersede return on investment. – Alfred P. Sloan Jr., Our Strategy Works Out to a “T”, Fortune - November 1963

ROI: The Only Metric

• Key Questions and Considerations for ROI Analysis– What resources and expenses will it take to recruit and

train for success? (Load)– What measurement will I use, and when is the “cliff” of

performance tolerance reached? (Non Producing Period)

– What does industry and personal experience tell me my success rate will be? (Turn-over)

ROI: The Only Metric

Sales Representative: Base Salary 60,000$ Expense Allocation: Load 1.75

Total Annual Expense (Per Rep) 105,000 Total Monthly Expense (Per Rep) 8,750

No. of Reps 2.00 Evaluation Period (Months) 24

Training / Non Producing Mos. (Per Rep) 9 Training & Selection Success Rate 50.00%

Training & Selection Success Spend 78,750 (a)Training & Selection Failure Spend 78,750 (b)

Sales Spend (Producing Mos.) 131,250 (c)Mo. WSEE Production 20

Total WSEE Production over Period 300 (d)GM Per WSEE (Per Yr.) 1,100 (e)

Annualized GM @ end of Evaluation Period 330,000 (f)Market Multiple on GM 1.00 (g)

330,000 (f x g)Total Organic Growth Investment 288,750$ (a+b+c)

ROI 114.29%

ROI: The Only Metric

A simple ROI model illustration

Mark PerlbergPresident & Chief Executive Officer

Oasis Outsourcing

Acquisition Benefits

• There is no substitute for organic growth but . . . • The “right” acquisitions add value• “Good” acquisitions can be a material and positive

component of an overall growth strategy• The “right” acquisitions help instruct, inform and

teach your team• Size matters in the PEO industry, for a whole

variety of reasons

Acquisition Considerations• Strategic (e.g. expand geographic footprint, synergies)• People / expertise / incremental products and services• Complexity (systems, geography, culture, etc.)• Organizational capability (can you do it and do you

have the “stomach” for it?)• Access to capital• Price and the key question: is it accretive?– what is your stand alone multiple?– what did you pay?– what incremental EBITDA did you receive?