US Market Overview
- Record level of M&A activity in 2021 that is expected to continue into 2022
- Buyers are aggressively competing to acquire large quality sellers
- Record high valuations are drawing more sellers into the market
- Strong economy that is expected to grow 3 – 3.5% in 2022
- Healthy equity markets (despite recent volatility)
- Abundance of capital
- Staffing firms are highly profitable and have ample amounts of cash for acquisitions
- Debt financing for acquisitions is readily available at historically low rates
- PE firms have record levels of dry powder, have become major market participants in deals above $50m in EV, and are aggressively competing for deals
- Cross-border deals increased 68% in 2021 versus 2020, and reached record levels in 2021
- Lower European valuation multiples make outbound cross-border transactions attractive to U.S. buyers
Private Equity- What are buyers looking for and tips for sellers
Drivers of PE interest in Workforce Solutions:
- Perception of staffing within PE has increasingly moved from ‘surge resourcing’ to recognition it is a strategic part of human capital resourcing
- Excited by growth potential for the sector
- Significant wall of PE money chasing quality assets
- Staffing companies’ cashflow fits with a debt leverage model
What does PE look for:
- Quality and depth of team
- Organic growth profile key (close look at KPIs including conversion rates etc.)
- Can the business scale, especially having regard to its people, technology and processes?
- Bolt on acquisitions often add a lot of value. Does the business have a good track record of making and successfully integrating acquisitions? (if so, a bonus)
Tips for Sellers:
- Understand why PE investor wants to invest
- Roll over of shares heightens need for two way due diligence
Digital Transformation
Growth of digitisation and platforms
- Percentage of buyers using talent platforms increased from 14% in 2020 to 22% in 2021. A further 47% of buyers expect to use a talent platform within the next 2 years*
- Total market for talent platforms is now approx. $15bn. Compound annual growth rate of 21%*
- Convergence—tech staffing models increasingly looking like traditional staffing companies and vice versa
- ‘Platform when you want it; people when you don’t’ (Upwork website)
- Role of recruiters changing—tech is taking away many of the more mundane tasks and allowing recruiters to focus exclusively on account management and recruitment
- The ‘network effect’ is important—some of the larger platforms have limited sales and marketing departments because so much comes through peer referrals
Platforms and M&A
- Platforms buying traditional staffing companies—accelerate client acquisition
- Staffing companies buying platforms—cost saving; streamline procedures; more advanced client offering
- Are there now too many platforms—-opportunities for tech consolidation?
*Source: SIA presentation / research presented at SIA Executive Forum 2022
Impact of globalisation and other market trends
Huge Talent Shortage
- All stats point towards a chronic shortage of talent
- 9m people left their jobs in the USA in December 21—a 31% increase on 2020. There were 4.7m more job openings in the USA than hires in December 21*
- Some evidence that the ‘Great Resignation’ may also be the ‘Great Retirement’*
- The talent shortage is helping staffing companies move up the value chain and become trusted partners—end users need them more than ever to address talent shortages
- Shortage of talent presents opportunities to make workers more productive (e.g. through training—so ‘train then deploy’ may grow further in popularity)
Addressing receptiveness to flexible working
- ‘There isn’t a worldwide shortage of talent…it just isn’t always located where you’d ideally like it to be.’
- Strong evidence that remote working is here to stay, not just a blip. A recent SIA study (large sample size) showed that 48% of internal workers would prefer total remote working—ie never going into the office*
- 31% of internal staff said they would take a pay cut if it allowed them to work remotely anywhere*
- Staffing companies expect an at least 10 fold increase in remote working for temporary workers in the USA—(2% to at least 20%)*
- Remote working for temporary workers also leading to less measuring inputs (time sheets etc) and more focus on results (.i.e. increasing trend towards SOW mandates)
- Those companies which address hybrid/remote working and globalisation will be more attractive M&A targets
*Source: SIA presentation / research presented at SIA Executive Forum 2022
Current legal risk/valuation issues in sector deals
How to make sure new business models do have capital value
- Platformisation – especially in volume staffing
- IP ownership
- Reliance on third party software
- VAT, workplace tax and employment status (new EU directive)
- Recruitment regulation
- Payment Services Regulation
- Statement of Work
- Credit risk
- Liability risk
- Is it really outside IR35?
Growth of new business models
- Train then deploy
- NMW
- Right to recoup training cost
- Access to funding
Current legal risk/valuation issues in sector deals
Supply chain risk issues
- Remote working – deploy overseas workers
- Use of PEO and employer of record models – lack of certainty/unregulated/unlawful in some cases
- Permanent establishment risk – VAT and corporation tax
- Local licensing problems, for buyer if not seller
- Use of remote deployment
- Use of PEO and employer of record models – lack of certainty/unregulated/unlawful in some cases
- Permanent establishment risk – VAT and corporation tax
- Local licensing problems, for buyer if not seller
- + Right to work/Brexit
- UK – concerns of investors’ advisers given increased HMRC interest in staffing supply chains
- 2021-2022 call for evidence about umbrellas – government believe there is tax fraud – CFA liability (unlimited fine)
- Use of sole trader models – burden of proof on staffing co to “show” no sdc – HMRC beginning to take action
- IR35 – end of honeymoon period – assessments and fines affecting Ministry of Justice etc even though they used checking tool
- MSC risk for umbrellas and others
- [NMW]
- No interest in what is “normal market practice”