Closing out 2021 with a record-setting number of M&A deals has the Contingent Workforce industry facing much optimism that more strategic staffing M&A transactions will be made in 2022. While business owners and equity holders are excited, the pandemic and workplace return has changed the playing field in the pre-due diligence, negotiation, and post-transaction stages.
“Private equity is looking for an owner who is not looking to retire nor is an absentee owner,” said Paul Pincus, law partner with Ortoli Rosenstadt LLP, on a recent webinar by Staffing Industry Analysts (SIA) titled Staffing M&A: A Hot Streak Poised to Continue? “Private Equity is looking for a partner with a commitment of 5 years after the deal with money tied up. There is no early exit opportunity for that money.”
Pincus added that while this path is risky for business owners, he has seen rollover equity double and in some cases triple in 3-5 years for those who stick it out. Pincus did state that deals will take more time because of the rollover equity and the numerous agreements to process.
An abundance of capital from both the investors and companies have quickened deals this year to rocket-ship comparisons. However, pre-transaction stipulations and upcoming federal tax reform are also critical elements for owners to decide to partner on M&A deals and determine how fast to proceed.
“Businesses are expected to come with an adequate amount of working capital. If you buy a Ferrari you don’t want to buy the steering wheel,” said Andrew D. Brown, Director, Fairmount Partners, a M&A advisory firm focused on middle market and emerging growth companies. “The threat of capital gains reform is causing more companies in the market to get deals done by Dec. 31st.”
Brian Wallens, Research Manager for SIA and webinar moderator, fielded questions from the audience that touched on finance, but dove mainly into people and culture. Brown answered those questions saying, “Investors and buyers are focused on; how are you hiring people and how are you retaining people. How is company culture impacting the business.”
Earlier Wallens asked what’s changed in staffing MA since the pandemic. Both Brown and Pincus agreed that while M&A professionals had to find ways to move deals virtually, M&A is still a face-to-face game to establish credibility. Technology has aided the transaction speed, offering data rooms to securely review financials and electronic closings have kicked up to a higher level.
“Buyers want to price deals on the last 12 months of revenue. Sellers want to exclude time during COVID and it is still a negotiation point,” said Pincus. This is a carryover from COVID and some of the liability issues COVID created. Buyers want to see how the companies are prepared.”
“Digitalization of Staffing. Companies who have embraced technology, are the companies in greatest demand in the M&A marketplace,” said Pincus. “Hiring platforms are still in infancy and I do not see them having an impact on M&A. Companies offering a hiring option will be something increasingly prevalent to staffing firms. Some of the firms are creating their own or white labeling another.”
“We are hearing of these platforms looking at staffing firms to build out that market,” said Brown. “Technology is changing rapidly for staffing firms and they need more than an ATS.”
It was concluded that labor factors due to the post-pandemic climate are driving M&A activity to record levels. One of those factors is the tight labor market increasing the amount of deals as everyone globally is trying to find a talent sourcing advantage.