Current State of the Staffing M&A Market

Introduction

Having just returned from Staffing Industry Analysts’ (SIA) 2022 Executive Forum North America after completing three staffing sale transactions in the first 45 days of 2022, UHY’s National Staffing Practice and UHY Corporate Finance are excited to share some recent insights into today’s Staffing M&A market.

The broader staffing sector experienced a meaningful recovery in 2021 following a pandemic-driven reduction in activity in 2020. From a volume perspective, 2021 saw 134 Staffing M&A deals close, representing a +37% recovery as compared to the 98 deals closed in 2020. The pandemic’s impact on the staffing M&A market is best illustrated by the significant, ~25% decline in 2020 deal volume as compared to the 2017-2019 annual average of ~130 closings.

UHY believes that 2021 deal volume reflects a normalized, go-forward run-rate for the industry, which has been further supported by the strong start to deal activity in the first two months of 2022. Although financial buyers are showing more interest in the staffing sector in recent years, the buyer universe continues to be dominated by strategic staffing companies. In 2021, strategics were responsible for 80%+ of successful closings. Large, publicly traded staffing companies continue to be selectively acquisitive even for small/mid-sized companies, and their continued acquisition activity has been yet another factor driving valuations higher for middle-market sellers.

It has become apparent that management teams across North America view strategic acquisitions as a core component of their growth strategies. Strategic rationales will of course vary by company and segment, but whether a company is looking to diversify its service offering, invest further in a specialty staffing sector, or expand geographic reach, the primary takeaway should be that there is a vast buyer universe aggressively putting capital to work in the staffing industry today. “Sellers of staffing companies who can articulate a strong value proposition will attract an aggressive pool of prospective investors in this market,” says Bryan Besco, a leading member of UHY’s National Staffing Practice.

M&A by segment

Staffing industry sector and competitive positioning are the primary drivers of M&A activity and valuation in the current environment. Higher margin segments, such as IT and healthcare staffing, continue to command the most significant interest among buyers. These industry sectors generate strong profitability metrics, but more importantly for buyers, they can present defensible and high growth, accretive financial projections supported by favorable market conditions.

Deal composition in 2021 – led by IT and healthcare staffing, which together represented ~50% of all staffing deals – reflects strong demand for high-skilled labor providers in professional fields materially influenced by the pandemic. The general healthcare/medical field, for instance, which has sustained challenging labor shortages of increasing intensity, continues to struggle with nurse/staff retention. “Healthcare and nurse staffing companies offer consistent availability of quality professionals and nurses wield significant pricing power in the current market, and we saw this first-hand in our successful sale of Alto Healthcare Staffing in late 2021. Alto experienced explosive growth in their clinical and travel nursing divisions as demand and prices rose over the last two years, and this was reflected in the competitiveness of the sale process and the ultimate valuation paid,” explains Jerry Grady, leader of UHY’s National Staffing Practice.

All of that said, the high level of demand for staffing acquisitions goes well beyond just IT and healthcare agencies, as activity levels and valuations have also risen in the industrial, commercial, and search agency sectors. Although healthcare and IT are currently leading the way in staffing M&A, there are opportunities for any well-positioned staffing company to receive stretch values in today’s M&A market.

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. As such, deal structure remains a critical consideration in any M&A transaction. Due to the unique operational dynamics in the staffing industry, particularly as it relates to month-to-month fluctuations in placement volume and margin per placement, 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%+ 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 as a percentage of total deal consideration. While this is more difficult in the staffing space, UHY has had tremendous success achieving 90%-100% cash payouts in recent staffing sale transactions – something that we have simply not seen in recent years,” says Jeremy Falendysz, a leading member of UHY Corporate Finance.

Valuation

Valuations remain robust, particularly within the higher margin professional staffing segments. A highly competitive buyer universe, represented by a mix of both financial and strategic acquirors, has repeatedly shown their willingness to pay premium values. Investment banks are uniquely suited to drive exceptional valuations in this market. “A well-run, timeline-driven, competitive sale process targeting the right buyer universe allows 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,” explains Jeremy Falendysz.

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 (i) organic growth profile, (ii) key performance indicators (e.g., margin profile, bill rates), (iii) scalability (i.e., Can the company absorb additional growth? Does it have the right technology to do so?), as well as (iv) the quality and depth of the leadership team. A general rule for middle-market staffing companies is that (i) values in the 4.0x-5.0x range are associated with lower growth/margin businesses in the Light Industrial and commercial spaces, (ii) values in the 5.0x-6.0x range are associated with average growth/margin businesses active in the professional and general placement agency spaces, and (iii) values in the 6.0-7.0x+ range are associated with high growth/margin businesses like those active in the healthcare, life science, and IT spaces. “Due to the wide range of factors which contribute to the ultimate valuation paid, it is advantageous to complete a valuation assessment prior to any liquidity event,” according to Wiley Lane of UHY Corporate Finance. “Because of the significant operational differences between staffing companies both within individual sectors and across the broader industry, we are completing more pre-sale Staffing valuations than we have in the past several years.” Although high-skill professional staffing firms see the highest valuations, there remains an appetite for acquisition across the broader staffing market. Within specific sectors, there are viable avenues by which to pursue and achieve attractive valuations.

2022 Staffing M&A outlook

“UHY forecasts the demand for acquisition-based growth in the staffing industry will remain high for both strategic and financial buyers as the economy continues to recover from the pandemic and the value of talent acquisition and retention continues to increase,” says Grady. UHY expects valuations to remain elevated across staffing sectors in 2022 (absent any material market disruptions brought about by escalating tensions in Ukraine, a rising interest rate environment, among other factors), including the potential for stretch values among the most sought-after acquisition targets. Additionally, deal volume will remain in line with 2021 levels, with 130-140 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,” says Falendysz. “Capital markets have never been more flush with capital and the staffing industry is in the spotlight with a strong focus on talent in this market.” Investors remain eager to put their cash to work, which should result in another strong year.