The Nuances of Mergers and Acquisitions with a 1099 Workforce

The advantages of working with independent contractors, also known as 1099 workers, cannot be overstated.

Specifically, if you’re running an operation relying on 1099 workers, you aren’t required to pay the employer portion of Social Security or Medicare for them. Additionally, you don’t typically need to provide traditional employee benefits, such as health insurance or workers’ compensation insurance. Put simply: the savings can be massive. Nonetheless, having a 1099 workforce model creates its own set of challenges, especially when it comes time to sell your business; it can add a layer of complication to the deal.

While right now may be too early to sell your business, it’s never too early to put in a robust compliance framework to ensure that your business is following the right growth model ahead of its sale. This is especially true given that deals involving businesses relying on the 1099 model can be burdensome and tough to navigate.

One of the first steps toward making the decision about whether or not your company is ready to be sold is understanding where your company is in the business lifecycle: seed and development, startup, young growth, high growth, or decline mode.

“You’re never too early in the cycle, but you can get too late in the cycle,” explains Mike Fiorito, an Openforce board member, in a webinar diving into what you need to know about 1099 workers. This is especially true if you’re in last-mile logistics.

Joining Fiorito in the webinar — teasing out the nuances of how to increase the valuation of your company, establishing a narrative, dealing with changes to a 1099 model, and a myriad of other factors with regards to mergers and acquisitions — are G2 Capital Advisors COO Ben Wright and Newhouse & Faino LLP Partner Ben Faino.

Here are some of the most important takeaways:

Get Started Early

Once you’re beyond the seed and development point of your business’s lifecycle, you can only benefit from establishing a strong compliance framework, while taking into account the current point of the economic cycle and the specific economic movement in your market.

The goal is to align this compliance framework with your long-term growth strategy early on.

There’s No Better Time Than Now

As has been true for the last three to four years, there’s been no better time than now to sell your business, especially if you’ve carved out a defensible niche in the last-mile logistics market. The question a lot of owners are asking themselves is: Do I really want to wade through another recession?

Weighing on either side of that question are the benefits of several more years of organic growth versus the monetization opportunities of selling the business or merging the business now. The current availability of capital in the marketplace, as well as the strong amount of dry powder and appetite to consummate deals, continues to push a lot of owners toward cashing in and selling their business.

Overall, it’s a cash-flush moment in the economy with regards to investors looking to drive growth through mergers and acquisitions. This creates a highly competitive market for mergers and acquisitions — which is great for sellers.

Not Ready to Go to Market

Even if the economic conditions are ripe, not every company is ready to go to market. During a readiness assessment, there are certain red flags that might mean your company isn’t ready to go up for sale. The most obvious factor is your underlying performance.

Some 1099 worker reliant companies dealing with last-mile logistics have struggled to compete in a marketplace turned upside down by Amazon.

If that’s the case for your company, it’s important to bring experts on board to help shore up margins, fix revenue growth issues, and help you establish a strong narrative that can be presented to buyers.

Buyers will also be looking at how robust your third-party administrator infrastructure is, how well you’re leveraging outside legal help, and ensuring that your business practices reinforce your independent contractor model — rather than undermine it.

Changes to a 1099 model

If it’s necessary to make changes to your 1099 model as part of revamping your compliance program, the sooner you’re able to firm up your company, the better off you’ll be.

This is why it’s recommended that company owners look to bring on capital advisors and a legal team 12-18 months before putting their business on the market.

The bottom line is that if you end up making a number of changes to your 1099 workers model, a buyer is going to want to see a track record under those changes where the growth rates and business processes are not showing any signs of erosion (or other negative impacts).

Potential buyers will be looking at a number of key metrics following those changes, including earnings before interest, gross margins, EBITDA margins, pre-cash flow conversion, and revenue growth rates.

Educating Employees

One of the most important aspects of the merger and acquisition of a company reliant on 1099 workers is educating employees.

For last-mile logistics companies, these employees are the ones who are dealing with 1099 carriers on a daily basis. It’s important that your employees fully understand the goals of the change and how to implement them.

Along these same lines, it’s necessary to create clear lines of communication between your company and your independent contractors. By ensuring that everyone has a complete understanding of expectations, it is less likely that issues will pop up when moving forward with this type of model.

Final Thoughts: The Nuances of Mergers and Acquisitions with 1099 Workers

The entrepreneurial and growth opportunities presented by the establishment of a large 1099 workforce has caught the eye of many strategic and financial investors. This is especially true for those interested in last-mile logistics, where white-glove, assembly, lab, and big-and-bulk shipping companies have managed to carve out lucrative, niche markets for themselves.

However, understanding how to build the necessary narrative to sell such businesses, as well as the due diligence and infrastructure needed, gets complicated. Bringing on a good technology solution or managed service provider to manage 1099 workers early on can close compliance gaps and move the deal along much easier.

Watch the nearly 50-minute webinar to get the full picture of a typical merger or acquisition involving 1099 workers. Fiorito, Wright, and Faino breakdown everything else you need to know about the 1099 workforce.

Watch the 50-minute webinar