Trends and Opportunities in HR and Employment Services

HR and employment services is a growing subsector of the business services industry, with both financial and strategic buyers showing increased interest in the space.

For a new whitepaper on consolidation in the business services industry, we talked to CEOs and deal professionals for their thoughts on the biggest deal drivers and what investors are looking for in HRO/PEO and staffing companies in particular.

According to a report from SDR Ventures, “The human resources segment has benefited from low unemployment rates, making the need to recruit and retain employees increasingly important for businesses. The growth in online, turnkey HR solutions like Zenefits and similar companies so far has not proved to be a large detractor to large HR companies like Insperity and Tri-Net.”

Human Resources Outsourcing & Professional Employer Organizations

Technology-enabled human resources outsourcing (HRO) and professional employer organizations (PEO) can provide their customers with legal and regulatory information, lower employee turnover, and increase productivity and efficiency. These solutions are increasingly popular among investors, as they offer recurring revenue and a scalable business model with a growing consumer base.

According to a 2015 analysis by Robert W. Baird, HRO businesses have attracted an average valuation of 9.7x EBITDA. Corporate and financial buyers look for such factors as “a compelling growth strategy, technology enablement/SaaS, and attractive financial characteristics.”

Staffing

According to Duff and Phelps, “much of the current M&A activity in the staffing sector is being driven by staffing company owners sensing that this may be the optimal time to sell their business during this economic cycle.” Valuations and demand are partially high for IT and healthcare staffing businesses. The report identifies a number of factors sought after by both strategic and financial buyers, including:

•      Scalable businesses
•      Proven history of growth and strong margin profiles
•      Diversified customer base
•      Experienced management teams

Of 37 total transactions in Q1 2016 in the space, only 8% of the transactions in the first quarter of 2016 were by financial buyers, with the remaining 92% completed by corporate buyers, according to the report.

Specialty Staffing

Within the general recruitment and staffing industry, there is a need for more specialized employment services. Agencies that have a deep network and expert placement abilities within certain vocational or skill-intensive roles have become more popular among investors.

In 2011, Morgan Stanley Private Equity acquired EmployBridge, a provider of specialty staffing services (mostly for warehousing/logistics, manufacturing and transportation) with 146 branches/on-sites in 30 states. Since then, non-software investments in specialty staffing has risen.

These agencies present a unique opportunity for growth. Executives at these firms often have decades of experience dealing with compliance and regulation within these specializations.

The recruitment process in these areas typically entails a barrier to placement (e.g., certifications or licenses). It is more complex and difficult to replicate, and therefore extremely valuable to investors.

Here are a few examples:

• Software development (e.g., Javascript, Django, C/C++, ASP.NET, PHP, Python, Ruby, Rails)
• Skilled workers (e.g., welders, technicians, machinists)
• Specialty vehicle operators (e.g., forklift and long-haul truck drivers)
• Creative suite (e.g., graphic designers, web developers, copywriters)