Mergers and acquisitions are a common feature of the ever-evolving staffing industry landscape. Roughly 8% of US staffing firms are acquired in any given year, according to an estimate last year by Staffing Industry Analysts, the publisher of this magazine. But 2016 saw a downswing in M&A activity, with the number of publicly announced deals involving staffing firms in North America falling to 69 from 92 the prior year. SIA cited inferior economic growth and heightened business uncertainty as the main reasons for the drop in transactions.
Uncertainty notwithstanding, what do staffing firms consider when looking to buy other staffing firms? Executives we spoke with cited a number of criteria, including fit with current strategic plans, price, culture and leadership.
“For us, the first filter we use is ‘does it fit our current strategy?’” says Steve Cooper, CEO of Tacoma, Wash.-based TrueBlue Inc. “What made a good target 12 years ago isn’t necessarily a good target today.”
Take, for example, TrueBlue’s transformative 2014 acquisition of SeatonCorp, including the PeopleScout brand. The deal added to TrueBlue’s portfolio a recruitment process outsourcing business, managed service provider solution, on-premise management and more.
But TrueBlue’s acquisition efforts had gone through changes over the years prior to the SeatonCorp deal. From 2005 through 2008, its acquisitions were aimed at expanding existing capabilities. Then the recession put a damper on deals from 2009 through 2011. Afterward, things changed again as the company noticed large customers were showing most of the growth, and it sought to bolster its large account handling, on-premise management and ability to recruit without branches. Cooper said TrueBlue first looked at acquiring SeatonCorp in 2012, but RPO wasn’t on the company’s radar at the time. The next year, further analysis led TrueBlue to modify its strategy and then RPO made sense.
Management & Risk
Next to strategy comes leadership in TrueBlue’s acquisition decision-making process. “Can we run this company with the current leadership team, or is the target leadership team willing to join?” Cooper asks. Those conversations need to happen up front.
The next two questions that need to be answered for TrueBlue relate to return on investment and then what risks the acquisition could represent, Cooper notes. Will the company be required to take out too much debt? Are there any inherent risks in the firm to be acquired? The fourth question must be answered once all the other questions point to yes.
Making sure the potential acquisition is a good strategic fit was also cited by L. Allen Baker Jr., president and CEO of Plano, Texas-based BG Staffing. The firm has made several acquisitions, including this year’s acquisition of IT staffing provider Zycron Inc.
“From a buyer’s perspective, you have to be disciplined in your approach and you want to make sure the acquisition is a good strategic fit,” Baker says.
Right now, he is looking to add skill sets or geographies in acquisitions. In general, he also looks at whether the potential acquisition is accretive and will bring value to earnings.
Price Has to Be Right
Getting to the right price is also a key consideration. Of course, sellers want the highest price and buyers want the lowest — both sides must compromise and come together before a deal can take place, Baker says. “The valuations are getting harder and harder to get agreement on primarily because sellers are wanting top value that they’ve seen in the marketplace somewhere,” Baker says. “Most sellers, and this isn’t a bad thing, have decided their company is worth ‘X,’ but they don’t realize it’s not going to be the same thing to all buyers.” For example, whether or not the owner stays on board can affect the price.
Brendan Flood, executive chairman of Staffing 360, also says price has to be right for the buyer and seller — especially if the management team owns the staffing firm to be acquired and will continue to operate the company post acquisition. “If they are going to stay with you afterward, then the price has to be right, otherwise you’re going to have a disaffected management team shortly thereafter,” Flood says.
An industry veteran, Flood has been part of more than 50 M&A transactions, and Staffing 360 has done six acquisitions including Lighthouse Placement Services; The JM Group; and, its largest deal, Initio International Holdings Ltd. Staffing 360 also looks at strategic fit, such as skills and geography, when acquiring a firm. Is the firm in a geography where Staffing 360 has a concentration of other operations, e.g., the East Coast of the US or London? An acquisition outside of those areas would need to be a larger firm that could stand on its own. Likewise, the company seeks firms in the five skill segments it focuses on — light industrial, finance/ accounting, engineering, IT and administration — and is focused on staff augmentation and direct hire.
Flood says Staffing 360 looks to buy well-run staffing businesses whose management teams will stay on to operate them post acquisition.
Management and the acquirers must get along. One way to determine this is the “enjoy getting together test,” Flood says lightheartedly. “If every time you meet them, you’re looking forward to going somewhere else, that’s probably a bad thing.”
Baker concurs. BG Staffing tends to buy firms where the seller will stick around to run the business. And it’s important the former owner get along with leadership at the acquiring firm. If the seller is not going to stay, then attention would turn to the second in command, who will remain to run the business under a new owner. “Typically, people want to stay on, but June be due to age or retirement, there’s a reason the owner June want to cash out and go to the beach,” Baker says.
Staffing 360 also asks the about tenure: How long has the management team been in place? A team with high turnover might not fit Staffing 360’s desired profile. Management aside, very few people within Staffing 360 do not have contact with clients or candidates so high turnover affects the way clients perceive the business and ultimately the bottom line.
One area Staffing 360 also checks is whether a firm’s top 10 clients tend to change over the years or remain the same, Flood says. If the top 10 clients tend to be the same, that’s good. If they change from year to year, that could mean the firm is selling on price. Clients who are only interested in price will likely find a lower price down the road.
And staffing firms that sell primarily on price aren’t developing the necessary relationships. “Selling based on the quality of the relationship with client and quality of service, even if more expensive than average, the client knows what he or she is getting and is more likely to stay with you,” Flood says.
An important aspect of bringing two companies together is culture, says Arthur Knapp, president of Geometric Results. Knapp formerly led the MSP operations at IQN.
“A lot of times organizations have developed a culture and personalities,” Knapp says, but in the MSX International acquisition of IQN’s MSP business, both sides shared common values and a focus on customers and operational excellence. In addition, “Both sides were used to a fairly collaborative management style,” he says.
Culture, in addition to leadership, also comes up early in potential deals.
In fact, Staffing 360’s Flood says the first phase of M&A is the “get to know you” phase. And after the deal, Staffing 360 works to maintain culture and keep the staff loyal — even keeping the acquired firm’s brand when possible. Staffing 360 also aims for zero redundancy, both before and after the transaction, and lets the internal staff know their jobs are safe as soon as possible.
The company is being acquired because it’s profitable and successful and the people need to know their jobs are safe, Flood says. The move also helps curtail speculation at the water cooler about workers’ futures with the firm.