The staffing industry today is receiving a lot of attention due to the so-called “Great Resignation” and the resulting focus on talent. With that attention comes increased investor interest.
Indeed, M&A activity in the broader staffing sector experienced a meaningful recovery in 2021 following a pandemic-driven reduction of about 25% in 2020, and we expect activity to remain strong this year. From a volume perspective, 2021 saw 134 staffing M&A deals close, representing a 37% recovery from the 98 deals closed in full-year 2020. The buyer universe continues to be dominated by strategic staffing companies, who were responsible for over 80% of successful closings.
As such, it is critical for operators in the space, as well as potential buyers and sellers, to stay up-to-date on this dynamic market to remain competitive.
According to my colleague, Bryan Besco, a member of our national staffing practice, sellers of staffing companies who can articulate a strong value proposition will attract an aggressive pool of prospective investors in this market. A well-run, timeline-driven, competitive sale process targeting the right buyer universe enables owners to leverage the highly favorable dynamics present in today’s market to drive higher values, higher cash payouts and an increased probability of a successful closing.
Calculating value. Valuations can vary for any number of reasons, but in staffing transactions, there are crucial components all buyers search for in a potential acquisition. These key value drivers include a company’s organic growth profile, key performance indicators and scalability, as well as the quality and depth of the leadership team.
Valuations remain robust, particularly within the higher-margin staffing segments. A highly competitive buyer universe, represented by a mix of both financial and strategic acquirers, has repeatedly shown their willingness to pay premium values. Investment banks are uniquely suited to drive exceptional valuations in this market.
We are currently seeing valuations in the ranges of:
- 0x-5.0x — lower growth/margin businesses in the light industrial and commercial spaces
- 0x-6.0x range — average growth/margin businesses active in the professional and general placement agency spaces
- 0x-7.0x-plus range — high growth/margin businesses like those active in the healthcare, life science and IT spaces
“Because of the significant operational differences between staffing companies, we are completing more pre-sale staffing valuations than we have in the past several years,” says Wiley Lane, Analyst, of UHY Corporate Finance.
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The deal structure. While valuations are clearly of high importance in M&A transactions, factors that determine just how much cash sellers receive (and when) tend to be just as important in assessing the attractiveness of a deal. Staffing acquisitions tend to include meaningful deal structure (vs. 100% cash-at-close transactions). Deferred consideration, such as performance-based earn-outs, seller notes and escrows, has historically represented 50% or more of total consideration for staffing transactions, which limits the cash paid at closing and shifts the risk of future payouts to sellers. Given sellers’ priority of maximizing cash-at-close, a critical job of any sell-side investment banker is to reduce deferred payouts. While this is more difficult in the staffing space, UHY has had tremendous success achieving 90% to 100% cash payouts in recent staffing transactions — something that we have simply not seen in recent years.
2022 staffing M&A outlook. “UHY forecasts the demand for acquisition-based growth in the staffing industry will remain high as the economy continues to recover from the pandemic and the value of talent acquisition and retention continues to increase,” says Jerry Grady, partner and national staffing industry practice leader. We expect valuations to remain elevated across staffing sectors in 2022, including the potential for stretch values among the most sought-after acquisition targets. Additionally, deal volume will remain in line with 2021 levels, with 130 to 140 staffing transactions expected in 2022. Despite some potential market disruptors sitting out there today, staffing M&A is expected to continue to follow the sustained upswing in activity we saw in 2021. Investors remain eager to put their cash to work, which should result in another strong year.