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Ketan Gajjar: Good afternoon and welcome to the Recruitment Curry show. This is your host, Ketan Gajjar, and today I’m happy to be joined by Akash Taneja. Akash is the founder and managing partner of Momentum Advisory Partners. Akash, welcome to the show.
Akash Taneja: Hey Ketan, thank you so much for having me on the show today. I really appreciate it.
Ketan Gajjar: Fantastic. So Akash, can you tell us a bit about yourself and your journey in the Recruitment Curry? M& A market in the staffing industry. Yeah, absolutely. First off again, thank you for having me on. My name is Akash Taneja and I am the founder and managing partner of Momentum Advisory Partners.
Akash Taneja: Momentum, we’re a mergers and acquisitions M& A advisory firm with a very specific focus in the staffing and solutions industry. So what does that mean? So we advise And represent founders, owners, shareholders, investors of staffing and solutions businesses in all segments and verticals of the industry, whether that be it, healthcare, accounting, finance, life sciences, engineering, et cetera, we advise and represent these individuals on sale of their company.
And so I’m pretty happy to say that since our founding of the company in July of 2020. There isn’t another firm that has completed as many transactions as we have in the staffing industry. And I think there’s, a number of reasons for our success in space. First and foremost our experience in the industry.
I’ve actually been doing this for just over 15 years. And so we have our finger on the pulse of the market. We know who the market participants are. We know what they are looking for. We know how to position our clients. To maximize value when they’re exiting their business.
Also, we take a very pragmatic approach to our clients. We’re very upfront with them from the onset. We set a very realistic expectation of where the market is at. We don’t like to tell our clients, that they can get this very high multiple when it’s not realistic. So we set expectations out very very early on with our clients.
And then third, I would say that we run a very formalized sale process. And for the most part, most of our clients, if not all of our clients, this is the very first time that they’ve done it. And we are, a partner in every sense of the word they’re putting their full faith and trust in us and we don’t take that lightly.
And so I think these three things are really keys to our success.
Ketan Gajjar: Totally. And thanks for the introduction, Akash. I’m sure, trust goes a long way, especially when it comes to something, which is of significant importance to the founders and both, buyers and the sellers.
And then 15 years is a long time. So what is the current M& A market in staffing industry like? Yeah, sure. It’s helpful to note that we’ve seen really for the last I want to say 13 years, I actually started my career in 2008. And so as you all know that was the, during the great recession.
Akash Taneja: So we saw from the very low of the lows, but since then, really I would say probably in 2009, 2010, it’s really been bottom left, upper right, in terms of MNA activity in the North American stock market. And so we have seen a softening in the market, but that’s really coming off of. A softening in 2023, I should say, but that’s really coming off of a very high level of M& A activity in 2022.
In 2022, there were just under 140 transactions that are announced in the staffing industry. And that was the largest number of transactions on a yearly basis over the last, 12, 13 years. So it is important to note that although we are seeing a softening. It’s off of very elevated levels.
So for Q1 of this year we actually saw 33 transactions in the North American M& A space, or in the staffing industry. And Q2 was down sequentially as well. We actually only saw 27 transactions. That puts us through the first two quarters of the year on a run rate of about 120 transactions for full year 2023.
I actually believe we’re going to be coming lower than that. Just given where Q3 has started off, we’ve gone up to a slow start here in Q3. But I do want to note that transactions are still being completed. What we’re seeing really is, and what we’re hearing from buyers, because we have pretty regular conversations with buyers is that they have a much higher threshold for the acquisitions that they are doing.
They have a very they have a higher standard now for the deals that they’ll take a look at. Although transaction activity has gone down, there are still a lot of transactions that are occurring of quality businesses. We actually put out a quarterly M& A activity report. We actually have our Q2 2023 M& A activity report that we published last month.
I’d encourage anybody who’s interested. To either go to our website or we actually also have it posted on LinkedIn, but in our most recent reports we actually asked one of the more active M& A participants on the buy side a gentleman by the name of Chris Moulton. He heads up the M& A activity.
For the tandem group, and he noted in our report that same thing he echoed what many other buyers were saying is that they’re looking for very high quality businesses, very strong management teams. Businesses that have a very specific niche companies that, place and find hard to find skill sets.
So those sorts of acquisitions are still on the top of the list for acquirers.
Ketan Gajjar: So it’s pretty narrowed down then in terms of the requirement and the choice.
Akash Taneja: Yeah, because what we saw in previous years, even just say in 2022, 2022. Companies, for the companies we were representing they may have looked at a business that we were representing, it may not fit specifically what their acquisition strategy was, but it was close to nothing.
So they would definitely take a look at it, put a bid on the company, but we’re really not seeing that that this year, we’re seeing much more stringent criteria from our buyers. Now, I do believe a big reason for that is just the current economic environment that we’re in, right? We continue to see, inflation, although it’s coming down inflation has been elevated the Fed continues to raise interest rates, and that makes the cost of capital more expensive.
It also makes the credit conditions tighter. So the access or availability to credit or debt is tougher to find. And buyers are just being more cautious, right? They’re seeing within their own businesses a bit of a downturn or slow down. And so there really no rush to, to go out and just start, continuing to acquire, they’re waiting for the dust to settle a little bit.
And that makes sense, right? So we do believe. As we get into these, next six to 12 months as The landscape starts to get a bit more clear that buyers will begin to slowly start dipping their toe back into it. And we’ll start seeing levels that we saw in 2011.
Ketan Gajjar: We would love that, wouldn’t it?
Yeah, absolutely. When it comes to the sectors, are there any specific pot sectors, which the buyers are looking at?
Akash Taneja: Yeah, so I would say IT and healthcare have really been leading the industry in terms of activity. Over the past, several years many years it’s IT, then it flips around it’s healthcare.
But we’re seeing a lot of activity in both IT, healthcare. Actually, what’s interesting, what we found in Q2 of this year, where there were the largest number of transactions per the quarter were actually of search businesses. So these could be retained search direct hire these are permanent full time placements which is a bit unusual from what we typically see.
But generally speaking, the hottest markets Where you’re seeing the highest valuations, the best structures are really in that more technology space and also healthcare.
Ketan Gajjar: And then in terms of the types of buyers, you touched upon this point previously is it, is there split between the strategic buyers or, financial sponsors?
What kind of balance are we looking at? Yeah, absolutely. What’s interesting is that what we’ve seen really in not just our. As a whole, is that there’s really not just one type of buyer that’s available to potential to a potential seller, right? So [00:09:00] traditionally you had the strategic buyer who could be larger.
Akash Taneja: Staffing organization. But now you also have financial sponsors that are involved. So this is particularly private equity. So private equity has made significant investments in the staffing industry over the past, several years. So major investments in the space. And so what they look to do is they look to buy what’s called a platform investment.
This would be their initial foray or their initial investment into a space. And from that, they look to build, grow that business, and do some add on strategic acquisitions through that. There are additional there’s a larger group of buyers that’s now available to sellers. And private equity actually what they do is they have a different structure that they provide or that they offer to a potential seller.
That a strategic buyer, doesn’t and what I mean by that is what a private equity group looks to do and not in every transaction But in many of their transactions what they like to have is they like to have the ownership Or the key managers of the business what they call rollover or invest into the larger platform.
So they like to have their owners that they’re investing, the businesses that they’re investing in, have some skin in the game. And so what it provides to to sellers is an initial liquidity event. So they’re going to get some amounts. of the purchase price at the closing, but then they get to invest alongside the private equity group.
And what they get is this, what they call a second bite of the apple. So the opportunity after three, five, seven years, however long the private equity group will hold the investments when they sell it, obviously the model is to buy low, sell high. That they’ll the owners will be able to to capture that second liquidity event and capture that, additional potential upside.
So that’s what private equity offers. And so in the last several transactions that we’ve actually completed, there has been a private equity component to it where the buyer was backed by a private equity group. Private equity group had made the investment into the platform.
that platform or other strategic staffing company made the acquisition of one of our clients. So we have seen them get much more involved. So I would say the market is still heavily, more heavily weighted towards strategic buyers in terms of the number of transactions. But private equity definitely is an important component to the
Ketan Gajjar: Sure.
Sure. That brings us to the most important question in which Most of the people would want to know that, how are the companies valued then, especially in the staffing companies.
Akash Taneja: Yeah, absolutely. Generally speaking, and this goes with most companies. Staffing businesses are valued on a multiple effectively it’s net income or EBITDA.
Earnings before interest, taxes, depreciation, and averages. Amortization. So it’s essentially, EBITDA is a proxy for cash flow. For most staffing businesses, this is your net income or your bottom line number. So they’re valued on a multiple based on ebitda, and many factors go into valuation. So they’re looking at the particular market segment.
They’re looking at the types of customers that that the prospective target has the geography, the industry. The financial profile growth rates, et cetera. So a number of things go into evaluating business. They’re also looking at leadership and management team. So a number of factors go into the evaluation of a staffing business.
And so they’re valued based on a multiple of EBITDA and the way that they’re structured is on a cash free, debt free basis. And what that effectively means is that the buyer is acquiring this net of any cash or debt that the business is carrying. So at the closing, a business has, let’s say a million dollars and it’s operating accounts.
And a half a million dollars of of debt on the business. So this could be like a revolving line of credit the buyer or the seller will get the benefit of that million dollars net of the 500, 000 of debt. So effectively they get to retain that 500, 000 cash net of debt. So cash free, debt free.
But it’s also important to note that the buyer in their valuation is assuming That the company will be delivered to them with what’s called a normative level of working capital. And so what that means is it’s important to note is that many owners, they assume that they will retain whatever receivables balance or accounts receivable balance that the business is carrying.
Unfortunately, that’s not true. A buyer will assume, again, that business will be delivered to them with a certain amount. So there is a calculation that goes into determining what that normative level of working capital is. But, it is important to note for companies or owners. of companies that are looking or considering a potential sale that You know, they do not retain the receivables if they do look to retain the receivables balance Buyers will just adjust their purchase price to reflect that so net it’s all the same so that’s just something important to note because you know I can tell you almost in every single situation with every single client You know, initially they are expecting that the receivables that they have in the business they will be able to collect those and keep those.
Sure.
Ketan Gajjar: Sure. So when it comes to the typical sales process, what does it look like and then what are the things to watch out for?
Akash Taneja: Yeah. So we work on a formalized sale process. So for many of our clients the journey to selling the business starts, months in advance and sometimes years in advance of even, entering the market.
There’s a lot of preparation that’s involved. Cool. What we do is we actually, we take a look at the business and we we evaluate we look at, we take a look at it the same way that a buyer would take a look at the business. We evaluated it we do an assessment on it, we value the business and we give our clients kind of areas that we feel that they need to improve on where they can maximize value.
So in many instances, this journey starts months in advance. But we run a very formalized process, so from start to finish, it can be anywhere from six months. And that is preparing offering materials strategizing the best way to position the company for market. Then we go out to the markets to all the market participants, we negotiate with them.
And then the longest phase Of the process or one of the longest phases of the process is the due diligence to closing Phase typically can take anywhere from 60 to 90 days This is after you’ve signed a letter of intent with a prospective buyer and they’re now doing a very deep dive Review of the business, to get to the closing.
So it’s a six month process a lot Is involved with it? We’re with our clients every step of that way. I think it’s important to note that, you want to make sure that you are, prepared in advance. And so what does that mean? So getting your financial house in order building your team around you of advisors.
So that’s not just an M& A advisor, but it’s It’s legal advisors, accounting advisors, and tax advisors making sure that you’re consulting with them before even going down the process of the sale to make sure that you put yourself in the best position to maximize value going forward.
Ketan Gajjar: Totally. You want the best team on board to make sure that you get the best price. Absolutely. Absolutely. There’s a lot that goes into it
Akash Taneja: that owners are not really thinking about valuation is one thing, but it’s, and then it’s also another thing is is negotiating the the definitive purchase agreement making sure you’re fully protected in that agreement.
And it takes really a, an attorney that has experience in transactions whether or not they’re fully protected. They have experience within staffing. It’s certainly important that they have M& A experience and if they have experience within staffing, that’s equally important as well. I would also say making sure from a tax standpoint that you’re structuring the transaction in a way that limits your tax exposure and is most tax efficient.
So these are sorts of things that you need to think of before even going down the path of
Ketan Gajjar: Sure. You mentioned about the time taken to close the deal. What is the quickest or, that you close the deal? You mentioned six months, but have you closed the deal, probably within a couple of months or if you want to share the story?
Akash Taneja: Yeah, sure. I would say the first transaction actually that I worked on when I started the firm we were engaged with the client. So typically I would say, on average a process from start to finish, takes about six months. It tends to take longer most times than it will be on the shorter end, so it tends to go over more so than it would go less than the six months, but the first client that I worked with we were hired in, I believe the beginning of August.
And he had some concerns that the incoming, um, president may raise the capital gains rates. And so he said he wanted to make sure that the only way that he would sell is if we sold before the end of the year. So I would say the quickest that we’ve done is something around five months, these are sorts of things that you don’t want to rush.
You want to make sure that you’re doing the right way. But in that instance, we actually were able to get to five months. What did help is that he had a very attractive business and he had a lot of potential suitors for the business. And so it made really our job a lot easier, but I would say it tends to go over six months more than it does less than six months.
And a lot of that has to do with. There’s a lot involved in it for a seller and just preparing the information that’s required to put together the the offering materials or to market the company. A lot goes into that and a lot of companies just, initially aren’t set up to, to produce that type of information.
Maybe they don’t produce it, a certain way that we like to see it or the way that buyers like to see it. So it does take some time. But generally speaking, I would say about six months.
Ketan Gajjar: There was my next question as well, because, it needs a lot of prep. So I’m sure, you come across a lot of sellers who are Obviously thinking of doing this, activity, but then when you actually discuss the facts what could, percentage of dropouts that you’ve found yourself that, somebody comes to you and then, when you talk about this is what you need.
Akash Taneja: Yeah, sure. So how we work basically is we like to, before we even we begin an engagement or sign up with our clients, what we do is we prepare what’s called marketability assessment and valuation opinions. We’re basically [00:20:00] viewing the company as a buyer would in the current market.
And we present them with a valuation, basically, essentially, what we’re seeing in the market for a company of their size and type. And we like to be very realistic with what, these owners can expect. Not just in terms of the total valuation. But also the structure of the deal because, it is important to note that, it’s not just an all cash deal.
A lot of deals have structure where there are contingent components. There are notes as I mentioned with private equity, there is rollover equity. So we’d like to give them all the information that we can in the beginning and have them make an informed decision whether or not it makes sense for them, right?
If it achieves their goals and their expectations. And so, many times it just, it’s not exactly the outcome that we’ve presented to our prospective clients that they’re looking for. And so they decide to wait. And so what we also, part of what we do is, okay, these are the areas where, a prospective buyer may view as risks.
And they may look to to value the business a little bit lower or have a less favorable structure because of this specific aspect of your business. And these are the things that you can do to improve it. So we like to give our, them areas that they should be working on to help them maximize value.
Whether or not, our valuation opinion meets our goals and objectives, now we’d like to be a resource to them and when the time is right, maybe it’s, a year, two years, or, multiple years down the line we’ll reevaluate it at that point, and we’ll go through the entire exercise again.
Ketan Gajjar: Sure. And then you mentioned about, obviously you are sustaining the sellers as well in terms of, how to maximize value, in a transaction. And that leads to the next point, which is how do rather the importance of working with a professional, partner to help you through the process.
And then, which is what Momentum Advisory Partners does.
Akash Taneja: Yeah, absolutely. Would say the majority of transactions occur are not through an advisor like us, right? It’s basically a larger staffing organization or private equity firm has identified a specific target and they approach that target themselves.
And so as a potential seller, in that situation, you’re really only dealing with one potential buyer. If you are, considering a sale at that time, that prospective buyer reaches out to you. What we do is First and foremost, we have experience, a vast amount of experience in this industry.
This is what we’ve been doing for well over a decade. We know who the market participants are. We speak with them on a regular basis. They reach out to us regularly to make sure that we know what it is, what type of a company that they’re looking for. So we know who the market participants are.
We know the types of businesses that they’re looking for. We know how the companies are valued. And so there’s a lot of value in that, in, in what we do, right? So it’s not just, we have access to a large group of buyers, which is very important. But we know how to position our clients in a way to, to maximize their value.
And like I said, in preparation, we can tell them, Hey, if this company if there are a number of suitors for this company, if there will be a large market for this company, or if it better serves their interest to, focus on certain things, grow the business. And then we’ll revisit that but also running a formalized process is important because, we’re getting multiple offers.
That’s the, the whole point of us running this formalized process is that we’re getting multiple suitors. And so we have negotiation leverage in that. get the top value for the business. Those are the sorts of just the sorts of things that we offer as a specialist in this industry.
It’s the experience that we have, the access to the buyers access to decision makers at the the acquiring companies. And we know how to position our clients in a way to, to maximize value.
Ketan Gajjar: Sure. Sure. And then, there can be a whole new, separate show for this, but there are a lot of, so there’s a push in the UK market right now to go to the States establish a staffing agency, a recruiting agency there.
What happens your, how would somebody in the, based in the UK, if they want to acquire a business, in the States, what are the points, high level that you would talk about?
Akash Taneja: Yeah, sure. So I think regardless if it’s a UK based firm that is looking to expand in the U. S.
or if it’s a U. S. based firm that’s, looking to expand within the U. S., I think the most successful transactions are done by those who have really had a plan in place, that have really given a lot of thought, come up with a strategy, included their, executive team, their CFOs, their legal to devise a strategy for acquisitions.
And part of that strategy is the specific type of company that they’ll be looking to acquire. So is it in a vertical hooks. Let’s say, IT staffing, are they looking for a specific technology or niche that the company does? Is there a specific geography the size of company that they would be looking to acquire?
Do they have the financing in place? To acquire the business. And also, I think it’s whether or not they’re going to target specifically companies on their own or hire a firm to do a search for them. I think one thing that they should definitely be doing if they’re looking, if they’ve already had their plan in place and are looking for acquisition targets is to reach out to firms like Momentum.
We work on exclusive engagements. That we can share with them, if there’s a certain company that we are advising and representing that may fit their criteria, they’re going to want to, to reach out to firms like ours. to discuss what types of business that they’re looking for.
So that makes sure that we’re on their radar. So I think initially those are the sorts of things that any buyer whether UK based or US based should consider before even, thinking of an acquisition.
Ketan Gajjar: What is one tip that you would part with, especially for the sellers in this market?
Akash Taneja: Yeah. So I would say, it’s never too early to start this process, whether you’re looking to sell in the near term or, many years from now, it’s important to get an understanding of the markets. Also how companies are valued what buyers are looking for because in a lot of cases a company might not be ready now, but there are certain things that they can do within their own business to maximize value.
So I think, the bit of bit of advice that I give is, is to reach out to industry specialists, to experts, whether at the. advisory firms like ours, accountants, attorneys, tax professionals, and start the process early, whether or not it’s something that’s imminent or in the distant future, preparation for a process like this is key and it’s never too early to start.
Ketan Gajjar: So prepare before you need it.
Akash Taneja: Yeah, absolutely. Absolutely.
Ketan Gajjar: Good stuff. Good stuff. So Akash, thank you very much for being on the Recruitment Covery Show. Fantastic insights there. And thanks once again.
Akash Taneja: Thank you for having me I really appreciate it. And look forward to talking to you soon.
Ketan Gajjar: Yes. Thank you.
Akash Taneja: All right. Bye.
