Selling can be the ultimate end-goal for many staffing firm owners, and that bodes well as far as the market goes. Of late, it’s been holding up satisfactorily, with private equity having a significant presence.
Staffing merger-and-acquisition activity in the US remains robust, according to several M&A specialists. “Over the past two years — and this is continuing — a substantial amount of the deals have been private-equity related,” says Jim Childs managing partner and CEO of Bowstring Advisors, a division of Citizens Capital Markets Inc. “That’s really been the biggest change in the industry over the last decade.”
Deals aside, there are concerns in some corners that we’re in the latter stages of the economic expansion. What this means is that now is the time to move if you’re going to sell. Keeping firms growing may also be getting harder, some say, amid the shortage of workers given the low unemployment.
Still, the news appears mainly good for staffing M&A. According to Staffing Industry Analysts research, there were 64 acquisitions of US-based staffing firms in the first three quarters of 2019. That compared to 98 in the full year 2018, a total of 80 in 2017 and a total of 67 in 2016.
Recent examples of larger transactions include Medical Solutions’ acquisition of C&A Industries and The Adecco Group’s sale of Soliant Healthcare.
“The market for staffing M&A continues to be strong and active,” says John Niehaus, managing director at Duff & Phelps LLC, adding there remains a good supply of both sellers and buyers.
The mindset among many sellers of staffing firms is to get a deal done soon or be prepared to wait another three to five years, Niehaus says, given concerns some have about the economic cycle.
Those concerns don’t seem to be affecting demand, however. “I think we’re continuing to see it be a seller’s market, and there is more demand for companies than there are companies that want to sell,” says Sam Sacco, owner of R.A. Cohen Consulting.
There’s demand for professional staffing firms, but Sacco says demand also remains strong for light industrial firms.
Private Equity the New Normal
Private equity firms have shown interest in the staffing industry in a big way in recent years, and many staffing industry deals are being done by such firms.
Bowstring Advisors’ Childs says an unprecedented capital shift to private companies has happened over the past five to 10 years, and the shift is seen not just in staffing but throughout the middle market — companies that are between $25 million and $500 million in revenue. In fact, there are half the number of public companies in the US today than in 2000, and large investors are reallocating capital to private markets from public markets.
In the staffing industry, Childs calculates that 30% of transactions over the last two years have been private equity buying “platform” staffing firms, which represent a private equity group’s initial acquisition in the staffing industry. Later acquisitions of staffing firms are “add-ons.” Child’s calculation excludes deals under $25 million in value.
Most private equity firms rely on debt financing for up to half the purchase price, and today’s low interest rates make money more affordable.
Childs says he sees this as the new normal, it’s a permanent shift. However, it’s good news for staffing company owners, who now more options than ever before.
In addition, the typical holding time that private equity firms keep a staffing provider in their portfolio has also shrunk to between two and five years from between five and eight years.
“When they can get value, they want to realize it,” Childs says.
Publicly traded staffing firms have taken a breather from acquisitions, with just a few companies remaining active, Childs says, although he notes there are indications that may be changing.
Duff & Phelps’ Niehaus says private equity will generally look to acquire growing staffing firms with $4 million to $5 million in annual EBITDA when making their first platform acquisition in the staffing industry, Niehaus says. Once they have a platform firm in place, they may look at add-on acquisitions with annual EBITDA of approximately $2 million or more.
Strength Through 2020
M&A activity should be strong at least through the presidential election next year, says Akash Taneja, managing director at investment bank De Bellas & Co.
Right now, the economy remains in good shape, unemployment has been at an all-time low and the Fed has been accommodating in terms of maintaining lower interest rates, Taneja says. Staffing firm buyers are still looking for deals, and staffing firm sellers are continuing to capitalize on strong performances and take advantage of favorable multiples.
“In a lot of cases, if a staffing owner has been looking to exit the business, now might be a good time to do that,” he says.
Mike Stomberg, CEO of The Planet Group, cites the industry’s growth in his company’s recent acquisition of staffing firm WinterWyman.
“With the contract staffing market projected to have continued, sustained growth, the ability to quickly diversify our recruitment offerings was enticing to us,” Stomberg says. “Planet and WinterWyman have complementary service offerings, a similar client base and a strong focus on culture and success.”
The deal also enabled Planet, a portfolio company of private equity firm MidOcean Partners, to quickly diversify its staffing offerings, he says.
Meanwhile, the economic climate has been a conundrum. While some indicators point to a slowdown, others remain strong. For example, last month’s jobs report was better than expected in terms of overall job growth.
“My feeling is that it’s easy to say we’re at the end of the cycle because it feels like we should be at the end of the cycle,” Sacco says.
A number of economic indicators are showing positive, and the No. 1 thing slowing down growth in the industry is the difficulty in finding workers to place in jobs, he says.
The shortage of skilled talent — at least in the healthcare space — was forecast to continue through at least the next 10 years, according to one discussion at SIA’s Healthcare Staffing Summit last month.
On the other hand, M&A panelists at the conference postulated that M&A activity in the healthcare staffing space may have peaked for the economic cycle.
For those looking to sell their firms, prospects for growth play a key part in making their firms more attractive to buyers.
Staffing firm buyers typically look for companies with a history of strong revenue and EBITDA growth, higher gross margins, a diversified customer base and a deep operational team that will stay on post transaction, Duff & Phelps’ Niehaus says. Firms with faster growth also typically see better valuations.
Another important aspect of M&A is whether the owner or management team will stay on board post-transaction to continue growing the acquired business. Buyers are looking to acquire operational teams, and many deals have earnouts or the current owner or management retains a minority stake in the firm. Staffing M&A deals become more difficult when owners or hands-on managers are not going to remain.
“What is it that you are selling when you are selling a staffing company? It’s relationships,” Niehaus says.
