Temporary and Permanent Staffing

As the nation and world markets plunge in the wake of the current credit crisis and lack of liquidity, staffing firms are poised for growth and recessionary resistance. While most big picture analysts would agree that American companies (primarily small businesses) are beginning to make cuts starting with layoffs they fail to recognize that this creates a valuable resource for staffing firms which are well capitalized or have a stong business plan. As the unemployment pool grows so too does the availability of a quality labor pool for staffing firms. Regardless of whether the firms are able to put the employees to work immediately or not, they garner a data base of well qualified employees they typically lack during a cycle where unemployment rates are lower than 4%. In some states where unemployment has increased over the past quarter to 6% or 8%, staffing firms are receiving applications for quality employees to which they never before had access.

Notwithstanding the down turn and layoffs exisiting and to be expected, the American economy will not come to a complete halt. Companies will first lay off temporary employee and then lay off permanent employees. However as companies receive jobs, orders, projects, they will need to staff those activities. They will typically reach to staffing firms to perform these projects because they are short term or uncertain as to their longevity. Use of the staffing firm as opposed to rehiring saves companies in a variety of ways. First they do not have the human resource ramp up to interview and rehire old or new personnel. Second they do not have to make new endorsements to workers compensation premiums which have already been decreased. Third they do not have to worry about benefits. Fourth they do not run the risk of increasing their unemployment rate any further with new layoffs once the job/project/order terminates. Fifth they obtain short term cash flow as most staffing firms are treated as net 30 day vendors. In other words the gross payroll, taxes, and insurance costs are not felt until 37 days after the first hiring cycle, which will more likely coincide with their collection cylce as opposed to 7 days from the first hiring cycle.

This trend continues as the economy rebounds. Firms will hire temporarily to pre-screen new hires. As they fill their new permanent base with temporary employees they will in the second to fourth quarter of recovery need an increase in their temporary labor pool to enhance their new hires. This is a time of growth for staffing firms.

In analyzing staffing firms, those firms which have strong infrastructure and managed costs are buys in the declining market. Staffing firms unlike other companies have virtualy no fixed assets which sit idle and cost businesses during economic downturn. Staffing firms costs are associated solely with their gross weekly wage base which in turn is based upon the volume of staffing required by their customers. Provided the firms have the volume during the down turn to meet base operating costs for overhead, they are poised to turn fast and significant profits at the bottom and recovery of a down economy.

Acquisitions of mid sized staffing companies are advisable during this economic decline. Due dilignece is fairly simple. Small to mid sized privately owned staffing agencies ($5,000,000 to $35,000,000 in annual sales) are subject to acquisitions based upon multiples of earnings between 2.5 to 6 times depending upon a variety of factors such as industry service, longevity, customer base, gross margin. Although credit markets typically are unavailable to most businesses today, staffing firms at the time of sale come with liquidity. Leverage is based upon cash flow. Equity investment for the public firms ought also be available because their balance sheets reflect significant cash availability.

Venture capital has rarely lost during acquisition of staffing companies, and public companies are currently undervalued and will be the first to return and hold values as the markets correct and stabilize or grow. Outside analysts fail to see the inverse benefit to staffing agencies during recessionary period of high unemployment, which makes these firms a sleeper with tremendous value in the free falling economy today.