Human Resources & Staffing Services M&A Update – December 2023

Technical Staffing Segment Supports Healthy HR & Staffing M&A Activity

Capstone Partners released its December 2023 Human Resources (HR) & Staffing Services Market Update, reporting that the HR & Staffing Services sector has showcased significant defensibility amid an elevated interest rate environment and a cooling U.S. labor market, evidenced by healthy levels of merger and acquisition (M&A) through year-to-date (YTD). Although sector deal flow to-date has eased compared to prior years, transaction volume has continued to outperform the broader M&A market, which experienced a 24.8% decline year-over-year (YOY) through Q2 2023, as reported in Capstone’s Capital Markets Update. Although the U.S. labor market has been hindered overall, employment in highly technical areas has trended upwards. This has provided a strong backdrop for M&A and earnings opportunities in the Technical Staffing segment.

M&A volume in the HR & Staffing Services sector has continued at a healthy pace in YTD 2023, with 128 transactions announced or completed. This marks a modest increase of 3.2% compared to YTD 2022 levels, indicating a resilience in sector deal flow. Sellers in the space have remained cautious of entering the M&A market, with many business owners opting to postpone liquidity events until early 2024 with the expectation of a more favorable valuation environment. This trend will likely result in an influx of sellers entering the M&A market in early 2024 and Capstone anticipates sector transaction volume to rise accordingly. Through year-end 2023, deal volume will likely remain on pace with the prior year, supported by strategic and private equity acquirers looking to capitalize on moderated valuations.

Led by private businesses, strategic buyers have accounted for the majority (61.7%) of YTD 2023 transactions. Acquisition strategies among privately held acquirers have often pertained to vertical expansion in high-growth, specialized areas such as Information Technology (IT) Staffing. Private equity activity in the sector has cooled through YTD 2023, representing 38.3% of total deals, a 6.9% decline compared to the prior year period. Sponsors have namely focused on bolstering portfolio businesses’ service lines, client bases, and geographic presence through add-on engagements. Both strategic and private equity acquirers have continued to prioritize middle market (less than $500 million enterprise value) M&A targets in the space, with middle market targets comprising 91.1% of disclosed deals from 2020 through YTD. M&A valuation compression in the sector has largely been driven by declining revenues and EBITDA margins among many sector participants, induced by a cooling U.S. labor market. However, HR and staffing businesses serving high-growth, in-demand areas have continued to garner premium valuations from acquirers.

Also included in this report:

• A breakdown of hiring trends and forecasted revenue growth by segment.
• Why acquirers in the space have continued to prioritize middle market M&A targets through YTD.
• What areas of the Technical Staffing segment have garnered heightened revenue forecasts and buyer interest, supported by recent notable transactions.