Discussing the Current Staffing M&A Market and H2 2024 Outlook

Jeremy, how would you describe the current staffing M&A market?

Having presented on the topic of staffing M&A at 10+ staffing industry associations nationally in the past 12 months and speaking with 125+ staffing company owners/CEOs over this time, we have a very good pulse on the market today. With 56 staffing deals closed in H1 2024, we are flat/slightly up vs. H1 2023 activity. This puts the sector on pace to match/exceed 2023 activity, which was the second most active year in the past 15 (following record 2021 activity). We anticipate the final 2024 deal count to be in the 120-130 area, just between the 139 and 116 deals in the prior two years (per SIA).

Some noteworthy observations on the state of staffing M&A today are (i) a continued focus on smaller deals/targets (sub-$25MM revenue), (ii) a continued pull-back from Private Equity (PE) buyers (~5% of buyers in 2023-24 vs. ~10% in 2020-22), (iii) a surprisingly aggressive amount of buyer competition in our “marketed” deals (frankly, somewhat independent of size and company-specific challenges), and (iv) similar valuation multiples as those in the white-hot 2021-mid-2022 market.

Looking forward, we anticipate a continuation of today’s seller’s market, with healthy overall deal activity. More staffing companies are engaging us and other M&A advisors on acquisition searches to bolster otherwise anemic organic growth. We also expect multiples to hold relatively steady across most sub-sectors, but EBITDA numbers have declined for many industry players in 2023-24, which can impact overall valuations if sellers are not effectively “positioning their numbers” with buyers.

Paul, what are your thoughts?

I largely agree with Jeremy that we’ll see a continuation of the current market for the remainder of 2024, with its focus on smaller deals and healthy valuations for attractive businesses. That said, buyers remain cautious due to declining revenue/profitability in many sectors (Healthcare/LI), and many sellers continue to hold off going to market until their numbers improve. As conditions improve, we expect pent-up demand to result in buyers (particularly PE) more aggressively competing for mid-sized/larger deals, and additional sellers entering the market. We expect both to occur as we move into 2025.

Paul, how have deal structures/timelines changed?

Compared to 2021/early 2022, large exceptional companies that are in short supply and high demand are continuing to see strong buyer demand, 90%-100% cash at closing, and 1-year earnouts on any deferred payment. On the other hand, companies without a compelling story have seen less cash (50%-80%), 1-3 year earnouts, and fewer interested buyers vs. 2021/2022.

Buyer due diligence, particularly on larger deals, is often taking 30-60 days longer due to concerns about the sustainability of revenue and other risks.

Jeremy, any closing remarks for staffing company buyers/sellers active in today’s market?

Staffing company boardrooms remain very focused on M&A today as they otherwise struggle with organic growth, and with quite a few larger deals sitting on the sidelines, we do see a recipe for a strong finish to the year. Further, staffing company multiples have remained remarkably (and surprisingly) consistent over the past several years. Finally, we see prospective sellers over-reacting to near-/medium-term macroeconomic challenges more so than buyers, who often have a much longer investment horizon. We see this in the form of would-be sellers fearing they may have “missed the window” to sell, only to find out that staffing industry buyers are still aggressively pursuing acquisitions at historically attractive multiples AND deal structures today. 

Paul, any closing remarks?

Sellers should do a business assessment and legal audit 1-2 years before going to market. Buyers want clean businesses and don’t want surprises during diligence. Surprises can reduce valuations, impact payment terms (less cash at closing), and require large at-risk escrow amounts.

In most cases, sellers should obtain a sell-side Quality of Earnings (QoE) report – a deep dive into the quality/sustainability of customers and projected business. In this challenging market for staffing services, a QofE can be particularly helpful in providing visibility to a buyer and should be done before contacting them.

Finally, if a transaction is $20MM+ in value, sellers should request that buyers obtain Representations and Warranties Insurance (a form of transaction insurance). This substantially reduces/eliminates the need for sellers to leave a portion of proceeds in escrow to protect the buyer against potential indemnity claims, and substantially minimizes the seller’s post-closing exposure to the buyer.

Additional Resource:

9 Tips for Staffing Industry Acquisitions