Recruitment businesses face ‘cliff edge’ as government support scaled back

Insolvency experts familiar with the recruitment sector have added their voices to warnings that the industry is headed for a fall as government support for business is withdrawn over the coming months.

In an interview in the Sunday Telegraph, Mark Cahill, ManpowerGroup’s UK managing director, warned that as the furlough scheme begins to be scaled back from the end of July, Manpower and employers around the UK will face hard decisions. “I think that will force us and some other companies to look at the furloughed staff… I fear there may well be some redundancies – but it is not in our interests to do so – these are skilled people we have invested in.”

Cahill went on to say the scheme, which is due to end at the end of October, meant “pain delayed” and not pain averted and “it does feel like we are going to fall off a cliff”.

Simon Plant, a licensed insolvency practitioner and a director of commercial finance services company SFP Group, told Recruiter that the furlough scheme and other support for business “reduced significantly the pressure” on recruitment firms. However, he warned, “the pressure will return when such support is withdrawn. When we reach these various pinch points, is when we expect the first of several ‘shocks’ to occur.

“Common sense suggests there will be a huge surge in insolvencies generally, but whether that’s in the next six months or the next two years is difficult to predict. It’s also difficult to know which sectors will be affected most and how that will impact on future recruitment. What we do know is that if you put the brakes on the economy in the way that we did, then any recovery will be slow and there will inevitably be casualties along the way.”

Andrew Watling, partner in restructuring and insolvency at business advisory firm Quantuma, told Recruiter that along with a rise in solvencies across all industries he expected to see a rise in insolvencies across the recruitment industry as government support was withdrawn, with retail, food and beverage, aviation, hospitality among those likely to be hit hardest. “With many employers shedding jobs and freezing recruitment, it is hard to see how already fragile businesses will survive,” he warned.

Watling said that recruitment companies are particularly vulnerable because of their reliance on invoice discounting and factoring, with “thin margins and late payment by clients or extended disputes impacting on the ability to drawn down on such facilities”. A combination of unserviceable debt and a rigid stance from HMRC resulting in a winding-up petition is also likely to lead to the failure of some recruitment businesses.

Despite the warning of difficult times ahead, Watling said it was not all doom and gloom. “This will also present opportunities for stronger businesses to expand and we expect to see some consolidation within the industry, possibly via pre-pack administrations, which avoid the risk and expense of administrators trading businesses while seeking a buyer.”

Philip Ellis, MD of Optima Corporate Finance, agreed, telling Recruiter that while M&A activity in the sector was currently subdued, “I suspect it might become a bit more of a buyer’s market over the next six months or so.”

Alex Arnot, adviser to some 35 technology and recruitment business, told Recruiter that a cliff-edge scenario later in the year wasn’t inevitable. “It’s all about planning now, and if people put in really robust well thought-out plans, I think most companies can ride the difficult wave. But don’t wait until September or October – start planning it now,” he said.

How the Coronavirus Job Retention Scheme is being wound down

  • July No change –  Government pays 80% up to £2,500 cap, employer pays 20%
  • August As for July, but employer pays National Insurance and pension contributions
  • September Government pays 70% up to £2,190, employer pays 10%
  • October Government pays 60% up to £1,875, employer pays 20%
  • Scheme ends 31 October

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