The strong economy combined with growth of the recruitment industry prior to, and during, the Covid period allowed many poor strategies to be hidden by positive results.
Acquirers have to be careful when evaluating potential acquisition targets, as they are weighing the benefits of the acquisition against the risks involved. This may include assessing the financial and operational risks of the target company, as well as any legal or regulatory risks that may arise from the acquisition.
In some cases, acquirers may be willing to take on more risk if they believe that the potential rewards of the acquisition are significant. The decision to pursue an acquisition will depend on a range of factors, including the acquirer's strategic objectives, the target company's financial and operational performance, and the potential risks and rewards of the transaction. It is easy to see why the ability to predict forward revenue, e.g., from temp and contract activity, becomes so important.
Economic Downturn
During an economic downturn, acquirers may have a heightened aversion to risk in the recruitment industry, as economic uncertainty can increase the perceived risk associated with mergers and acquisitions.
In a downturn, companies may face challenges such as declining revenue and cash flow, increased competition, and reduced access to capital, which can make it more difficult to identify and execute successful acquisitions. As a result, acquirers may be more cautious and selective when evaluating potential targets, and may focus on acquiring companies with strong financial and operational performance, rather than taking on more speculative investments.
The impact of economic uncertainty on acquirers' risk appetite will depend on a range of factors, including the severity, duration and sector impact of the crisis, and the strategic importance of the acquisition to the acquirer's long-term growth objectives.
Small to Medium acquirers
Unlike larger agencies, small to medium agencies may have limited leadership capacity and financial resources and may be more vulnerable to economic volatility and market fluctuations. As a result, they may be more risk-averse and cautious when it comes to pursuing mergers and acquisitions, as they may not have the same level of financial cushion to absorb potential losses.
Despite these challenges, small to medium recruitment agencies may still be able to pursue strategic acquisitions if they are able to identify and target companies that align with their business objectives and have strong financial and operational performance. In these cases, it may be necessary to seek outside expertise and support from experienced advisors who can help guide them through the process and mitigate the associated risks.
Deal Structure
Recruitment agency sales are influenced by the negotiated structure of the deal. Both parties have their position on risk and reward, and the resultant agreement has a bearing on both deal value and contract conditions.
In a period of uncertainty, the acquirer is likely to be seeking more assurance about future performance and the continuity of business assets such as business development and consultants performing at a strong level. Due Diligence may be more thorough in these areas, and stronger earn out conditions may be applied. The selling party may need to be more flexible in their requirements to meet these conditions.
In summary, the perception that acquirers have an aversion to risk in the recruitment industry is not necessarily true. Acquirers are interested in strategic acquisitions that will add value to their businesses and help them achieve their growth objectives. But economic uncertainty will change the structure of deals. The acquirers will place greater emphasis on understanding risk and deal structures are likely to reflect this aversion to risk.
Deals will be done, but those looking to divest may need to meet the market expectations from the perspective of risk and reward.
