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.

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M&A activity is clearly on the upswing from staffing firm owners looking to take fast advantage of the emerging post-pandemic economy. While last year saw an understandable decline, 2021 has already seen an uptick, with SIA reporting that the North American staffing M&A activity reached its highest level since the third quarter of 2019.

M&A is a big decision with multiple considerations. The desire for fast growth could lead to avoidable pitfalls. Compound that with post-COVID unknowns, and you have a recipe for a challenging M&A landscape.

In this article we will explore these challenges and look at best practices for addressing them so you can make the best most informed M&A decisions for your staffing business.

Find a Trusted Expert. When you’re thinking about buying or selling, you’ll want a partner to help you in the process. Whether it’s one partner or a team across different professions such as legal, finance and investment banking, the most important quality to look for is experience.

Start by asking your industry friends who have been through M&A before. Chances are, they know whom to go to and whom to avoid. You can also hire an investment banker or a CPA to find a buyer or seller for you.

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Do Your Due Diligence. The most important consideration in an M&A is determining if the firm will be profitable for the buyer. To do this, you have to assess the financial performance of the staffing firm over a period of 3 to 5 years. The buyer is going to be looking at the balance sheet, income statement and more to determine debt structure, historical cash position, net worth, gross margins, current pricing, EBITDA, etc.

With Covid-19, this is an extra challenge because the last 18 months have been anything but typical. Buyers and sellers have to keep this in mind when determining the final price.

Other important questions to ask include:

• What does the current business look like internally?
• What does the customer mix look like?
• What is the growth potential for that vertical?
• Are there opportunities to reduce overhead or expenses?

Ask Questions. When it comes to merging two disparate companies together, financial performance and what it looks like on paper can only tell you so much. An important part of the M&A process is asking questions to get an idea of what the company is really like. What’s the company culture like? Are they compatible? It’s one thing to merge cost structures together – it’s entirely different to do so with culture.

Other important questions should be around practical matters such as the ease of combining locations and teams, which might be further complicated by an uptick in remote and hybrid work. You’ll also want to know whether the business is sustainable or if the industry is cooling down.

Understand the Purchase Structure. In simpler times, a seller might lay out the terms for you, and you would negotiate and make an offer based on that. Now, it’s often much more straightforward: “Make me an offer,” or, “Here is the purchase price; give us the pricing structure.”

This opens up some opportunities to be creative if you have the resources to do so. For example, if the seller is asking for a certain amount, you could offer a small amount of cash down with an earn out over the next few years. It’s an environment where you can be flexible when it comes to purchasing.

In summary, although the time may feel right to grow like crazy, not all deals are created equal. Extra patience and due diligence in light of the challenges of this time may be warranted. Staffing firms that do their homework in this way will be more successful when it comes to M&A.

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The post M&A as a Growth Strategy: What You Need to Know Before You Buy or Sell Post-Covid appeared first on Paragon Strategic Staffing.