M&A HAS RECOVERED FROM COVID

In Q1 2022 alone there were 23 deals involving targets within the recruitment sector. The demand for companies in this sector is being fuelled by “the great resign”, where one in five workers are expected to quit their jobs during 2022. This is not just fuelled by a desire for larger salaries but, thanks to the lockdowns, employees are seeking much greater fulfilment and work-life balance from their jobs. Consequently, vacancies are at a high, which further increases the profitability of recruitment companies.

It is certainly worth also noting that 60% of deals conducted in Q1 2022 involved US acquirors*, demonstrating the strength of the UK recruitment market.

BUYERS LOOKING FOR SECTOR SPECIALISTS

Being a specialist in a particular sector within the recruitment market is becoming increasingly important to buyers. Trade buyers look to consolidate their area of the market whilst private equity is looking for sector experts that are able to drive greater profitability. In particular, Technology, Healthcare and Renewable Energy have proven to be popular sectors for recent buyers. The skills shortage is also increasing the focus on more specialist sectors who can source and find candidates.

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"The demand for recruitment companies is being fuelled by 'the great resign'."

Rob Starr
Head of M&A, Shaw & Co

HIGHER MIX OF TEMPORARY PLACEMENTS DRIVE HIGHER MULTIPLES

Recruitment companies with a wealth of contracts for the supply of temporary staff are more attractive to potential buyers as they offer more repeatable income. These drive higher multiples as buyers are better able to count on this income coming into the business. However, having a mix of both temporary and permanent recruitment is still valuable given that the recent increased job fluidity means that activity is now high in the permanent sector of the industry. Having robust contracts in place with clients is also important for extracting greater multiples for the business as this obviously gives a buyer confidence over future profitability.

PRIVATE EQUITY INTEREST REMAINS HIGH

Private equity has traditionally been attracted to the recruitment industry as Ebitda performance has been both strong and dependable, with strong cash flow conversion. Within specialist sectors there are opportunities to deploy a ‘buy and build’ strategy to improve Ebitda, enabling the business to perhaps gain attention from a larger acquiror. Private equity houses have also kept up their interest in financing management buy-outs (MBOs). Recent activity within this sector includes: Aliter Capital backing the MBO of Concept Resourcing in August 2022; and Soho Square investing in Oliver James Associates in January 2022.

THE FUTURE  

With increased interest rates and a threat of recession on the horizon, there are obvious headwinds that could adversely affect the recruitment market. However, job vacancies still remain at an all-time high, partly fuelled by the shortage of workers following Brexit. Companies are also trying to catch-up with the aftermath of Covid to plug the holes in their workforce.

Nevertheless, some areas of the recruitment market are seeing a drop-off due to uncertainty and a shift in priority, such as in IT, where projects are postponed or curtailed. Nevertheless, whilst recession can often spell bad news for general recruiters, other external influences mean that it is likely to be different this time. A large number of recruitment firms have survived Covid and have put in more robust defences against economic downturn and are much better prepared this time around.

There are many indicators pointing to demand remaining high and growing in the future, and where staff shortages in certain sectors such as healthcare, life sciences, professional services, and education remain in demand.

If your business is performing well and operating within a specialist sector then now would definitely be a good time to begin planning your exit strategy.

*Source: Recruitment Review Q1 2022 Grant Thornton

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