So you’re buying a company? It’s hard to get a deal done, so congratulations! But wait, before you sign the dotted line on that purchase agreement, think about these three letters…
P E O.
Private equity funds and strategic acquirers who buy companies should carefully consider engaging with a Professional Employer Organization, or PEO, prior to the closing date. Here are three reasons why.
Economies of scale = richer plans, lower rates
First, during due diligence a PEO often can find hidden pockets of cost reduction that can enlighten the buyer in regard to potential synergies. For example, assume the target company has 45 employees, a SUTA (state unemployment tax assessment) rate of 4% and a medical plan in the open market. A PEO could likely reduce the target company’s SUTA rate, since the PEO is the employer of record and should be able to leverage economies of scale to have lower SUTA costs. In this case, a 3% reduction in SUTA would yield $12,100 in savings, assuming the target company is based in Texas.
Additionally, a PEO can offer a large group medical plan that may have richer plan designs and lower rates than what a company can obtain on their own in the market. Due to economies of scale and a difference in underwriting methodologies, most companies will be able to find lower rates under a large group policy versus a small group. Assuming 80% participation and a blended (including all coverage tiers) per employee cost for medical insurance is $700 per month, even a moderate decrease of 10% would result in an additional $30,000 to EBITDA. How nice would it be to offer the newly acquired employees a better benefits package at a lower cost on Day One?
PEO certifications provide confidence to financing partners
Second, a PEO by definition is the employer of record for purposes of processing payroll and remitting payroll taxes. A PEO that is both ESAC-accredited and CPEO certified offers the buyer the highest level of assurance that the PEO is financially viable and has been audited every quarter to ensure client payroll taxes were filed and remitted on time. A savvy buyer can utilize a PEO as negotiating leverage with acquisition lenders, as it’s the highest level of assurance that the lender will not be forced into a secondary lien position since they know that the company’s payroll taxes are taken care of. Some lenders will recognize this decreased risk in the form of a lower interest rate on debt raised to purchase the company.
Identify risk and compliance gaps
Third, a PEO can identify and manage risk as it relates to the HR function both pre- and post-closing date. During due diligence for example, a PEO can dissect any HR compliance gaps (e.g. outdated HR forms, lack of processes etc.). Staff One HR offers complimentary due diligence for clients so that they understand the target company’s true HR risk prior to closing. This is especially critical for stock purchases where the buyer will inherit risk and liabilities that existed prior to the closing date. Also, a PEO can assist post-closing in the areas of transition communication, organizational redesign and employee relations. At Staff One HR, we are the only PEO in the world that is an authorized reseller and partner of Predictive Index, which is a tool used to help identify top talent and align that talent with the right positions. Post-closing date is a great time to utilize Predictive Index to ensure the right people are in the right seats going forward.
As an ESAC-accredited and CPEO-certified PEO that is nationwide, Staff One HR is uniquely positioned to assist buyers before and after the “ink is dry” on the purchase documents. Contact us today to learn more at email@example.com or 1.800.771.7823.