Yrb Staffing Agency Case Study

Individual write-up for YRB case

Words: 1205 (excluding questions)

• What was the nature of the problem with YRB, in terms of operations? What was wrong with its financials and what caused this issue? What information does he need to consider to get answers to his questions?

YRB was a staffing agency, whose growth strategy is by acquisition and then exit. It usually bought recruitment company by using method of ‘pre-pack’ to obtain both tangible and intangible assets cheaply, without taking over liabilities.

In terms of operations, the problem with YRB was that the group did not maintain a healthy cash flow, no longer generating cash after the acquisition of StaffCo. Due to the group’s recruitment expertise and straightforward strategy, it conducted no legal due diligence and little financial due diligence.

YRB planned to grow market share, turnover and profits through acquiring StaffCo. But there are several major financial reasons causing the issue. Firstly, the group acquired business mainly based on turnover multiples, paying more attention to the turnover increase than to the profitability of target company. Companies with growing turnover, like StaffCo, always required higher sale price at exit, and the bank was financing all the growth. Secondly, the business models of YRB’s and StaffCo’s are very different, influencing the cash inflows and outflows profoundly at consolidated level. For YRB group, its cash flow previously depended mainly on payment timing. On one hand, to accelerate receivables turnaround, the group used an invoice discounting facility to receive 85% of the face value of the invoice value. On the other hand, YRB paid staff less deductions and passed the deductions to HMRC later when HMRC required, slowing down the cash outflow from the group. While for StaffCo, it had independent contractors and ‘self-employed’ status, which cannot help to delay the cash outflow to HMRC. Thirdly, the need for cash generated by new contract from the acquired business leads to increase need for short-term financing, and the company achieved it through a term loan, putting more pressure on capital structure. Additionally, the world economy was in the financial crises in 2008, when the acquisition was completed, so the banks were reluctant to provide more loans.

 The problem was mainly due to management did not take many factors into consideration and just did a hasty decision. Here are some essential information that would have deep impact on YRB’s acquisition of new companies.

1. The Business Model

The different business model will determine the efficiency of the combined business and make difference in creating cash, profits and capital needed for it.

1. Profitability and Growth

Companies with high revenue growth may not be profitable enough to produce more profits after acquisition, and such companies are always at high sale price and need more investment in working capital and Capex to keep the momentum of growing.