Maintaining Compliance During Final-Mile Mergers and Acquisitions

The last-mile economy may be growing, but compliance is still the key to sustainable growth.

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Despite global challenges due to the Coronavirus disease (COVID-19), the logistics sector of the supply chain economy is currently projecting solid growth for the next five years, thanks largely to unprecedented gains in e-commerce and omnichannel fulfillment. In other words, while some last-mile logistics companies are struggling to adapt, others are seeing massive returns—especially businesses that rely on 1099 workforces. This model allows you to scale quickly and ebb and flow with workforce needs. 

As an inevitable result of this growing sector, mergers and acquisitions are becoming a hot topic as well. And, though working with or transitioning to an independent contractor (IC) model can make the business better prepared to buy or to sell, this model does come with its own set of challenges, from driver shortages to worker classification concerns. These issues are why it’s always a good idea to put a robust compliance framework in place to minimize risk and ensure your company is following that model to the letter.

Start prepping early—as in, right now

Start establishing a strong IC compliance framework as soon as possible and aligning this framework with your long-term business strategies. Doing so will establish a solid foundation for planning to sell your business or even acquire another one, especially if you have (or are looking to carve out) a niche in an established market, such as supply chain last-mile logistics. 

But, if you’re close to selling or buying, there are also several questions you should be asking about your IC model:

  1. How can I establish a contractor model that makes my business more attractive?
  2. Will I be more appealing if I can prove my IC workforce is fully compliant?
  3. What if the buyer or seller has an IC management platform in place?

Keep in mind that the answers will vary based on whether you intend to wait for the prospect of greater business growth or decide to sell or merge your business now. Overall, the economy is currently flush with investors looking for merger and acquisition opportunities, so now is a great time to act, but only if you’re ready.

Are you ready to go to market?

Even if the economy is ready, your company might not be. There are certain factors that could mean your company is currently a less desirable candidate for a sale or merger, including:

  • Metrics. Buyers will be looking at a number of key metrics, including earnings before interest, gross and other margins, pre-cash flow conversion and revenue growth rates.
  • Performance. IC-based businesses often struggle to keep up with online marketplace giants. If this sounds familiar, consider hiring experts to help repair your margins and image.
  • Infrastructure. How well are you leveraging internal and external resources to ensure your business practices support rather than undermine your IC workforce model?

The bottom line is, to be ready for the market, you may need to make some changes to your business—in particular, the way you interface with ICs. This includes revamping the compliance program, and to do that, bring on advisors and a legal team at least a year before making any big decisions. That way, if you do end up making changes, a potential buyer can see a track record of positive results.

Preparing and executing

One key aspect of preparing for a merger with or acquisition of a company reliant on a 1099 workforce is making sure those workers are properly informed. Employees and ICs alike should understand any changes, including why they’re happening and how they’ll be implemented. This requires clear lines of communication between your company, employees and the ICs you contract with. Ensuring everyone has a complete understanding of expectations makes it less likely that issues will occur when moving forward with a sale or acquisition.

That’s just one possible issue, and there are many others that can arise when getting a company ready to sell or merge. The good news is that an IC management platform can help with all of them, providing a clear, logical path from IC onboarding to final settlement.

For example, you’ll need help maintaining detailed worker classification documentation, even while a deal is being negotiated. And, whether you’re the one doing the buying or selling, a third-party administrator (TPA) will work directly with the other company to orchestrate enrollment and onboarding processes, develop a comprehensive driver communication strategy and ensure settlements begin right on schedule. 

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The final question

It’s obvious why a 1099 workforce may be appealing to investors, especially in an industry like last-mile logistics. Building the necessary structure to sell or buy such a business, however, means you’ll need a solid technology solution or managed service provider to onboard, pay, insure and retain 1099 workers. Such a system will close compliance gaps, provide risk mitigation and ensure the deal keeps moving along smoothly.

  1. How should I manage a contractor model to make my business more attractive? Creating documented distance between your organization and the IC workforce is the first and most critical step. By showing that there have been steps taken to prevent misclassification of 1099s as W2s, you’ll eliminate questions and make the organization more attractive. There are a variety of ways to do this, but many organizations are turning to technology – notably IC management offerings – to simplify the process.
  2. Will I be more appealing with a trail of good fact-checking regarding my fully compliant workforce? You bet! Making a 1099 workforce fully compliant is a huge checkmark in your favor when being appraised for an acquisition or merger. This is complicated business, so make sure you have a solution that stores documentation and allows you to access it from a central location.
  3. What if the buyer or seller has an IC management platform in place? Then that’s a signal that they are serious about the risk of misclassification and have invested in preventing confusion.  Of course, you’ll want to kick the tires on any technology investment that a buyer or sellers has in place; in the case of an IC management platform, a good option is to confirm that it offers fully customizable integration with existing technologies to ensure the transition is as seamless as possible. 

The last-mile economy may be growing, but compliance is still the key to sustainable growth. If you’re considering investing in a comprehensive IC management platform, make sure that in doing so, you’ll also have access to helpful risk management resources to make sure you maximize your gains from a merger or acquisition. One way to know if an IC management platform can help mitigate risk for your business is to ask for a free risk assessment on just how defensible your contractor model is in today’s ever changing legislative environment.