Mark Sinatra·July 3, 2023

Don't Overlook HR Diligence: 3 Items to Check | Mark Sinatra Interview

Mark Sinatra is a search fund veteran who acquired Staff One HR, a PEO (professional employer organization / outsourced HR) company based two hours north of Dallas, around 2008 via a traditionally funded search. The business was a classic lifestyle-business target: an owner near retirement with no succession plan and an unprofessionalized back office. Sinatra spent the first three years fixing and professionalizing the business before entering a six-year organic growth phase (2011–2017), during which he also made three strategic add-on acquisitions (book-of-business deals) at a weighted average of ~2.7x EBITDA post-synergies. His most painful lesson came when his largest client grew from 11% to 30% of revenue during the recession and then was lost entirely after a bad replacement hire for the retiring relationship manager — a failure he attributes to overvaluing HR credentials and undervaluing relationship-building skills. He responded by adopting personality profiling tools for key hires and shifting to a team-pod servicing model. Sinatra sold the combined business in 2017 to a PE-backed competitor doing a roll-up, which then sold to a public company within 12 months. The episode focuses heavily on his three-pillar framework for HR diligence (compliance, key employee transition risk, strategic team assessment) and his playbook for timing and executing add-on acquisitions.

Deal facts

multiple: 2.7x EBITDA (weighted average for add-on acquisitions, post-synergies); sold at double-digit multiple
revenue: $5m–$20m range (implied; 'companies with five to twenty million revenue')
notes: Acquired Staff One HR (PEO/outsourced HR company) circa 2008 via a traditionally funded search fund. Held for approximately 9 years (2008–2017). Made three add-on acquisitions (book-of-business deals) in the last two years before exit, at a weighted average EBITDA multiple of 2.7x post-synergies. Sold to largest privately held competitor backed by PE firms doing a roll-up; that acquirer then sold to a public company ~12 months later. Business was based about two hours north of Dallas.

Why this business

Sinatra pursued a traditional funded search after business school because he wanted to run a company without having a specific startup idea he was passionate about. Staff One HR fit the classic search fund thesis: a lifestyle business built by an owner nearing retirement with no succession plan and no liquidity plan. It was an outsourced HR/PEO firm, an industry he found compelling and ultimately stayed in throughout his career.

What's working

Organic growth: after roughly three years of professionalizing the business, Sinatra drove consistent double-digit organic growth from 2011 to 2017.
Industry trade group involvement: serving on two industry boards gave him visibility and credibility, enabling proprietary and semi-proprietary sourcing of add-on acquisitions.
Strategic add-on acquisitions: three book-of-business deals acquired at a weighted average ~2.7x EBITDA (post-synergies), then sold the combined company at a double-digit multiple—significant arbitrage.
Timing of add-ons: doing book-of-business acquisitions in the second half of the hold period allowed high client retention to be demonstrated to buyers, strengthening the exit story.
Decentralized client servicing model: after losing the largest customer, shifted from single-point-of-contact to pod/team model to reduce key-person concentration risk.

What's hard

First three years were spent professionalizing and fixing an under-professionalized business rather than growing it.
During the 2008–2009 recession, organic growth was hindered and some clients went out of business or reduced headcount.
Largest client grew from ~10–11% of revenue to 30% of revenue during the recession due to a shrinking denominator and a growing client—an unintended concentration risk.
Lost the largest client (30% of revenue) after a bad replacement hire: the retiring key employee who managed that relationship was replaced by someone with corporate HR experience who lacked the relationship-building skills needed for a small/mid-market service business.
Took three years to get the right people in the right seats, which delayed the shift to growth mode.
Integration warning: doing book-of-business add-ons too early, before a strong retention model exists, risks losing those clients before exit.

Notable quotes

I feel like the HR component really gets overlooked and if I had to kind of boil it down into I would say you know three areas — one would be HR compliance, the second area would be key employee transition risk, and the third part is really assessing going forward are there — do you have the right team and in the right seats doing the right thing the right way.

It took me honestly too long — I would say it took me a good like three years to really kind of figure out the right formula and to have those right seats filled with the right people, but I can tell you once I was able to do that it enabled me then to focus on those add-on acquisitions, to focus on growth initiatives, and all the fun stuff that really drive significant value in the company.

I remember walking into the building one day and got in the elevator and saw this FedEx guy with an envelope going to my floor and I'm like oh geez — I just had a really sinking feeling in my stomach that it was going to be some sort of a cancellation letter and it was.

I got really involved in our industry trade group — even to the point where I served on two different boards at different times — and that gave me really incredible visibility and profile within the industry so that when I did my reach out to potential target companies it was often a friendly reach out just as hey I'm just representing the industry trade group.