Solving The Value Equation

HRTech Fall 2017 Founder and Shareholder Liquidity Alternatives Update

As we near year-end 2017 and embark on our organizational and personal financial planning for 2018, there is no better time to understand the market current and near-term liquidity options. This is particularly important in that it is well known that there is only a short list of American publicly traded HRTech companies, that ever achieve a successful IPO.

“Over the decade we’ve made mistakes others should avoid, and we’ve celebrated deals that have created ALL constituents wealth.”

The “public IPO"option will be reserved for only the top 1% of the businesses in the near-term. Therefore, as fiduciaries we provide the following alternatives review and commentary, to guide your year-end financial planning.  

Consistent with past historical market trends the liquidity alternatives that will continue to be most prevalent will include non-bank financing: mezzanine financing alternatives, minority ownership recapitalization and majority ownership recapitalization, and obviously the outright sale of the company equity.  New entries into the market include family wealth offices, and other alternative asset investment groups.

In that most of us are very familiar and currently utilize the structured debt/bank financing liquidity option, in this article we focus on those alternatives that involve the liquidity of equity: mezzanine, minority recapitalization, and major recapitalization. Our objective is to enable you to effectively think through these alternatives as they relate to your specific shareholder situation.

As founders and shareholders we've learned to treat our equity as “the most valuable asset” and never treat it as a “commodity”.  However, once the decision has been made to tender equity after appropriate debt structures have been utilized; then the below equity alternatives should be considered.

The best capital financing partner is in the long-term best interest of the company and ensures the business model is scalable, the team is incented to perform, and a market leadership position is created. 

The selling and the timing of your equity participation is potentially the most important and relevant personal financial decisions of your life.

For shareholders to create wealth at exit, they must seek out the select few equity providers that have successful experiences in the HRO / HRTech sector, which are therefore: Useful Capital.

Our guidance is; each of you should carefully evaluate your specific situation against these alternatives and when both the market and the company’s “timing is right”, seek outside assistance in the application of these alternatives. The selling and the timing of your equity participation is potentially the most important and relevant personal financial decisions of your life.  

Download a summary of the useful capital and liquidity options. 

Solving the needs of the HR Department

SHRM defines small business (“SMBs”) as any business with less than 500 employees. In the United States alone there are more than one million small businesses with less than 500 employees. 

• The SMB market demand is generally satisfied by transactional processing providers that provide payroll administration transactional services, and vendor solutions providers that provide basic “minimum professional standard” HR and Workforce services.
• The Enterprise market demand is generally satisfied by large public or institutional backed providers with “packaged & bundled” robust services, that provides technology and services that manages the employee employment life cycle demanded by the enterprise market. The most successful providers are either technology centric platforms (HRIS: Human Resource Information Systems) or implementation organizations that aggregate various point solutions generally on a vertical market basis.

 

Beyond startups and enterprises, the “lower middle market” of companies with 50 to 1,000 employees includes 100,000 organizations. This lower middle market is greatly underserved with prebuilt, preconfigured solutions for its needs. 

Beyond the HCM technology gaps, the HR compliance service gap continues. The rising percentage of non traditional workforce, combined with the demand to outsource benefits, claims, and other administration processing coupled with the requirements to update cloud technology including workflows and regulations and policies chance has created an emerging market for HR compliance as a service.

Across North America, there are more than ~340 private companies with greater than $1m in annual revenues that provide HRO Services, of which less than a hundred combine proprietary technology + tools & content + a portfolio of services by module/function. These firms are further bifurcated with the majority of their revenues  divided between the SMB market or these enterprise market.

HR Compliance as a Service enables the bundling and unbundling of HR Outsourcing services and capabilities via single access for the end user HR Department.

As a result of the lower middle market demand for HR outsourcing compliance services; there is a sizable opportunity for either emerging or existing vendors to create a lower middle market HRO sector leader.