The shifts in the staffing industry over the past few years have been significant. Most staffing companies have had to deal with changing client and candidate expectations as well as working through new business-models that can fundamentally change the way they operate, that is; the growth in RPO and MSP arrangements. These changes can threaten the viability of many SME firms who face substantial margin pressures and increased (and different types of) competition.
One impact of the market changes is in an increase in acquisitions being considered as a means of achieving growth targets. However, the issue of the balance of risk v return is more sharply in focus now. Businesses that instil greater confidence through a higher level of sustainable earnings will be in more demand than those who don’t.
In the staffing industry sustainable earnings have been traditionally defined by a few key characteristics;
- The number and consistency of temporary/contracting placements
- The ratio of temporary/contracting v permanent fees at gross profit level.
- The size of the business, number of billers
- The number and strength of Preferred Supplier Agreements and contracted work.
Other factors play a role in the attractiveness of a business to a buyer and includes; sector, management quality, staff experience and staff turnover rates. However, the elements noted above really do determine the degree to which experienced buyers will perceive the sustainability of a staffing business.
The last five years have re-enforced, in the main, that businesses focussed extensively on permanent placements have had patchy results since the global financial crisis. Although there are some impressive exceptions to this, in general, perm placement businesses have had a more “bumpy ride” in that time. Consequently, those businesses find it harder to demonstrate the sustainability required to achieve greater values at the time of a sale.
Why are they seeking this proof of sustainability? Organisations targeting acquisitions want to know that next year’s profit is reasonably predictable; and the year after. Temporary placement rates provide that increased certainty and a relative form of annuity income.
Today the recruitment industry is more complex. Market opportunities that provide annuity revenue are sought after. The changes in the market that were referred to earlier also bring opportunities for companies who adapt best, as always. Since the financial crisis many corporates have found new ways to address their human capital requirements: RPO, managed vendor agreements and statement of work (SOW) projects. Agencies capable of delivering services through these models can add annuity revenue to their business.
We now see acquirers looking for revenue streams that come from these types of sales models. Why they seek it is of course; firstly it provides annuity income and secondly it creates alternate ways of engaging with the client. Strategic acquirers are more attracted to a sales model that better protects the revenue stream rather than one that follows the traditional path to accessing a client’s job requirements. In short, they won’t pay as much for staffing agencies that operate in the same way they did ten years ago.
It is our experience that SME agency owners tend to overvalue their businesses. There is a tendency to focus on the past successes and not the positioning of the business for the future.
The agencies that achieve the greatest value are those that provide buyers with some certainty for future years. It can be in a mostly permanent placement business as long as that business is in a good sector and is, importantly, of sufficient size and profile to demonstrate sustainability. Businesses that achieve high and repeatable rates of temporary placements will be in demand, assuming strong margins are attained to deliver sufficient profitability. Other forms of repeatable revenue and new client-engagement models also add to the value of an agency.
Adapting a staffing agency to be able to deliver services in different ways is challenging. Achieving it can provide the sustainability to a business that raises the market valuation of an agency appreciably.
Article written by Richard Hayward, First Published in Global Recruiter May 2014