Staffing sector sees increase in acquirers purchasing businesses

There has been a surge in the number of acquirers looking to purchase businesses in the staffing sector, says Carl Swansbury, corporate finance specialist in the staffing sector. Judging by the number of transactions already completed this year, the outlook for 2011 looks interesting… but what makes a business attractive to acquirers?

Few would argue that 2010 wasn’t a challenging year for many in the staffing sector. As well as the fragile economic backdrop, there were several changes in legislation – leaving many business owners feeling vulnerable and unsure about the future.

Instead of looking to grow, acquire or sell their businesses, owner managers decided to sit tight and ride out the storm – but that was no bad thing. 2010 may have been a difficult year, but it gave many company heads the chance to reflect, consolidate and make plans for the future, and it worked.

In 2011 we are now seeing the results of that period of reflection. The staffing sector is moving again and as a result I have completed a number of transactions in the past 12 months including the sale of Ethos Recruitment Limited to Staffline Group Plc and the acquisition of Atlan by Advantage.

I am finding that acquirers are eager to bolster their existing businesses by making strategic bolt-ons in markets which are proving to be fairly static in terms of organic growth. Many acquirers recognise that 2011 will offer greater growth opportunities for both temporary, contract and permanent recruiters and therefore the right deal will be earnings enhanced almost from day one.

Now that the market is moving again, we can think about company credentials. But what makes a staffing business attractive to a potential purchaser?

When eyeing up a potential target a purchaser will look at scalability. The target business would have to be scalable and have potential for future growth. It goes without saying that the business would also have to be well funded.

You also need to think about the visibility of your company and its prospects. Is there potential for growth? A strong, incentivised management team is crucial to a company’s success, as well as a well respected enviable brand. Focus on the USPs of your business – as well as creating good corporate accounts with sole and preferred supplier status.

Purchasers may look for a larger, well diversified business to acquire, but they also look at smaller specialised businesses with a niche service to offer. For example, if it is a small owner managed business, it would need to be a specialist firm as this gives the business more impetus.

Businesses need to display a good mix of contract and permanent revenues – and show turnover with net fee income and margin growth.

So, what are the ideal targets? The recruitment sector is consolidating with a large number of businesses looking to make strategic acquisitions, for example Staffline’s recent purchase of Ethos – its twelfth acquisition in as many months.

I’m in regular contact with a number of buyers and investors within the staffing sector, which are starting to come to the fore looking to make strategic acquisitions.

But it’s not all about the here and now – deals don’t happen overnight.  I speak to sellers and ask them what their plans are for the future. We then devise an exit strategy where we look at ways of growing the business, and making it more attractive for a buyer in, say, three to five years’ time. It’s all about achieving your personal and business objectives.

I would always recommend getting a strategy in place for a future sale and then set about preparing a list of prospective buyers. By getting a strategy into place, and working through the possibilities, there can be excellent outcomes for both sides – such as the sale of Ethos to Staffline.

There is undoubtedly an increased appetite for acquisitions. I am seeing a notable increase in the numbers of vendors – and I believe that the industry will continue to consolidate over the next 12 months opening up huge opportunities for all.

We, at Watersheds believe that a favourable market and regained company confidence are set to fuel M & A activity in 2011. This will attract risk/reward premiums as well as diverse and interesting investment opportunities across all sectors.

Factors

• Companies’ business confidence is returning, with management teams turning their attention to the future and looking for potential external growth opportunities to substitute relatively flat organic growth.
• Companies have built up strong cash reserves- according to a business survey conducted by Bloomberg, Britain’s top 1000 companies have accumulated 3,000 billion in cash between 2009 and 2010.
• Stabilisation in the financial markets is facilitating more accessible financing for companies looking for acquisitions.

Selling your business

The so called lost years of 2008 through to 2010 were challenging for private companies and thus saw a marked decline in the number of sales due to a combination of diminished earnings, disintegrating bank credit and poor visibility as to future market conditions. Historical earnings have always been seen as one of the major dictating factors in valuation and so business owners put any potential sale on hold. This resulted in the number of deals completed by companies under the £50 million range dropping to 500 in 2010 from a 2007 figure of 1000.

Types of Buyer

• Financial buyers buy private companies as investments in order to aid their growth to be resold at a later date to industry buyers or big financial buyers.
• Strategic/ industry buyers acquire private companies to expand their business into new products, markets or areas.

The trend in the last three years has seen financial buyers reduce their activity whilst strategic acquisitions have been buoyant. We believe this is due to industry players finding value in a strategic fit, whereas financial buyers are more dependent on historical earnings and have a reduced appetite for taking risks.

Deals

Prior to the economic downturn, there were approximately 1000 deals per year- a level we perceive to represent the natural flow of retiring owners and companies sold because they were more valuable to an industry buyer. The decline in activity has left a deal overhang which will manifest itself over the next few years. This then suggests there will be an increasing number of sellers arriving on the scene. In view of this a greater amount of emphasis must be placed on the way in which the business is a marketed to extract maximum value in the most cost effective manner possible. Selling a business is about finding strategic buyers who will deliver the best value in competition with each other. It is not about mass marketing exercises to ‘dredge’ up interest. We use our research tools, extensive networks and some lateral thinking to identify and approach buyers who have a real strategic reason to buy the business, and access to the funds to enable them to do so.

 David Cameron wants to make this decade the “most entrepreneurial and dynamic” in British history. He is calling on the doers and grafters, inventors and entrepreneurs to save us from the financial quagmire we find ourselves in. This is a reasonable objective given that Enterprise UK suggest that a one percent boost in self employment rates could propel the UK economy by around 1.5%. We at Watersheds have looked at how realistic an objective this is and what stifles so many businesses and ultimately how we can help.

Red Tape 

The government needs to reduce taxes and national insurance in the early years of a business and create labour laws which give businesses greater flexibility.

Late Payment

Late payment can lead to the downfall of many a small business. A Barclays business survey, found that at any one time 9 billion is owed to small businesses in the UK.

Positive signs

At the end of 2010, the government announced a new 40,000 strong network of business mentors which will help businesses. In trying to create a platform for small businesses to grow, the government is reducing the main rate of corporation tax from 28% to 24% over 4 years and the small firms rate will be reduced to 20%. Moreover the successful Enterprise Finance Guarantee Scheme will be extended for a further four years, which enables more bank lending to viable SME’s. The government is also looking into continuing the Enterprise Capital Fund which enhances the provision of equity finance to SME’s by using government funding alongside private sector investment.

At the end of last year the banking industry pledged 1.5 billion pounds to a new Business Growth Fund, that will invest in the kinds of expanding small businesses that are crucial to Britain’s economic future. Furthermore, Project Merlin has ensured a commitment from the four major banks, as well as Santander, to make more money available for lending to small and medium sized business. The Project Merlin deal saw top UK banks — such as Barclays, HSBC, Lloyds and Royal Bank of Scotland — pledge to lend about 190 billion pounds to business this year, up from about 179 billion previously 

We at Watersheds are helping SME’s to grow both organically and inorganically by fundraising and mergers and acquisitions. We were surprised to learn that only a third of SME’s had sought some form of financing from banks in the last 12 months. This we believe is due to their being a blanket perception that banks are not lending and the process of obtaining finance is now too complex. This is where Watersheds can help, we have strong relationships with a wide range of banks and financing facilities and we are experienced in raising funds in such a way that benefits the business and contributes towards its sustainability.

As we settle into a new era of fiscal austerity David Cameron has switched the focus to a more upbeat tone with a string of announcements to help firms incite a strong economic recovery.

 Mr Cameron recently revealed plans for a £200 million network of technology innovation centres and £60 million to assist offshore windpower farms. Furthermore Cameron has asked Lord Young to give him a “brutally honest” review of what the government should do to help people set up and run more small businesses.

Lord Young’s appointment coincided with a series of initiatives launched by Whitehall departments designed to make life easier for small businesses. The Government wants to ensure the public sector meets its target of awarding 25% of all contracts to SMEs. Moreover businesses with few assets will be able to access the flagship Enterprise Finance Guarantee scheme for the next four years. Business minister Mark Prisk also said that £200m would be invested in publicly-backed equity funds that will invest in companies with growth potential.

In a speech to the CBI in London David Cameron highlighted the need for increased lending to SMEs. The banks stand accused by the government of providing too few loans at too high a cost to SMEs since the financial crisis in 2008. However there is an argument that the fall off in lending has happened because small businesses are choosing to borrow less in response to a weaker economy. Whatever the reason, it is clear that the government have placed a huge emphasis on the role of small businesses in rebuilding the economy.

 Despite these accusations the UK banks are also contributing and have suggested implementing a £1.5bn fund to invest in small businesses. The so called “business growth fund” would invest the equivalent to about 0.1% of the UK economy’s annual output over a set period, buying 10% stakes in the shares of small companies. The fund should also make it easier for small businesses to access funds and those companies that take advantage of the new capital available should also be able to pull in further debt finance.

 We, at Watersheds have been encouraged by the progress the incumbent government have made in terms of restoring confidence in a fragile economy. The steps being taken to diminish public debt are having the effect of restoring confidence within the decision makers of SMEs which in turn is leading to a pick up in the disposal and purchase of companies, as well as an increased demand for fundraising services as firms look to expand both by acquisition and organically.