Current State of Staffing Mergers & Acquisitions – A Holistic View

The state of the economy – and the staffing industry – has been shifting constantly over the last several years. This, of course, has a corresponding effect on those seeking to buy or sell.

To help make sense of the current market for staffing business Mergers & Acquisitions (M&A), TechServe Alliance assembled a group of industry veterans for a discussion with TechServe members. John Larson, Principal Consultant with TechServe Alliance’s M&A Marketplace, was joined by Jeremy Falendysz, Partner & Managing Director with UHY Corporate Finance, Martin Borosko, Esq., Staffing Practice Leader and Managing Member, and Steve Norris, also a consultant with TechServe’s M&A Marketplace.

Here are some key takeaways from their discussion:

• The past year has been challenging for the staffing business, but there are signs of improvement on the horizon.
• The number of M&A transactions in staffing was extraordinarily low in 2020, but has rebounded in the years since, hitting a record high in 2022.
• Despite challenging economic conditions, multiples for public staffing companies have been remarkably stable since 2021, varying between 7.4x and 7.7x.
• While the percentage of private equity deals in the buyer market dropped to a low of 3% in early 2022, it rebounded to pre-pandemic levels in late 2022 and the first half of 2023.

Read on for more detail, and the context behind these takeaways.

The economic backdrop

The economy continues to send mixed signals. Inflation has fallen from over 9% to under 4%, but that is still above the Fed’s 2% target. Interest rates are therefore staying at their 22-year high. There are still fears of recession (although many had predicted incorrectly that the economy would be in recession as of now). Unemployment is low, particularly in IT and engineering.

All of these factors, naturally, have an effect on valuations, and on the pace of M&A activity.

The regulatory climate, too, is influencing the industry. Several states – specifically New Jersey and Illinois in recent months – have passed legislation aimed directly at the staffing sector.

In addition to those specific pieces of legislation, regulations are generally following the evolution of staffing. “The regulations are matching the business environment, which is becoming more sophisticated, more technology driven,” Borosko says. “And so compliance is becoming more sophisticated, and more costly.” This is a particular concern when it comes to data protection and security, where the staffing industry can expect to see much tighter regulation (and therefore more compliance challenges) in the coming years.

Operating conditions in staffing

Against the backdrop of the economic and regulatory environment, there’s no question that the last year has been a challenging one. Industry-wide, 2023 is shaping up to be a flat year when it comes to revenue.

There are fewer job orders; permanent requisitions are down by roughly 30%. Competition for that business is fierce, putting pressure on margins.

In this context, though, staffing owners should remember that the current decline follows several record years. And there are glimmers of hope on the horizon; across the industry there’s growing optimism that Q4 of this year and Q1 of next will bring stabilization, if not growth.

Falendysz notes that it’s also important to look at business performance relative to the industry as a whole. “In this market, if you are flat year over year, you are performing in line with the market. If you’re up 5%, you are definitely outperforming the market.”

Over the past year, AI has increasingly become a point of discussion – and in some cases, for concern – for the staffing sector. The group agreed that while AI will undoubtedly affect all industries, including ours, it is too early to tell exactly how.

“What I’m seeing, especially with the larger scale clients that we represent, is a lot more investment going into AI technology,” says Borosko. “So, while there’s no direct impact today, I think there will be impact in the industry in the near future, and in the M & A marketplace.”

One thing is certain: as AI technology expands, staffing companies can expect it to be regulated – in the way it ranks candidates, for example – further increasing the cost and complexity of compliance for staffing firms.

The current state of staffing M&A

After peaking in 2007, the number of M&A transactions in the staffing sector dropped, and then grew incrementally from 2012 through 2018. Deal volume dropped again in 2020 with the pandemic but has rebounded significantly since then.

In 2022, in fact, there were 139 transactions recorded, topping the 2007 number by a significant margin. This was a 24% increase year over year, which is notable given the general pullback in the broader market that year. Based on year-to-date performance, Falendysz predicts that the number of transactions for 2023 will fall between those in 2021 and 2022.

Within the overall transaction numbers, there is significant sub-sectoral variation. IT staffing accounted for 25% of transactions in 2022, and only 13% in 2023 year-to-date. In the same period, the percentage of professional staffing transactions rose from 8% to 28%.

The nature of deals has changed. There are fewer deals in the $50 million-plus range; $10 to $25 million transactions are more plentiful currently.

Unsuccessful transactions are also more common in the market right now, according to Borosko. “We’ve had more deals on our table that have not closed, that have fallen apart or taken a pause, largely due to the economic conditions that the staffing industry is facing.”

There’s an additional dynamic Falendysz says to watch for. With changing regulations in specific jurisdictions, some companies are choosing to exit those specific markets by selling offices rather than the entire business. “We’re seeing some folks articulating a strategy shift moving assets out of those markets. And on the other hand, we’re seeing some folks engage us to pick up some assets in those markets. I think we’re going to see more carve outs.”

Valuation in today’s market

As mentioned above, multiples in public staffing companies have remained remarkably steady over the past year. Access to capital has been challenging over the past few years – and is still so for larger deals -but the picture is improving for smaller transactions. Currently, Borosko says, the market is lopsided, with many buyers and fewer sellers. There is more competition, particularly, in the $10 to $25 million range, with larger companies looking more at smaller companies for acquisition targets. It’s noteworthy that the valuation multiples for companies falling within this range typically tend to be lower compared to those observed in public companies.

Deal structure is changing as well. While cash-on-close rose to 90-100% (compared to only 70-80% earlier), it has started to decline. Deals with 50-60% cash-on-close are more typical in the market today.

For companies considering selling, there are several things the group recommends to make the business more attractive to buyers.

Given the decline in permanent placement, Norris advises that staffing companies are best to keep the ratio of that portion of their business relatively low. “Permanent placements are really having an impact, especially on smaller firms where perm placement is a high percentage of their overall business,” he says. “A buyer is always looking to minimize and mitigate their risks. If you can keep perm to around 10% of your revenue – in fact, in a perfect world, 5% – these numbers that we are talking about aren’t going to impact your business as much.”

Borosko also notes that buyers strongly value sellers who are willing and able to stay in the business during the transition period. Sellers who can plan for at least six months, possibly a year or more, are best positioned.

Is now the right time to be a buyer or a seller?

This is never an easy question to answer, because as Larson notes, it raises so many other questions. “What do you do as an individual business owner? How do you take all of this information and use it to make strategic decisions about how you build your company, drive your company, and potentially exit? I get questions every week: ‘Is now a good time to sell?’ Or, ‘It feels like it’s a bad time to sell; maybe I should be a buyer.’”

While the answer may never be clear, one thing is: seeking expert counsel is always a good idea. If you are considering buying or selling, contact John Larson or Steve Norris with TechServe Alliance’s M&A Marketplace for input and advice.

The information above – and much more – was covered in a recent webinar presented to TechServe members. Missed the live presentation? Not to worry; you can view the recording here, or download the slide deck here.