One of the reasons owners of privately-held businesses often choose to sell is the state of the buyer market. If buyers are plentiful, funding is locked in and the availability of good options is restricted, valuations and pricing expectations often rise accordingly, and vendor-friendly deals can be done. If we cast our minds back, this was particularly magnified in the lead up to the GFC, where debt was cheap and plentiful, private equity was backing virtually anything with a pulse and many corporate balance sheets were, for wont of a better term, bloated.
Fast forward to 2019 and the market is exhibiting different characteristics. Unlike in 2006/7, few saw a slowdown coming as the sub-prime housing market crash was, at the time, the figment of some analysts’ overactive imaginations. Now, predictions of turbulence ahead are published aplenty, yet the fundamentals of developed economies continue to support buoyant conditions for the foreseeable future. Nobody really knows where or when a correction is going to rear its head, but one is inevitable of course. In the meantime, it’s business as usual for most.
Back in the pre-GFC boom, one of the key drivers of the business buyer frenzy was private equity, with billions of dollars in uninvested capital (“dry powder”) looking for a home globally. That figure in 2019 has ballooned further. In Australia alone, AVCAL estimates more than $9 billion in dry powder is burning a hole in PE pockets. Lessons have been learned, though, with investments still being made with due caution and less risk.
In the Australian recruitment market, ASX-listed companies such as Chandler Macleod, Skilled Group, Programmed, Rubicor and Clarius used to hoover up any good business that came along. Investments were also being made from Europe (UK, France, Netherlands in particular) and in some cases North America, but M&A originating from Asia was rare. That picture has now changed, with Chandler Macleod one of the many Australian firms now under Japanese ownership, Skilled and Programmed merging, and Clarius, Rubicor and others struggling. More recently, it has been Asia driving M&A within the recruitment sector, with the balance going largely under the radar as mid-sized private concerns buy up smaller competitors or participants in growth sectors.
Speaking of sectors, has much changed in recent years? Selling a business with predominantly permanent recruitment fee income has always been a challenge, despite the net margin effect of a consistent perm contribution that should not be ignored. Still, at the top of the laundry list are the usual suspects: ICT, Healthcare, Business Support (temp and perm) and Industrial. All four usually consist of on-hired labour through contractors, temps or casuals, which provides buyers with some comfort around sustainability and the level of reliance on the current owner(s) for revenue generation. They are also relatively easy to bolt on to existing operations, so offer a lower risk expansion option.
Offsetting the benefits of on-hired labour, though, is the tightening of the regulatory environment, with labour hire licensing starting to become a requirement nationally, One-Touch Payroll now in effect and storm clouds on the horizon under a possible change of government at a Federal level. Not to mention the ongoing difficulties in hiring and retaining quality recruitment consultants that seems to afflict agencies of all shapes and sizes. For some, the increased cost of compliance combined with a continual margin squeeze provides some pause for thought around exit timing.
With these changes in mind, it is folly to assume that buyer expectations, motivations and valuations are in keeping with previous years. Business owners setting their exit expectations based on outdated information might find a less conducive climate when they finally decide to pull the trigger, leading to disappointment. And with economic conditions due for some turbulence, is this is good as it’s going to get? Only time will tell, but perhaps it is prudent to act while the going is good. Those that remember the GFC will recall the carnage inflicted on the recruitment sector and the corresponding change in buyer behaviour.
It’s not too late to start planning and preparing. Just in case it doesn’t get any better than this.