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 I.Review of Concepts II.The Code to Profitability III.ROI – A Case for Organic Growth IV.ROI – Considerations for Acquisition Growth V.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)

8. P&L for 1 WSE computed from 2012 NAPEO Ratios 10% Increase in Productivity + 10% Increase in Cost Containment + 5% Fee Increase (1,200 x.05=$60 or.16% in crease Gross Revenues41,100 41,160 Payroll(34,900) 34,900 Net Revenues6,200 6,260 Direct Costs(5,000) Gross Profit1,200 1,260 Operating Exp Labor Costs(550)(495) Other(550) (495) Operating Inc100155210270

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” Available at SSRN: http://ssrn.com/abstract=977840 or http://dx.doi.org/10.2139/ssrn.977840 “ ” 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).

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. 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……. Organic Growth: Not a decision of “if”

15. “ ” 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 Organic Growth: Not a decision of “if”

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. “ ” 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 ROI: The Only Metric

18. 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 ) ROI: The Only Metric

19. 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?