Are we heading for a “Freedom Day” bounty in recruitment M&A?

The UK recruitment industry looks set for an exciting period as continued economic improvement coincides with the ease of lockdown measures. M&A activity started to increase in the concluding months of 2020, with 10 deals being reported in the last quarter. The market’s considerable momentum moving into 2021 was stalled by the 3rd National Lockdown at the start of the year. However, with business confidence rising in line with economic growth, M&A activity is expected to accelerate.

The recruitment industry typically acts as an economic indicator due to the wide sectoral exposure it has. However, it is likely to experience inflated growth within a few confined sectors. Education, healthcare and IT are likely to lead the recovery, being driven by firms’ incentives to upskill workers as well as the Government’s unprecedented post-pandemic spending. Recruitment firms working within these sectors have so far been commanding higher EBITDA multiples compared to those offering other specialisms, such as manufacturing and construction.

As we progress into a post-covid economy with improving business confidence, there are opportunities for firms to exploit changing workplace expectations. As working-from-home becomes the norm, virtual hiring processes are an essential for firms to stay in the market. The move to virtual recruitment has additionally enabled firms to increase their global presence, with recruiters no longer geographically constrained to a single location. The technologies underpinning this expansion will serve either as the foundation for growth or will lead to the obsolescence of traditional recruiters.

Over 15% of UK recruiters have already moved their recruitment processes to fully virtual and the utilization of virtual hiring has helped firms overcome (to some extent) the impact of a smaller pool of workers due to Brexit.  Recruiters are now able to target international candidates much more easily, allowing progressive firms to make the concept of “Global Britain” and the associated benefits a reality.

Lockdown has emphasised the necessity for certain technological adoptions if conventional recruiters are to stay pertinent in the market. Consequently, highly apt technological recruiters exploiting the use of predictive analytics and natural language processing are positioning themselves as attractive targets for acquirers, with large corporate recruiters hoping to bolt-on smaller tech-enabled firms to gain a more comprehensive recruitment channel.  However, the progression of the digital landscape within the industry has not completely levelled the playing field, with significant differences still evident between market leaders and those who have been slower to adapt.  Although technological advancement carries weight in the fight for market position, the level of its importance currently varies between recruitment sectors.

The availability of workers has reached a 24-year low due to Brexit, furlough and COVID related uncertainty and this has caused a shift in the value drivers of the market towards reliable contacts and end-sector exposure. As a result, recruiters with strong access into in-demand markets have become more attractive to potential acquirers for the exposure and contacts they hold.

Implementation of IR35 from 6th April into the private sector and the consequent impact on recruiters may have detrimental effects on profits if they do not have the capacity to cater for genuine IR35 contractors. The legislation will largely impact medium and large businesses as well as recruitment agencies who supply workers which are operating through intermediaries.

The market for the past few years has predominantly focused on temporary and contract staffing as against permanent placements (86% vs 14% respectively), and this is likely to continue in the coming years with increases in the gig economy. Recruiters with the ability to navigate this shift successfully and to deal with IR35 compliantly are likely to benefit.

As a result of the deals HMT has advised on within the human capital sector, we have accumulated a breadth of knowledge regarding the value drivers in the market, an understanding of the buyer and investor landscape. If you believe your business has the right attributes to be attractive to investors and/or acquirers, and you would like to get in touch to discuss your options, please contact one of the team on 01491 579740 who will be delighted to help you.

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