Low Interest Rates and Technology Sector Driving Strength in the Recruitment and Staffing Mergers and Acquisitions Market

According to the REC’s report on jobs the recruitment industry has only experienced contraction in five of the past 18 years. It is true that growth in the last six months has slowed from its dizzy heights of 2013/14 but the long term performance of the sector is a highly attractive one for investors hence why top sector advisors Deloitte say that they are as busy now as they have ever been.

I recently attended the Recruiter Fast 50 awards and a spokesperson for Clearwater - the highly respected and experienced corporate finance house - commented that the market for acquisitions and investment remains strong particularly for single market businesses. I feel that this is the key to success in equity transactions right now. Investors want to back market sectors that have good medium to long term growth potential and where recruiters and staffing organisations can differentiate their offerings. This is why cutting edge digital and technology businesses together with specialist engineering businesses are attracting strong interest from investors.

My advice to shareholders and the management of businesses looking to raise capital or to sell is to position the business in the right area. You need to stay flexible, there are no prizes for doing a great job in a poor market. Healthcare was, until recently the sector to be in but legal pressure has temporarily caused investors to think about the long term prospects for the sector. The financial services sector has long been a strong sector for recruiters but is it now commoditised so to get investor interest you will probably need some tangible differentiators. There are of course long term stable market sectors that always attract investor interest such as accounting, but even here you should ask why you?  What is it about your business rather than your competitors that will attract interest?

It is also important to understand where the money for investment and acquisitions is coming from. Private equity firms rely heavily on bank debt (something of an oxymoron) and of course right now that is cheap. Equally acquisitive companies can also raise money cheaply right now so there is no shortage of funding for the right deal. I believe that post recession, particularly post 2012, this has been a major contributor to the high level of investment and M&A activity in the sector.

It can also be argued that the low cost of debt has helped drive up valuations in recent years. I am always being asked what multiple will my company attract if I sell? There is no simple answer to this seemingly straight forward question. We often hear the outline details of transactions but in truth these usually sketchy third hand details cover up the true value of transactions; is there an earn out or deferred component in the deal, is the value based on previous, current or future earnings?

Whilst in recent years we have, on occasion, seen significant increases in acquisition or investment multiples most analysis over the past 15 years or so show the average multiple paid by acquirers is around six and a half times the current year EBITDA of the target company. We have of course seen transactions that attract multiples in excess of this figure occasionally in to double digits but again you need to examine the deal structure to fully understand how these multiples were derived.

There are a number of factors that affect the multiple an investor or acquirer is likely to pay. To me there are three key ones; market, scale and business model. The Hamilton Bradshaw business HCIG was sold to Graphite Capital in 2014 for what was rumored to be an eye watering multiple but you should note that this business was probably on a trajectory to make over £10million in EBITDA. Although the business did not meet my preferred single market design it was positioned in a number of resilient markets both private and public sector focused. Furthermore a significant proportion of the businesses’ revenues were generated through businesses with a recurring revenue stream - contact and temporary placements as well as managed services styled projects. The perfect storm particularly when you dial in an experienced and highly accomplished senior management team.

Raising money or achieving a sale often appears straight forward, in truth it is the culmination of years of hard and focused work. If you want to talk through any of the points raised in this short piece or to discuss your own issues please feel free to drop me an email - jonathan@eliteleaders.co.uk. Alternatively, why not attend the REC’s Scale Up Business Growth Seminars, where I’ll be speaking about topics such as this. Contact the REC on 020 7009 2100 to book your place.