As we all head back to work after the summer break, it is timely to reflect upon the year that was in 2018 and look ahead to what is likely in store in 2019. Globally, M&A activity reportedly hit year-on-year highs in 2018, with more than USD5 trillion in the value of announced transactions, despite a decline in deal volumes. In the Australian recruitment sector, more than 15 domestic transactions were reported (with more flying under the radar), covering mergers, acquisitions, buy-ins and capital injections. APositive Workforce Finance reported record levels of median profit for recruitment agencies, up 61% compared with the same period in 2017, which correlates with our experience in assessing the financial performance of participants in the recruitment sector over the past 12 months.

For Acquisiti, it was a busy year with a number of successful acquisition transactions, plus an atypically high number of valuations/appraisals being requested as inputs into management buyouts, strategic planning and partnership splits. Demand from buyers continues to be strong across a number of industry sectors and geographies, particularly from companies based in Japan and Southeast Asia.

2018 was characterised by strong deal flows, better quality assets, motivated & well-funded acquirers, greater flexibility in deal terms/negotiations, rigorous due diligence and commercially sensible and realistic business valuations. Annuity income streams continue to be the most critical trait of attractive acquisition targets, whilst working capital calculation was the most contentious negotiation point.

So what does 2019 have in store? If the Chinese Year of the Pig lives up to its reputation, we are all in for a period of wealth and prosperity, despite the storm clouds forming on the horizon as a result of global concerns over the US-China trade war and Brexit, and the inevitable nervousness surrounding elections in NSW and at a Federal level.

Despite these portents of impending doom, the consensus among forecasts issued by professional firms such as EY, Deloitte, Baker McKenzie, Freehills and Minter Ellison is for another robust year for M&A before a projected cyclical slowdown in 2020. Private Equity (PE) will likely continue to be a major player in transactions, with more than USD1.1 trillion in dry powder (uninvested capital) globally, of which more than AUD9 billion is looking for a suitable domestic home.

For recruitment agency owners, 2019 could be one of the best on record, with national unemployment rates at decade-long low levels. At a State level, Victoria has exceeded the commonly-accepted level of full employment (5%), with a reported rate of 4.8% as at September 2018. Job vacancies appear to be at record high levels in that State, with one forecaster (Pete Wargent, CA) suggesting that the unemployment rate my dip even further, where “it could have a 3 in front of it”. Tight employment markets are where recruitment agencies shine, so this bodes well for the industry broadly.

The Department of Jobs & Small Business Employment Projections report (May 2018) forecast considerable growth in employment over the five years to May 2023, with the greatest growth coming in the NDIS-driven Healthcare & Social Assistance, Construction, Education & Training and Professional, Scientific & Technical Services sectors.

With all this in mind, 2019 looks set for a continuation of buoyant trading conditions for recruitment agencies and other participants in the sector. As such, it would be reasonable to expect that buyer appetites will also continue to support solid valuations and deal volumes. Business owners looking to exit in 2019 would be well advised to start the process of preparation sooner rather than later, as sale transactions can take up to 12 months to complete. Those contemplating a sale may also want to consider obtaining an independent appraisal of business value to understand realistic market expectations.