An overview of a start-up that is based on consolidating professional employer organizations.
COMPANY: Paradyme Corp.
HEADQUARTERS: Columbia, S.C.
TYPE OF BUSINESS: Professional employer organization, which supplies companies with employees and acts as a coemployer by handling payroll and benefits
FOUNDERS: Tim Faber, 39; David Bass, 36; Chuck Cross, 43
CAPITAL: $3 million in personal funds, $9 million in venture capital and private funds
KEY COMPETITION: Several large public companies that are actively consolidating PEOs
COMPETITIVE STRATEGY: Consolidate independent PEOs; run market-based service centers in all target geographic markets
From start-up to $1 billion in five years? Tim Faber thinks he has a strategy to make it happen.
Until last year, Faber ran a temporary-staffing company, U.S. Personnel, which he started in 1987 and built to $35 million. But he saw more-sizzling potential in professional employer organizations (PEOs), an upstart sector whose revenues, say Wall Street analysts, are projected to hit $185 billion in 10 years. So Faber sold U.S. Personnel and staked $2 million of his own money and $1 million from his partners on his new venture, Paradyme, planning to build a nationwide PEO through acquisitions, aggressive sales, and unconventional marketing.
Although PEOs originated in the mid-1980s, and there are some 2,500 active ones, not many people know about them. Their combined penetration of the market--which consists of companies with fewer than 200 employees--is only 3%. But it's growing. "The industry is about where temp staffing was 30 years ago," Faber says.
PEOs offer a solution to the paperwork nightmares that come with having employees: payroll, taxes, you name it. As coemployers, PEOs assume those burdens, freeing up the management's time. And by pooling employees from a multitude of companies for health insurance, workers' comp, and other coverage, PEOs negotiate rates no small business could get on its own. For those services and more, Paradyme typically charges clients 2% to 6% of gross payroll, as determined by risk factors, but the insurance savings, Faber says, often make clients net winners.
Fueled by $12 million, mostly in venture capital, Paradyme has already acquired four PEOs, with 7,300 "work-site employees" and $150 million in aggregate revenues. Ideally, Faber would like to buy one PEO every quarter, funding the deals in stages. But rather than economize by centralizing operations in one location, as competitors sometimes do, he'll establish service centers in all target markets. There is one in Columbia and one in Atlanta; others are planned for wherever acquisitions warrant them.
Despite the extra overhead required, Faber believes geographic proximity will prove decisive in a business in which volume is critical. "In marketing," he says, "we can do things centralized PEOs can't match. We can bring clients into a center and introduce them to our human-resources experts, our risk-management team, and our customer-service reps. That's a phenomenal advantage. When you're dealing with companies that have only 10 or 20 people, they want you nearby, not 1,000 miles away."
If, say, an employee is injured on the job, a local service-center rep can arrange medical care, do the paperwork, and hold the client's hand. "Our clients perceive huge value in things like that," Faber says. "It costs more, but you can't create above-average profitability in this field without a market-dominant strategy. We'll build service centers capable of handling 20,000 employees. Once we get above 5,000, we'll see nice profits."
Faber's business model projects annual earnings of about $1,000 for each work-site employee, partly through insurance arbitrage, and a one-half of 1% after-tax profit. On his radar: a public offering, perhaps next year.
The best source of information about professional employer organizations (PEOs) is the National Association of Professional Employer Organizations (901 N. Pitt St., Suite 110, Alexandria, VA 22314; 703-836-0466; fax, 703-836-0976; www.napeo.org/peo). The membership of this trade group--about 400 companies--encompasses the largest PEOs. The executive vice-president is Milan P. Yager.
Another organization, the Institute for the Accreditation of Professional Employer Organizations (7910 Woodmont Ave., Suite 1040, Bethesda, MD 20814; 301-656-1476; fax, 301-656-5932), puts a stamp of approval on those PEOs that meet its rigorous standards. Executive director Regis Canny can provide the names of accredited companies; they also can be found on the institute's Web site.
PARADYME, Tim Faber, 2000 Center Point Dr., Suite 2275; P.O. Box 210963, Columbia, SC 29221-0963; 800-948-8524 17