Growing Your PEO Market Share & Increasing the Bottom Line --- Organic Growth – Acquisition – or Both?

1. Growing Your PEO Market Share & Increasing the Bottom Line ---Organic Growth – Acquisition – or Both? Joel Duncan, CEO, Merit Resources Mark Perlberg, President & CEO, Oasis Outsourcing Daniel S. McHenry, Business Group Practice Leader, McHenry Consulting Wanda J. Silva, President, Silva Capital Solutions

2. Growing Your PEO Agenda • Review of Concepts • The Code to Profitability • ROI – A Case for Organic Growth • ROI – Considerations for Acquisition Growth • Questions & Answers

3. Grow your PEO • What is “Bottom Line Growth?” • An increase in net income/profitability while maintaining the integrity and quality of the service and products you provide AND doing so on a consistent basis • Larger PEOs Better efficiency Greater Profit • > Revenue (payroll/wse’s) + same or < cost (SG&A) = Greater net income

4. Grow Your PEO • Concepts – NOT MUTUALLY EXCLUSIVE • Organic Growth – “Same Store” – Internal Growth • Includes filling lost business & adding new • Acquisition Growth – Adding one very large client all at the same time! • You cannot complete a successful acquisition if you have not proven you can manage internal growth • Where is your commitment??

5. The Code to Profitability • Revenues • Organic Growth • Strategic acquisition • Pricing • Expenses • Process Efficiency • Cost containment • = Greater Profitability

6. Beyond the focus of new business there are potential locked-up profits in your business. • Let’s examine a few simple components and an example of their impact on your income statement.

7. What is the impact to the bottom line ? • A 10% increase in productivity (labor) • A 10% increase in cost containment (expenses) • A 5% increase in pricing (best coupled with a new service or product offering)

9. What are some other potential profitability considerations ?

10. Growing Your PEO Market Share and Increasing the Bottom Line: Organic Growth vs. Acquisition Joel Duncan, CEO Merit Resources, Inc. – Des Moines, IA

11. Introduction 1. Organic Growth: Not a decision of "if” 2. A Case for Organic Investment 3. ROI: The Only Metric

12. Organic Growth: Not a decision of “if” “ Organic growth, fostered by selective pursuit of winning operational and financial strategies along with prudent acquisitions that dovetail to its key strengths are the key pillars of a successful corporation. – Prakhar Vaish, Acquisitions Vs. Organic Growth - A Question of Corporate Strategy (April 1, 2007). ” Available at SSRN: http://ssrn.com/abstract=977840 or http://dx.doi.org/10.2139/ssrn.977840

13. Organic Growth: Not a decision of “if” Some corporations even nurture an almost cult-like dedication on the part of senior management to promote acquisitions but many such dreams fail to flare up the company’s bottom line. Despite a booming M&A market, extensive research has repeatedly shown that majority of acquisitions result in negative to moderate returns. – Prakhar Vaish, Acquisitions Vs. Organic Growth - A Question of Corporate Strategy (April 1, 2007). “ ” Available at SSRN: http://ssrn.com/abstract=977840 or http://dx.doi.org/10.2139/ssrn.977840

14. Organic Growth: Not a decision of “if” • but rather, a decision of application, commitment, and resources. • Direct distribution vs. indirect • Client referral reliance and strategy • Marketing’s Role • Lead generation strategy • Market awareness commitment and advertising • Niche industry strategies • Etc…….

15. Organic Growth: Not a decision of “if” Organic growth is as natural as eating right and exercising. It’s not! Organic growth strategies require an unwavering commitment, and a sustainable plan to achieve success…..Just like healthy living. – Joel Duncan “ ”

16. A Case for Organic Investment: NAPEO Financial Ratio Survey 2012 • The Argument; Larger PEO’s…. • Spend More on sales • Make More • Grow More • Pay More….to sales reps • Produce More…Per sale rep

17. ROI: The Only Metric “ There are other measures for running a business; for example profit on sales, and penetration of the market, but they do not supersede return on investment. – Alfred P. Sloan Jr., Our Strategy Works Out to a “T”, Fortune - November 1963 ”

18. ROI: The Only Metric • Key Questions and Considerations for ROI Analysis • What resources and expenses will it take to recruit and train for success? (Load) • What measurement will I use, and when is the “cliff” of performance tolerance reached? (Non Producing Period) • What does industry and personal experience tell me my success rate will be? (Turn-over)

19. ROI: The Only Metric A simple ROI model illustration

20. Mark Perlberg President & Chief Executive Officer Oasis Outsourcing

21. Acquisition Benefits • There is no substitute for organic growth but . . . • The “right” acquisitions add value • “Good” acquisitions can be a material and positive component of an overall growth strategy • The “right” acquisitions help instruct, inform and teach your team • Size matters in the PEO industry, for a whole variety of reasons

22. Acquisition Considerations • Strategic (e.g. expand geographic footprint, synergies) • People / expertise / incremental products and services • Complexity (systems, geography, culture, etc.) • Organizational capability (can you do it and do you have the “stomach” for it?) • Access to capital • Price and the key question: is it accretive? • what is your stand alone multiple? • what did you pay? • what incremental EBITDA did you receive?