With over 20,000 staffing and recruitment firms in the industry, there are always mergers and acquisitions that occur. According to Duff and Phelps research 115 staffing industry M&A transactions were completed by 96 unique buyers in 2020. This was a 20% decrease from the 143 transactions completed in 2019. Strategic buyers accounted for 85% of the staffing industry acquisitions in 2020, with private equity funds (financial buyers) investing in new platform acquisitions accounting for the other 15% of transactions.
Of the 115 transactions reported in the 2020, 44 involved companies whose predominant service offering was IT staffing and/or IT consulting. Healthcare staffing is another historically attractive sector, with 16 transactions completed in 2020.
We’re seeing that in this post-Covid era, a lot of staffing firms are in the market to acquire, but unfortunately, few do it well. Buying a small competitor or acquiring in a new market to get into that market sounds fun and sexy. The fact of the matter is that there are tons of places to make mistakes, whether it be wrong fit, not enough education of the financial indicators, or just being a novice to the valuation process.
In this short blog, I am going to outline some of the common errors I see buyers making in their attempts at acquiring a small to midsize staffing firm.
- Synergy & Trust: The number one thing a buyer needs to do at the onset is to establish synergy and trust with a seller. In fact, a buyer needs to actively build synergy and trust through the entire process. Why? No seller is going to sell their company to a person or group they do not trust. It is that simple. Building trust takes time and work. I see it often overlooked.
- Breaks in Communication: No news is bad news. Setting up weekly or bi-weekly calls to stay connected, move the process along, resolve issues, establish credibility, walk through information given and received is critical to success. When there are breaks in communication a buyer is simply communicating to a seller that they are not interested. Not good.
- Lack of Flexibility: No two deals are the same. No two sellers are the same. Buyers may have a preferred way in which to acquire a company, but when buyers approach the market with a “one size fits all” strategy, specifically regarding to the way they plan on structuring the payout of the acquisition, then they are just going to leave a lot of potential deals on the table.
- Lawyers: I see this error often with new buyers. Namely, they utilize a lawyer that does not have staffing industry experience. Big mistake. A buyer’s legal provider is likely to have M&A council on staff, but how much experience does this council have in getting staffing acquisitions across the finish line. I have seen a lot of deals go sideways simply because the buyer’s lawyer did not have the expertise in staffing.
- Lack of Focus: Nail down an acquisition profile and stick to it. Yes, stick to the profile. Such a profile is going to address the issues of size, geography, staffing niche, etc. Going to the market haphazardly or “opportunistically”, as I commonly hear, is only going to set up a buyer to waste a lot of time chasing a lot of deals that are only going to get washed. Get focused and stay focused.
- Money: Get the money lined up and secured. To start looking for acquisitions prior to having a bank on board and money lined up is only going to delay the process of acquiring a company. It is also going to communicate red flags to a seller. Most sellers will require “proof of funds”. The point here is to get your bank on board on the front end prior to going to the market.
- Not Using a Cultural Assessment: This is so effective in understanding if an acquisition is going to be a good fit. Find a tool or hire a consultant to conduct a cultural assessment on the buyer. Understand the buyer’s cultural preferences. Survey the potential acquisition using the same cultural tool. Determine if the acquisition target has cultural preferences that match the buyers. If a buyer acquires a firm where there is not a good match, post-acquisition is going to be ugly.
Here are just seven points here where buyers make common mistakes when acquiring companies, but there are many more. I will tell you, if you want to lose a lot of money, go do an acquisition without the appropriate assistance.
Here at the Visus Group we have 75+ staffing firms in our RoundTable program and over half of these members are actively seeking acquisitions. If you are looking to get orientated into doing acquisitions, think about our advisory services or joining a RoundTable and learning from staffing firms that have a track record of successfully getting deals done.