New Venture Lab: Equipping Christian Entrepreneurs

Question

I run a small service business and I am considering using a PEO.  There is a three year commitment to administrate my employees and the fee they charge is 4% of my gross payroll.  I am also considering selling my business.  Any advice?

Answer

PEOs are useful for small businesses.

The advantages of a PEO are typically as follows:

• More professional compliance, HR forms and processes, etc.
• Less time and hassle for the business owner
• Potentially happier employees due to all the extras of a PEO that a small business usually does not provide such as automatic deposit, 401(k), etc.

The disadvantages of a PEO are typically as follows:

• A loss of independence and some control by the business owner
• Employee perks that may be "too rich" and too costly
• New PEO policies that may not be consistent with the owner's policies or wishes (think same-sex benefits and other HR policies that may not be consistent with your Christian beliefs)
• Company may be subject to larger company HR laws which can be less favorable

But, if you are planning on selling your business, it would be quicker and easier to sell without adding a new PEO relationship to the mix.  Switching to a PEO in the middle of trying to sell your company would likely be too disruptive.

If you do want to sell your business, you want to take some time to dress it up and manage it well prior to selling. 

Most businesses, including small businesses, are sold based upon the company's performance during the Trailing Twelve Months -- usually stated as TTM -- (which simply means the last 12 months).  The value is typically a multiple of earnings, such as 4x or 5x the earnings (usually EBITDA) of the company.  For example, if your company earned $150k in the last 12 months, and the value of a company your size in your industry is 4x earnings, then the value of your company would be $600k.  The earnings of small owner/operator businesses is usually adjusted to include the value of all of the perks of the owner that a typical manager would not get, such as an auto allowance, health club membership, excessive bonuses or owner distributions.