SI Review: December 2011


The Price May Be Right

Recession stalled the M&A market, but opportunities remain for firms that perform

By Craig Johnson

Like everything else, the economic downturn has taken its toll on the M&A market. Publicly announced mergers and acquisitions of staffing firms slowed dramatically during the depths of the recession. But recently, the market is showing some signs of perking up. Some observers believe that firms that are performing well have an edge.

We have data to substantiate this trend. Staffing Industry Analysts’ Pulse Survey shows acquisitions ticked up in August after decelerating over the previous few months.

“After declining steadily throughout 2011, the acquisition rate among Pulse participants has rebounded in August and September,” says Dan Begley-Groth, research associate at Staffing Industry Analysts, the publisher of this magazine. “The acquire/sell preference ratio, also declining throughout 2011, increased substantially in September as well.”

However, the number of publicly announced U.S. acquisitions remains low, with just 10 announcements in the third quarter of 2011 and 11 in the second quarter, down from a high of 39 in the first quarter of 2007.

“This deceleration in acquisition volume is consistent with the near-term prospects for the U.S. economy and the likely impact of the soft economy on the staffing industry,” says Sona Sharma, senior research analyst at Staffing Industry Analysts. “However, there have been a couple of high-profile acquisitions announced recently. And we are still getting a few calls from potential buyers and sellers asking about valuations.”

Experts say there is interest in mergers and acquisitions, especially in some niches such as information technology. However, the healthcare niche remains relatively soft.

The Right Time?

But is now the right time to sell a staffing firm? The answer depends on your firm’s financials and one’s personal goals/ situation.

“I think it is picking up, but while there are opportunities to sell, valuation is still very deal-specific,” says Brooke Hollis, president of Hollis Associates Acquisition Advisors LLC. “Although there’s more activity and more people looking around, without strong personal reasons, it may not be the best time to do a transaction if a firm’s numbers aren’t that attractive.”

If there are strong personal reasons to sell and business is doing well, a staffing firm can get a reasonable valuation, Hollis says. However, if there’s no compelling reason to sell a staffing firm soon and business is moving in a positive direction, it might be better to hold onto the firm a little longer in order to improve valuation.

Those firms selling now would need to have margins in line with the industry.

“The people who can sell now and attain their price objectives are those whose margins are normative,” says Al De Bellas, president of De Bellas & Company. “There are plenty of buyers out there; I wouldn’t say that makes it necessarily a seller’s market … as long as margins are normative, there’s a good match right now.”

Companies are looking to acquire firms whose gross margin (gross profit divided by revenue) and EBITDA margin (earnings before interest, taxes, depreciation and amortization) are within a normal range.

De Bellas also notes that buyers are active in all segments of staffing, although there are differences among the segments in the multiples that are used to value a business.

“The professional or specialty or clinical — the ones that have the higher gross profits are most sought after — they are going to be closer to the high end of the multiple range,” he says.

One staffing niche of interest to buyers is information technology staffing.

Buyers like IT because it’s perceived as one of the faster-growing areas of staffing, says John Niehaus, director of staffing M&A services for Duff and Phelps Securities. Indeed, more than half of the firms on Staffing Industry Analysts’ 2011 list of fastest-growing staffing firms provided IT staffing as their primary service offering.

Niehaus says buyer interest mirrors the highperformance areas of staffing. “That’s what buyers want to acquire, they want to acquire strong growth, high performing businesses,” he says.

Some hallmarks of such companies, Niehaus says, include:

  • Above average gross margins vs. their industry peers
  • Solid profitability
  • Direct client relationships
  • Minimal customer concentration
  • Strong management teams committed to staying on with the buyer post transaction

Niehaus also says he is seeing a wide assortment of buyers, including private equity groups, international buyers and privately held firms with access to capital.

Private equity groups, in particular, tend to have more of a focus on professional staffing firms and all firms that have clear differentiators.

Rick Wilson, managing director of Crutchfield Capital Corp., attributes this focus to professional firms and those with differentiated business models; such companies tend to have better margins and their business cycles are not as dramatic as commercial staffing. Given the typical hold cycle for a private equity investor, these investors are more sensitive to growth prospects and downside protection over the next three to seven years.

Performance During Recession

Another factor is how firms fared during the recession. Wilson says buyers today like to see how staffing firms performed through the 2008 and 2009 downturn. Staffing firms that outperformed the market during the recession would be more attractive to buyers, and everything else being equal, can command better prices.

“Understanding why some companies perform better than others in a downturn can make a significant difference in valuation,” he says.

The form of the deal affects pricing also. For most staffing deals, earn outs remain an important part of the deal structure. With an earn out, a buyer will pay cash up front when buying a staffing firm plus agree to pay a certain amount more to the sellers over a period of time, such as one or two years. The extra payments, or earn outs, will depend on the performance of the business post transaction.

“The vast majority of staffing deals have an earnout component to them,” Niehaus says. “If a seller is looking to achieve full value, it’s customary that an earn out is part of the transaction.”

In an earn out, a seller shares risk with a buyer and allows the buyer to pay more for the business, Niehaus says. An all-cash deal would typically result in a lower total valuation.

Companies in a better growth position tend to have a higher cash component in the deal.

Ensure Good Valuation

Jack Lyons, president of Lyons Solutions LLC, says he’s seeing many hesitant sellers in the marketplace now because they feel all the buyers currently looking for firms are only those willing to pay the lowest amounts. But that’s not the case.

“A good company will bring a good price in the marketplace,” Lyons says.

“I don’t know any buyer out there that’s going to buy a company they can’t possibly make money owning,” Lyons says. “A company that’s profitable, that’s growing, that’s got a good customer base and good management team and good controls is going to be looked at in the marketplace as something that is valuable.”

One thing sellers should do is avoid rushing and selling a firm without preparation, he says.

“The quickest way to a low offer is to wake up one morning and say ‘I want to sell my company,’” Lyons says. Just taking the first offer isn’t going to bring results that sellers want.

Staffing firm owners should consider adopting the attitude of always being ready to sell and having the company prepared, he says.

People Count

Of course, it’s not only financials that buyers look at. Buyers also look at key people in the firm.

Bob Cohen of R.A. Cohen Consulting says buyers sometimes fly in their key people, sometimes more than once, to prospective acquisition targets to see how they might fit.

Sam Sacco, also of R.A. Cohen Consulting, says good employees have always been important. However, today “in some instances the management is driving the purchase as much as the business,” Sacco says.

Looking Ahead

While the doldrums of the recession put a crimp in the number of mergers and acquisition deals in the industry, there’s optimism the M&A market will become more and more vibrant. After all, staffing will remain an important industry going forward.

“From my standpoint, we are definitely seeing a significant improvement,” says Sacco. “Just recently we’re seeing some very nice buyers with cash in their pockets coming out to play in the arena again.”

Craig Johnson is managing editor, staffing publications, at Staffing Industry Analysts. He can be reached at


Big, Private Equity and Diversity Are Trends

Jim Childs, managing partner of Childs Advisory Partners, sees a few large themes in the mergers and acquisitions marketplace over the past few years.

Those trends include some of the biggest firms getting bigger, increased activity from private equity and an increasing presence of larger diversity staffing firms.

“The big global players are buying professional staffing in the U.S.,” Childs says. “That’s sort of been a theme that’s been unfolding over the last few years, and we expect that to continue.”

Some examples include Adecco S.A. buying MPS Group Inc., Randstad Holding NV buying SFN Group Inc. and ManpowerGroup Inc. buying Comsys IT Partners Inc. MPS Group and Comsys were the leading middle-market consolidators of staffing firms, Childs says. Now that they’ve been acquired that may open an opportunity for other midsize consolidators of staffing.

The middle market is also the area where private equity has been most active, he says. In addition, private equity has an interest in vendor management system and managed service providers.

Another trend is the increasing presence and size of diversity staffing firms.

“You have more and more diversity companies that are doing big numbers now because in the last 10 years, the Fortune 1,000 has purposefully tried to do business with these types of firms,” Childs says.

This can be good for smaller diversity firms because they may be able to sell to the larger diversity firms without concerns about losing diversity status. That could be a concern for a non-diversity company buying a diversity staffing firm.


Noteworthy Staffing Deals

While M&A activity has been relatively slow in the staffing industry this year, there have been several noteworthy deals. Here are some of the most significant:

  • Randstad Holding NV acquired SFN Group Inc. for $771 million. Randstad ranks as the world’s second-largest staffing firm while Fort Lauderdale, Fla.-based SFN ranked No. 13.
  • Recruit Co. Ltd., a Tokyo-based staffing and publishing firm, acquired Staffmark, the 14th-largest U.S. staffing firm. Staffmark will continue to operate under its own brand and continue to be headquartered in Cincinnati. The deal gave Staffmark an enterprise value of $295 million.
  • Adecco Group, the world’s largest staffing firm, acquired Drake Beam Morin Inc., the third-largest U.S. outplacement provider. Adecco already owned Lee Hecht Harrison, which ranks as the second-largest U.S. outplacement provider.
  • Groupe Crit, a Paris-based staffing firm, acquired a 75 percent stake in PeopleLink LLC, a South Bend, Ind.-based staffing provider. PeopleLink, which ranks No. 93 on Staffing Industry Analysts’ list of largest U.S. staffing firms, is set to continue operating under its own brand.
  • Pinnacle Technical Resources, a Dallas-based staffing firm, acquired Provade Inc., a San Mateo, Calif.-based vendor management system provider. The deal will give Provade diversity status.
  • Automatic Data Processing Inc. acquired The RightThing, a recruitment process outsourcing provider. The RightThing is also the parent company of AIRS, a recruitment training and technology company.


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