Specialisation is key as market for deals heats up: City Comment
17 April 2014
Increasing interest in mergers and acquisitions (M&A) raises the question as to whether there are any particularly ‘hot’ sectors for deals.
Thu, 17 Apr 2014 | Philip Ellis, Optima Corporate FinanceIncreasing interest in mergers and acquisitions (M&A) raises the question as to whether there are any particularly ‘hot’ sectors for deals.
Over the past two years, any analysis of deal values by sector would show the dominance of Oil & Gas after the large private equity transactions involving the likes of Fircroft, Air Energi and NES. I cannot recall a time when such sector dominance would have prevailed but I don’t think it is indicative of what lies ahead: it was a period in which a paucity of M&A activity coincided with private equity investors deciding that recruitment was again becoming a sector worthy of investment while the energy market was regarded as having longevity. There were also a number of high value assets from which the owners were prepared to exit.
In the current climate, most recruitment businesses seem to be enjoying relatively good fortunes. This will of course vary from business to business and such generalisations are admittedly dangerous, yet this reflects the cross-section of recruitment businesses I have spoken to this year. That being the case, are any particular sectors hot?
The reality is that a business will only sell successfully if there is a hungry buyer. Given that businesses are generally valued as a multiple of profits, the buyer needs to be confident of gaining a return on the investment, so must see continued growth both in the market and of the specific business in question.
Again from personal experience, we are talking to businesses from a wide range of recruitment sectors that are ready to make strategic acquisitions. To illustrate the diversity, these sectors include:
There does seem to be particular interest in Education at present, but if buyers exist in all of these sectors and more, that must be encouraging news for owners operating in these spaces with exit ambitions.
It will perhaps come as no surprise that low-level generalist recruitment is not regarded as valuable, due to in-house recruitment being able to reach candidates more readily now, both through their own website and social media.
So having a specialism, a market presence, brand recognition with clients and candidates, and relationships with hard-to-access candidates, will create value. Equally, moving into a new sector just because it is perceived as hot will not guarantee value creation. There are probably already some established players in that market who will be hard to dislodge. That said, identifying a new niche or micro-niche would be very valuable.
Recruitment deals have traditionally tended to include earnouts to offer the buyer some protection that the business they acquire is not going to disappear into a puff of smoke – with varying degrees of success.
But at a time of rising profits, an earnout can be a useful tool for vendors too. Many owners are planning to sell in 2-3 years’ time, having built up their profits during what is expected to be a healthy trading climate. However, the surplus of businesses for sale would offer buyers the opportunity to shop around, which may in turn depress prices or multiples. Securing a sale ahead of the pack with an earnout mechanism to secure additional value from growing profits could be the safest way of capitalising on today’s market conditions.
Over the past two years, any analysis of deal values by sector would show the dominance of Oil & Gas after the large private equity transactions involving the likes of Fircroft, Air Energi and NES. I cannot recall a time when such sector dominance would have prevailed but I don’t think it is indicative of what lies ahead: it was a period in which a paucity of M&A activity coincided with private equity investors deciding that recruitment was again becoming a sector worthy of investment while the energy market was regarded as having longevity. There were also a number of high value assets from which the owners were prepared to exit.
In the current climate, most recruitment businesses seem to be enjoying relatively good fortunes. This will of course vary from business to business and such generalisations are admittedly dangerous, yet this reflects the cross-section of recruitment businesses I have spoken to this year. That being the case, are any particular sectors hot?
The reality is that a business will only sell successfully if there is a hungry buyer. Given that businesses are generally valued as a multiple of profits, the buyer needs to be confident of gaining a return on the investment, so must see continued growth both in the market and of the specific business in question.
Again from personal experience, we are talking to businesses from a wide range of recruitment sectors that are ready to make strategic acquisitions. To illustrate the diversity, these sectors include:
- IT
- Engineering
- Healthcare
- Accountancy
- Education
- Industrial
- Oil & gas
- Umbrella companies
- Domiciliary Care
There does seem to be particular interest in Education at present, but if buyers exist in all of these sectors and more, that must be encouraging news for owners operating in these spaces with exit ambitions.
It will perhaps come as no surprise that low-level generalist recruitment is not regarded as valuable, due to in-house recruitment being able to reach candidates more readily now, both through their own website and social media.
So having a specialism, a market presence, brand recognition with clients and candidates, and relationships with hard-to-access candidates, will create value. Equally, moving into a new sector just because it is perceived as hot will not guarantee value creation. There are probably already some established players in that market who will be hard to dislodge. That said, identifying a new niche or micro-niche would be very valuable.
Recruitment deals have traditionally tended to include earnouts to offer the buyer some protection that the business they acquire is not going to disappear into a puff of smoke – with varying degrees of success.
But at a time of rising profits, an earnout can be a useful tool for vendors too. Many owners are planning to sell in 2-3 years’ time, having built up their profits during what is expected to be a healthy trading climate. However, the surplus of businesses for sale would offer buyers the opportunity to shop around, which may in turn depress prices or multiples. Securing a sale ahead of the pack with an earnout mechanism to secure additional value from growing profits could be the safest way of capitalising on today’s market conditions.
