COVID-19 put our lives on hold, but as the economy opens back up, we are starting to see life get back to normal. While many people may still be working remotely, we now see an uptick in mergers and acquisitions as companies can function more freely. 45 deals in the staffing industry were announced in the first quarter of 2021 alone, increasing by 50% compared to the previous quarter.
Assessment of the IT M&A Market
Before the pandemic, we saw about 140 deals per year in the overall staffing industry. There was a continuous influx in M&A before COVID-19. 2020 saw a decline in activity, but as we open back up, “we are well on pace to highest levels in decades,” according to John Niehaus, Managing Director of Duff & Phelps. IT/consulting continues to be the sector with the most growth.
Low capital gains rates and the amount of cash available to buyers also play a factor in the rising inactivity. While rates remain low, buyers see this as the perfect time to acquire a new asset.
Evaluating a Staffing Agency
The most common evaluation method taken in the IT staffing industry is the multiple adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) approach. In the past, we’ve seen evaluations based on a seller’s last 12 months of earning, but due to the lockdowns, the EBITDA approach needs adjusting.
From a buyer’s perspective, the factors required to make an acquisition have remained relatively consistent. Buyers are still looking for strong gross revenue, preferably in the 20-30% range. Staffing firms with a diverse client list are also attractive; a single client taking up more than 20% of a firm’s revenue is too high. Michael Babb, a Managing Partner of Osceola Capital Management, likes to see larger percentages of contracted staffing as opposed to firm when evaluating an agency.
Preparing Staffing Firms Going to Market
Tom Nunn, Business Strategy and Executive Coach, urges agencies to have realistic expectations when preparing for an acquisition. While a $100 million staffing agency may get 10X EBITDA, this doesn’t translate to less valuable firms.
Going through the process alone is another mistake Tom sees firms make. Even if the staffing agency finds their buyer, they still benefit from hiring an M&A attorney. The process is complex, and firms need help making the transition.
Structuring a Deal
The evaluation is just one aspect of negotiation. Other factors include:
- Forms of consideration
- Equity
- Seller notes
- Earnouts
- Working capital
- Employment agreements
- Non-competes
- Size of the escrow
Many of these other factors, such as earnouts, require additional negotiations. Earnouts are very common in the staffing industry; the payout is based on a contingency on the company’s future performance.
Mergers and acquisitions will continue as our industry grows. 2021 is set to be a record-breaking year of activity. IT staffing firms preparing for a merger or acquisition need to prepare an accurate evaluation, have realistic expectations, and hire experienced help to secure a mutually beneficial agreement.
Members can access State of the IT M&A Market: Perspectives from Buyers & Sellers in the Market webinar through the TechServe Online Learning Center.
