Timing the Sale of Your IT Staffing Company

118947101The IT segment of the staffing marketplace is performing well right now and is one of the most sought after segments for staffing industry acquirers per our discussions with active buyers.  It’s not as active as it was in the late 1990s, nor are multiples quite as high as during the “bubble” period before Y2K, but many companies in this segment are performing quite well and valuation multiples for recent IT staffing transactions have been attractive.  Given the favorable market dynamics, many IT staffers are now giving serious consideration to the timing of their sale transactions.

Overall, broader middle market M&A activity has accelerated over the past couple of years as the US business climate and economic outlook continue to improve.  Strategic buyers are becoming more active as they are flush with cash, their stock prices are high and they have specific growth objectives that need to be achieved.  With the cost of capital still very low due to the Federal Reserve’s ongoing stimulus program and resulting low interest rates, many buyers are targeting strategic acquisitions as the best way to augment these growth initiatives.

Financial buyers (private equity) also remain active acquirers of the larger and fastest growing staffing companies, as the continuing surplus of private equity money is driving many funds to aggressively seek new opportunities to invest their capital. Since the start of 2012, financial buyers have purchased 16 staffing companies as new platform investments, while PE owned staffing companies are among the most aggressive buyers for tuck-in strategic acquisitions.  This trend may not continue if interest rates rise when/if the stimulus spending program eventually winds down, which could adversely impact valuation multiples and private equity buying power.

PREMIUM CONTENT: The Role of Finance in Strategic Planning

Within the broader staffing industry, the outlook also continues to be positive.  The US temporary employment penetration rate matched its all-time high in November 2013 at 2.03 percent. Overall unemployment is down to 7.0 percent.  More important for professional staffing companies, the unemployment rate for those with a bachelor’s degree or higher moved down to 3.4 percent, the lowest since 2008.  This strong economic data suggests continued strength for higher-end professional jobs in the technology industry and other professional sectors.

With all of the recent good news for the staffing industry and its prospects for continued growth, timing the sale of a business can be confusing for owners.  Owners must weigh the opportunity to sell now versus potentially grow their company’s EBITDA for a couple more years.  One complicating factor is that buyers are more likely to pay premium valuations when the growth outlook for a company or industry is projected to be strong for several more years.  The faster a company is projected to grow, the quicker the buyer can achieve the necessary return on their invested capital, thus allowing that buyer to theoretically pay more for an acquisition.  During the later stages of an economic cycle, buyers typically begin to forecast slower growth for their acquisition targets and thus offer lower valuations, if they even are willing to consider acquisitions at all.  Thus, staffing owners should consider the opportunity for continued EBITDA growth within their own company versus the risk of having a more limited buyer pool and potentially lower valuations in the future when timing their transaction plans.

An additional factor in the timing of a sale transaction is the concept of “best buyers.”  In any market and any market niche, there usually exists one or two “best buyers” who need to make acquisitions and thus may pay higher prices or provide better terms than other acquirers.  In the IT staffing sector, these buyers most likely need to seek companies with very high margins and/or growth rates, typically have targeted acquisition profiles (either by revenue size, geography or market niche) and like a shooting star, may quickly burn through their acquisition funds and retreat from their “best buyer” status to integrate these completed acquisitions into their existing lines of business.  In a typical M&A sales process, it is not uncommon to see the top valuation 10 percent to 15 percent higher than the second highest offer.  But with these very motivated buyers, their valuations may be 25 percent to 30 percent higher than the second highest offer when they find the ideal strategic fit!  The market conditions aside, staffing owners should continually strive to identify who their “best buyers” may be as well as understand the timing considerations of these buyers.

The ultimate decision to sell a company must factor in a company’s current performance, the overall sector outlook, general economic factors and the owner’s unique goals and objectives resulting from the transaction. With multiple buyers currently willing to offer attractive valuations and terms, especially for those companies growing rapidly with above average margins, the current IT staffing M&A environment is very active and rewarding for the best performers.

MORE: Talent acquisition at the heart of M&A

John Niehaus

John Niehaus
John Niehaus is a managing director with Duff & Phelps Securities LLC. He has been actively involved in the management of staffing-related M&A transactions for more than 20 years. He can be reached at john.niehaus (at) duffandphelps (dot) com.

John Niehaus

Share This Post

Tweet

Related Articles

2 Responses to “Timing the Sale of Your IT Staffing Company”

  1. […] Timing the sale of your IT staffing company […]

  2. […] Timing the sale of your IT staffing company […]

Powered by staffingindustry.com ·