Disquiet over Brexit as well as the application of IR35 to the private sector have created uncertainties that are being felt when it comes to the buying and selling of recruitment firms in the UK.
Experts say that the M&A market for UK staffing firms is tougher this year, but there remains interest in firms in sectors such as IT and engineering as well as recruitment providers with operations in international markets outside the UK.
“It’s fair to say the M&A environment, generally, in recruiting in the UK is challenging at the moment; it’s not a secret,” says Ronny Grosman, managing partner of Blackwood Capital Group, a corporate finance and M&A advisory firm with offices in London.
That challenging environment affects the sale of recruitment firms.
However, the level of difficulty depends on what segment you are in, Grosman says. With IT or specialist engineering recruitment firms, for example, there’s less, while financial recruitment firms are seeing more challenges, especially with Brexit.
“Brexit affects anything and everything, but it tends to specifically be challenging for financial recruiting or financial services recruiting,” he says.
The challenging environment weighs on multiples of EBITDA firms get when the sell. For example, years ago, financial recruitment firms were getting multiples of seven times EBITDA; today, it closer to five times EBITDA, Grosman says. However, IT and specialist engineering firms can still see six to seven times multiples or more depending on their growth and profitability.
Uncertainty stemming from Brexit seems to have slowed interest in the recruitment sector from private equity firms this year. And while US companies have traditionally been interested in UK firms, they seem less interested now, Grosman says.
On the other hand, there is still some interest from recruitment firms in continental Europe that are looking to expand into the UK or bolster their presence in the country.
Staffing Industry Analysts’ data shows there were 44 acquisitions of UK-based staffing firms in 2018, up from 28 in 2017. So far this year through the third quarter, there have only been 32 such acquisitions.
“I think right at the moment there’s quite a lot of hesitation in the market,” says Adam Herron, group COO at London-based nGAGE Specialist Recruitment Ltd. Because of the Brexit situation and uncertainty, most people are waiting to see what develops before making big commitments, Herron says.
The IR35 legislation is also causing uncertainty as it will affect how companies engage freelance contractors. IR35 is already in place in the public sector and will take effect in the private sector on April 1.
“The hope from most people I speak to is those situations will get resolved and will get back to business as usual thereafter,” he says.
Wait and See
Philip Albright, head of human capital at Goldenhill International M&A Advisors, also cited uncertainty over Brexit and the implementation of IR35, as well as the possibility of a general election having a negative impact on acquisition activity.
“Foreign buyers that would normally be considering acquisitions of UK businesses are taking more of a wait-and-see attitude,” Albright says. “I think it makes private equity buyers a bit more cautious as well.”
But there are still buyers.
“Although activity levels are down, that doesn’t mean that nothing is happening particularly in the sectors expected to grow faster than the overall market,” he says. That includes areas of recruitment related to STEM, or other speciality areas where job candidates are in high demand and difficult to find.
On the flip side, Albright says there’s been an uptick in interest among UK-based staffing firms in acquiring outside of the UK, with a particular interest in the US market.
What to Look For
And when looking at firms to acquire, the most interesting tend to be those with STEM-type businesses and those that have an international presence, Herron says. Both Henlow and GCS are technology businesses and they have a strong international emphasis.
Also, a good mix of contract recruitment is a draw in this M&A environment.
“Contract recruitment is, in the main, more interesting from an investor’s point of view … clearly, they like the fact there is more continuity and future visibility of earnings than the kind of one-off nature of permanent business,” he says. Although, having a good blend of both is still important.
Itself, nGAGE is a contract-led business with 70% of revenue from contract and 30% from perm placement, and it’s backed by private equity firm Graphite Capital. It’s run as a platform play with 14 separate companies under its umbrella, each operating its own brand.
When making acquisitions, nGAGE looks for a strong management team that is excited about the future, Herron says. It buys a majority stake and leaves management with a stake as well, so they still have skin in the game. It’s not looking for businesses where the management is interested in cashing out unless there is a strong second tier management team keen to take the reins and lead the business with their support.
Herron also says he has heard anecdotally that private equity investors are looking for businesses that have more stability and are more resistant to the ups and downs of the market. And they are always looking at how companies differentiate themselves from others, whether it be by technology or some other factor.
Blackwood’s Grosman says buyers view an international presence — such as in the US or Germany — as being more attractive. Having operations in the UK outside of London can also be a plus. He also cited the importance of a focus on contract recruitment as well.
But for those firms that are pure UK and pure contingent perm recruiting, they find it difficult, he says.
Grosman also says there appears more demand for contract recruitment providers than perm because of the increased stability of contract.
While political activities can weigh on the market, they can also spur M&A.
“From my perspective the reason we are acquisitive at the moment is doing business in the UK and staffing — particularly in the sector were in — is getting harder with more compliance, more legislation, increased costs to operate and therefore we need the scale and the size of volume in order to be able to cover the increased costs and burden of trading,” says Nick Dettmar, CEO of Swindon-based Outsource UK.
His company is interested in acquiring firms with a focus on contract rather than perm. It also looks at those with longtime customer relations and whose operations are complementary to its own.
Outsource UK acquired RZ Group back in April.
In addition to legislative actions, there are other effects on the recruitment M&A market, for example, the appetite for funding and what banks are going to do, Dettmar says.
So far, they still seem interested in funding recruitment M&A, and there are no signs they will lose interest, he says.
* This story has been corrected from a previous version.