[EP 066] Market Matters: M&A Market Update in the Recruitment Sector

Joanna: Hi, it’s Joanna Oakey here and welcome back to the Deal Room podcast, a podcast brought to you by our commercial legal practice — Aspect Legal.

Today we’re lucky enough to hear a market update from Rod Hore of HHMC Global, all about the trends, drivers, strategies and issues that impact mergers and acquisition activities within the recruitment sector. So keep listening, and we’ll get started!

Joanna: In today’s episode, we are welcoming back the fabulous Rod Hore from HHMC Global. Rod, thank you so much for coming in to talk to us again today. It’s always a pleasure having you on the program.

Rod: I’m delighted to be here and thanks so much for having me again.

Joanna: The insights I think we wanted to drill into today relate to your M&A market update.

I was the lucky recipient of one of these updates that you sent out and I just thought well this is some really interesting information in your Business Intentions Report that I really think we should be talking about on the podcast today. So maybe if you can give us a little bit of an overview of what the report is, what it’s all about and then we can drill into the M&A side.

What is this report all about?

Rod: Okay, thank you. HHMC Global is a very specialist organisation in that we only work within the recruitment industry. We very rarely do activities outside that and our role within the recruitment industry is to provide strategy advice but mostly is to provide merger and acquisition activity.

We are very deeply involved in what’s going on within the recruitment industry from an expansion point of view and how the industry is progressing. But also understanding what are the drivers for recruitment agencies, their valuations, their growth and what is going on in the global market and how that might impact us across Australia and New Zealand.

We’ve published quite a lot of material on that, including some e-books on valuations and more recently have started to put out this business valuations update which we provide every six months and it’s a survey across the industry and gives us a real finger on the pulse of what’s going on in terms of the drivers for the organisations and what’s going well, what’s not going well and what their expectations of the future is.

Joanna: Fabulous. And look, I know we’re going to just talk about the M&A market update section, but I’m actually just interested. How about we just kick it off with talking a little bit about the more general recruitment related results that you’ve identified in the survey and then we then we can talk about specific M&A areas.

A positive time for the recruitment industry

Rod: Yeah. Sure. I mean the recruitment industry is having a great time. The recruitment industry does rely on the broad global and local markets to be doing well and because confidence in the general market is strong, companies in general are growing and are profitable. Then the recruitment industry is doing well on the back of that.

As matter fact, in the 10 years since the financial crisis, this is actually a really sustained period of growth for the recruitment industry. It’s seen the emergence of a new crop of really strong privately owned organisations that have come through in the local market. It’s a very positive time. Profits are up. Revenue growth is strong, and confidence is certainly high.

Joanna: Well that’s great news. It’s a positive then.

Rod: It is. I mean not everybody does as well as others. The average is good, and that means there some outstanding performance. But there’s also issues that need to be understood within the industry. And our survey has been really good at trying to identify specific things that people are concerned about.

One of the challenges for example is that it’s really hard to get experienced staff. There’s actually a staff shortage within the recruitment industry, which sounds a bit weird but that’s true.

Shortages do apply across many industries and the recruitment industry is one of those. And so, traditionally recruitment companies have been able to grow by just hiring more experienced staff and being able to apply them to the opportunities they’ve got. But that’s an example of a challenge they’ve got at the moment because those experienced staff don’t exist.

 

 

A greater need for mergers and acquisitions

Joanna: Interesting. Okay. All right. And so, I guess if we’re moving on then to look at this, specifically the M&A area and the market update that you’re providing in this area, what are we seeing in terms of activity that’s happening in the M&A space?

Rod: Yeah, look the merger and acquisition activity has been really strong. While there’s been this positive global economic environment for the last 10 years, that has had a lot of confidence within business owners. When business owners are confident, they will invest.

In an emerging, maturing industry like the recruitment industry, mergers and acquisitions are one of the ways that organisations will grow and expand, in addition to the fact that you have a lot of people who reach a logical point where they want to sell their business. If we think about it from the buyer’s perspective, it’s a very positive environment and so therefore there is activity.

I mentioned just minor things like staff issues. People are finding it difficult to grow organically. All of those sorts of things push towards a greater need for mergers and acquisitions. You’ve got the economy, you’ve got some global trends where the world is a smaller place and all of those global trends mean that an organisation that might be say in Europe or in North America or in Asia, they have clients themselves that want to operate in a broader way. And so therefore the recruitment organisations need to have a global footprint. That means that there’s opportunities for international companies coming into Australia and New Zealand, so global trends are good.

Joanna: And sorry, just to throw a question in there. What countries are you seeing the greatest demand for in terms of coming into Australia as buyers?

Rod: The big headlines over the last four or five years have been out of Japan. There’s been quite significant investment in the Australian equipment industry from Japan and there’s a set of circumstances in Japan that means that they’ve been very global and very acquisitive and that looks like it will continue for a number of years.

Out of Asia-Pacific, there is that number of rising countries so we’re finally starting to see out of the massive economies of China and India some large recruitment companies that are now acting in an international way and some of the smaller mature countries like Singapore and Hong Kong as well.

But globally there’s even more interesting things happening. Not so much from North America because the domestic market in North America is so strong that it is very logical for people to expand within their market rather than internationally. But out of Europe there is big changes so Brexit is very positive for us I believe if it ever happens, and if we ever know what it means and if that ever settles down.

We have this view that when Brexit does occur, Australia will be a favoured partner for the United Kingdom and the United Kingdom has already had a very strong relationship in the recruitment industry with Australia and we see that growing and getting stronger.

Joanna: Yes, well I think we could all say we have met many British recruiters out there.

Rod: Yes, that’s right. There is a certain accent to the Australian recruitment industry and that’s dominated out of the UK and that’s good and so if it is easier to do business between the UK and Australia then that would be really positive for our industry in the future because the UK industry is about three times the size of Australia’s.

Joanna: Wow. Just on that note and I know it’s not necessarily particularly relevant to the M&A side. But it’s interesting to drill into why do you think it is such an attractive industry in Australia for British people?

Rod: I think we’re a relatively easy country to do business with. I think we’re a very desirable place to be. I think Australia is attractive for British people and British business people. There are also some attractions for British companies to operate in North America, not just the United States but in Canada. But if they’re thinking about this time zone then where else would you go but Australia and New Zealand. All of the other options look a little more complex.

Joanna: Okay. All right. I interrupted you before when I wanted to drill into some of those areas for more detail, but I think I interrupted you in terms of talking about the general M&A market outlook. So we’re talking about international opportunities or opportunities for international buyers. What else are you seeing out there?

 

 

Market demand, and the regulatory environment

Rod: Yeah, look we consider that our local economy across Australia and New Zealand is going to be, continue to be strong. I don’t see anything on the horizon at the moment that people would say is going to interrupt the fact that people are, that there’s going to be a continuing skills shortage and there’s going to be continuing need for recruiters to do their job.

The politicians and the regulatory environment are continuing to try to throw standards in that process. There’s been some really bad court cases about contingent work recently. There’s a lot of talk about licensing or lack of action about licensing. There are some concerns if there’s a change of government in Australia, what that might mean for the recruitment industry.

There’s a possibility that we would even see that the benefits that we see in valuations and in sustainability from having a strong contingent part of your recruitment industry might even change a little bit. Because if the regulations and if the laws around contingent labor becomes so onerous, then all of a sudden that may not be the really big positive at the moment. Maybe it’s too early to actually be even talking about that. But certainly, there’s been some court cases and been some issues that that we do need to watch.

Those things are not changing the recruitment industry at the moment. Those things are just on the horizon. People are dealing with them like all regulatory activities. The recruitment industry is the receiver of those things. They happen elsewhere, and we just have to deal with it and the industry has proven itself to be pretty strong and been able to adapt and move through that. And so, some market conditions are as good as they can be.

What we are finding is that those market conditions, while they are really positive, they don’t really change the underlying activities to do with mergers and acquisitions.

Joanna: All right, so maybe it’s a good chance for us to then go deeper into what that means in the recruitment industry. What are these main drivers I guess Rod?

What makes an organisation attractive?

Rod: Yeah. There are a lot of small companies within the recruitment industry and it is sometimes difficult to get good information about what makes an organisation attractive or how an organisation might be valued.

The recruitment industry has very low barriers to entry as we’ve discussed in previous podcasts and that means that there are a lot of very small organisations out there and so nobody quite knows the numbers. But let’s say there’s 10,000 recruitment companies in Australia, then probably 9000 or 9500 of those are actually considered to be very small organisations, and they have a different valuation and a different way of being valued than the larger companies.

The market conditions haven’t changed from the point of view of a buyer is going to be looking for certain attributes when they do an acquisition. They are quite often about sustainability but also attractiveness. Sustainability is about size and it’s about recurring revenue.

It’s about making sure that on Monday morning you don’t have to sell everything to it to earn your money. But there’s some way that the revenue has been sustained. Those things haven’t changed over time.

Joanna: And look, each of these things really aren’t dissimilar to most other industries as well. You know certainly service-based industry.

Rod: No, they’re not. That’s right. Because of the lack of information sometimes that’s available though people will extrapolate what happens in what they read in the newspapers about what might happen with a very large transaction and apply it to their very small business and those things don’t match. I mean there is no relationship.

Sometimes therefore the attractiveness features of what goes on within a recruitment company in terms of being able to value it are not considered so people who are on the buying side are looking for what sector that organisation works in, so where it actually adds value.

Is it an IT specialist or is it a health care specialist or accounting specialist? What geographies does it operate in? Has it got sustainable staff and leadership? And that’s a really key issue, especially if the business owner is looking to exit the business.

The ease of doing the transaction, so is it a company that is legally structured and financially structured so that is actually easy to do the transaction. I know you’ve done a lot of work on that in your podcasts.

Then there’s the whole deal of the valuation and the valuation structure and you know that’s another whole topic I’ve been able to go into. But if people are unrealistic or if people are making it complex to do a transaction, then they become unattractive and the buyer has plenty of choice or go somewhere else.

 

 

Building versus acquiring a recruitment company

Joanna: Yeah, absolutely. One of the things that I find interesting about the recruitment industry, the M&A activity in recruitment industries. One of the things I see less than perhaps I see in other industries is the likelihood of someone perhaps that wants to go and start a business buying an established business in recruitment.

For whatever reason, I see a bit less than that in other industries. Where in recruitment, to my mind, it seems a bit more that if someone wants to start a recruitment business, they will just go build a greenfield recruitment business rather than acquiring another small recruitment business. Obviously, it happens, but I just mean less regularly than other industries.

Is that something that you see? And if so, why? Why do you think that’s the case?

Rod: I think an individual buying a recruitment company, especially if they themselves are not from the recruitment industry is actually a really complex thing to do. It is a very people-lead and relationship-based industry. There are no assets in a recruitment company so it’s unlike going and buying for example a printing franchise or something like that, where you know what’s going to happen on Monday morning. There’s orders underway, the customers walk in the door, there’s corporate clients, there’s all of those sorts of things that you can put some certainty to or at least some risk assessment to.

In a recruitment company, which is purely about relationships and purely about the people and the staff that work for you, it’s a very high-risk activity. And so therefore the option of building your own, as opposed to buying something, is always a very valid discussion point.

Joanna: And do you have many buyers on your books that are recruiters sitting in other organisations that are looking to make the move out to their own practice by looking for a recruitment practice to buy?

Rod: Almost zero.

Joanna: Yeah! It’s fascinating isn’t it?

Rod: Over our 20 years, that’s not been something that’s been. I’m struggling to think of one that has been part of our business. We’re usually doing business to business transactions where an organisation is looking to acquire another organisation.

Joanna: Well I think you know in my experience at least that does seem you know something in the recruitment industry that is a little bit different to many of the other service industries that we see.

Rod: Yeah, for sure.

Joanna: And certainly, for recruitment then it appears to be acquisition as a method of growth or perhaps an alternative to organic because organic can be hard if you can’t find the staff.

Rod: That’s right, and also slow and so this economic cycle it’s not going to go forever. Business confidence is not going to live forever if you’ve got demanding customers that want you to do certain things, then acquisitions can actually speed up the process of being able to solve that issue.

There are other factors at play. I mean the recruitment industry is maturing. It is a large cost within large organisations and so therefore procurement and H.R. and so on get involved in the process so there’s pressure on margins and all of those sorts of maturing industry pressures. And so sometimes acquisitions can help alleviate that as well by you can buy a higher margin business in another location or with a different customer base and so on. There are other factors within the broader industry.

But in general, people are looking to expand their sector or their geography. They’re looking to buy into a new sector or they’re looking to buy into a new geography. Very rarely people are looking to just acquire to buy market share.

Not much consolidation across the market

Joanna: And how is consolidation looking across the market at the moment? Has there, what sort of space are we sitting in now do you think in terms of the cycle of consolidation?

Rod: I change my mind on this actually a little bit each year or two. A few years ago I was sort of slightly depressed for the Australian recruitment market because there’s been so many large acquisitions happen from overseas that I was a little bit concerned that Australia and New Zealand would turn into being a little bit of a branch office that we would only have smaller companies and all of the larger entities would be owned by overseas corporations.

I actually have changed my mind on that because there’s been such a really good growth from some strong Australian-owned businesses that I can see that the replenishment of those Australian owned business is happening quite quickly. And so you know this economic cycle has really spawned some great companies and that’s great. That is really good for the future.

I just am really positive at the moment about the maturity, the leadership, the growth that’s coming out of the industry. The barriers to entry for being able to join the industry and so therefore the thousands of small companies haven’t really changed. I mean that is changing a little bit but hasn’t really changed. And so, we won’t see too much in terms of consolidation until there’s some dramatic impact there that some barriers put in place that people have to jump and therefore the ease with which you can go and start a small business becomes just not viable.

Joanna: All right. Well let’s then look practically at what all of these means if you’re a business who’s listening to this or an advisor to a business that is in the recruitment industry and is looking at building itself for sale say in the next two to five years, what’s your advice at the moment? Has it changed from perhaps since discussions we had a year ago about you know what the update in the market, our current market conditions have in terms of impact for what they should be thinking about in building for sale?

 

 

Lies and misinformation within the industry

Rod: Yeah, look the one thing that has changed is that I think the. And this is a negative comment. I think the ongoing, continuing cycle that we’re in, this good cycle that we’re in has allowed a whole range of people who don’t know much about the recruitment industry to make a whole bunch of statements and spread misinformation basically about valuations and about the opportunity for companies to achieve great outcomes which are just impossible. They’re not going to happen. And so, you know lies and misinformation.

I never used to think that the recruitment industry was that different to the rest of the world. I thought a services industry like I.T. or financial planning or accounting or law or recruitment all had the basic characteristic that was similar. But maybe the recruitment industry is actually different and maybe it’s this low barrier to entry and the fact that there are thousands of small companies out there.

So we’re unfortunately seeing a lot of information in the marketplace which is just plain wrong and is giving people a wrong information about what their value might be or what their options might be for the future and that’s coming from some quite large companies sometimes. So we’ve seen valuations of small recruitment companies being compared to valuations of very large recruitment companies. There is a gap between those two. There is no relationship between those two and we’re having to fix sometimes that misapprehension or that misinformation that’s out there in the marketplace. So that’s a bit disappointing.

Joanna: And can we drill a little bit more into you know, we don’t have to if you don’t want to, where this misinformation is mostly coming from?

Rod: A lot of accounting firms will only be able to access public information and there is very little information about the recruitment industry in the public domain. So if you wanted to look up recent transactions for example you’d be able to see listed companies like program to million sold to the Japanese. You’d be able to see very large established private equity backed companies like Google Bank being sold to the Japanese, and so on, and a few other transactions that are in the marketplace.

But those are not the right data points to be using for the majority of the recruitment industry that is privately-owned, relatively small and may have completely different characteristics and certainly different corporatization. A company that is publicly listed is a corporate entity that has sustainability and has rigor about its processes.

A 20-person organisation or a 15-person organisation does not have any of those characteristics. It is run by the owner and so on, and so if people are applying the wrong information to the wrong circumstance.

Joanna: I think many of our listeners are accountants and I just pushed to a bit more on that question and I could feel your reluctance to go there.

Rod: I try and stay positive.

Joanna: But I think it’s really important for us to be real about where some of these issues are coming from and it can be very helpful I think too for professionals to hear from industry-specific advisors about what is actually happening in that industry and the issues that they are seeing. So I think thats why its really important to really drill into this and obviously I can tell from the way you’re talking about this that you’ve clearly got a few real examples of clients coming in having had different viewpoints on valuation as to then I guess the reality is that you have to then talk to them about it. And no one wants to be the bearer of bad news, right? And I guess that’s the reality.

So in terms of us then providing practical useful guidance for anyone who is out there and perhaps faced with a client who comes in from a specialist industry, like for example recruitment and is asked to provide a valuation. Presumably, one of the things that valuers from all different disciplines have access to is benchmarking tools, but I guess what you’re saying here is benchmarking tools in and of themselves aren’t providing enough in terms of giving a true reflection of where the market is really sitting. Maybe can you just talk a little bit about that point Rod?

Rod: All right. One of the reasons we’ve published so much material and written our e-book and done all of those things is to try and put some of that material out there because we want people to understand that the characteristics of the recruitment industry that has been, of the recruitment company that has been valued really does have an impact on what its valuation is.

If it’s a small company or if it’s a company that relies on pure sales driven revenue, then it will be valued less than an organisation that has different characteristics. So those sustainability components of a recruitment company are really valid in terms of understanding a value. It’s not to do with profit. It’s not to do with longevity or anything like that. It’s about the sustainability of that business. If it’s a small business, it will be probably wrapped up in the founders and shareholders and if they’re selling, they probably want to leave. That adds to the risk.

If it’s a young business, then it hasn’t really proven itself. It’s only living, this sounds harsh, but it’s a living off the enthusiasm of those founders who are in there, with full of energy. What happens after five years or six years? How does it go then?

There are stages that an organisation goes through and we talk a lot about organisations that get zero to 20 people, 20 to 50 people and then what they do when they’re above 50 people in size, and the characteristics and the valuation for those organisations does change dramatically. Let alone the mix of business, let alone the customer base, let alone the way that they treat their staff and pay commissions and all of those sorts of things which are then quite unique to the recruitment industry.

And unfortunately, what’s possibly because the recruitment industry is relatively small and uninteresting in the global scheme of things, what is talked about in the press and what is available in the press is only at the very large end. It’s the listed companies, the companies that have been around forever, those that are privately, private-equity backed and that’s a very small percentage of the market. What happens underneath that usually is different and doesn’t apply.

 

 

Joanna: Well look Rod, you are just a powerhouse of information. I just love speaking to you. I think this discussion is going to be hopefully listened to by a lot of our accountants and valuation advisors because I think you’ve really, even though we’re talking about a market update, we ended up talking about so much more. And I’ve cut you off a few times! Are there any, anything else that I’ve cut off in the middle of that you feel like we’ve missed out of the discussion Rod?

Rod: No, I don’t think so. I think you know the industry is quite exciting and there are changes happening to it from every perspective. Some of that impacts the way that values will be done or will be assessed in the future. Some of it relates to the financial funding. I think private equity for example is on the rise in Australia, which is great. But while the economy continues to be strong, there will be a skills shortage, there will be confidence and things will be positive.

Joanna: Well, I like it. There’s an upbeat report from Rod Hore.

Now Rod if any of our listeners want to get in contact with you, I can testify to the fact that you are incredibly personable and really willing to sit at the end of the phone and have a very commercial discussion about things so I’m guessing you might say to our listeners that your line is open if there’s any accountants out there that just want to have a chat about some recruitment firms that they’re working with that they really need some specialist advice and assistance with.

Rod: Yeah, sure. And all our contact details are on hhmc.com.au. Feel free to give myself for my colleague Richard Hayward a call and we’d love to help. We do work with a lot of accounting agencies across the country and happy to receive a call.

Joanna: Fabulous and I just love to throw a pitch in there for you guys. You are just absolutely fabulous to work with. And I’ve not met a client that hasn’t been screaming your praises from the rooftops, so there you go.

Rod: All right. Thanks so much, Joanna.

Joanna: Okay, good work. Well look, thanks Rod! Thanks for coming on board again. Maybe we’ll have to make this an annual event doing our market update.

Rod: All right. I look forward to it.

Joanna: That concludes our M&A market update for the recruitment industry from our guest Rod Hore of HHMC Gobal.

If you’re interested to get a copy of this report, you can reach out to Rod and his team at HHMC Global by checking out our show notes at www.thedealroompodcast.com where we’ll link through to their website. There you will also find a full transcript of this podcast episode if you would like to read it in more detail.

I hope you enjoyed what you heard today. If you did, please subscribe to the Deal Room podcast on Apple Podcasts or your other favorite podcast player to get notifications straight to your phones whenever a new episode is out.

Thanks again for listening in! This has been Joanna Oakey and the Deal Room Podcast, a podcast proudly brought to you by Aspect Legal.