Trends in Scottish Recruitment Mergers & Acquisitions

On the backdrop of the recent political and economic uncertainty and the numerous headlines that these have brought, one market sector that has seen an uptick has been the Scottish recruitment market as companies across a range of sectors seek to hire temporary staff to cover current demand and/or increase the recruitment of specialist project expertise.

Given the current flux in the economy, and with the Brexit deadline of 31 October fast approaching, it is understandable why businesses wish to err on the side of caution and service current orders with the assistance of agency staff as opposed to committing to increasing headcount with full or part time employees. This consensus was confirmed in a recent report published by the Royal Bank of Scotland which found that the demand for temporary workers had increased significantly in July of this year whilst the appointment of permanent staff had fallen for the first time in more than two and a half years.

However, this has given rise to an increase in trading performance generally across recruitment companies, many of which have been faced with challenging market conditions especially those specialising in the provision of talent to the energy sector, as companies in that space are seeing an increase in volumes as exploration & production increases as the sector recovers.

With an improvement in trading and better visibility on future revenues, there is a sense that transactions in the recruitment space will increase as strategic acquirers wish to purchase specialist firms to grow or diversify their own service offerings, grow their geographical footprint and/or gain instant access to key clients of the targets. In the year thus far, there have been some notable examples involving Scottish based recruitment firms such as:

• The sale of Aberdeen based technical recruitment company Brander to the Dutch headquartered Atlas Professionals. The transaction, which was announced in January, complemented the Atlas growth strategy to expand the capabilities inherited from the acquisition of Programmed Marine in 2017 in the Drilling & Offshore, Engineering, Decommissioning and Renewables markets.
• The acquisition of RZ Group, formerly Recruitment Zone, by Outsourced UK in April which will provide Outsource with a Scottish presence and increases its headcount in excess of 100 staff. A key highlight of the deal being the cultural fit between the business which is paramount given the nature of recruitment companies.
• Edinburgh centric Taranata Group, acquiring London based outsourcing and IT consultancy firm Hanya Partners. The transaction forming part of Taranata’s founder Paul Atkinson’s ambition of £100m of revenue for the Group by 2020.

With what appears to be a rising tide for the Scottish recruitment market, it seems that there are further opportunities for consolidation as acquirers continue to meet their own strategic objectives. However, being people dominated businesses there are five key items specific to recruitment companies that should be considered when looking to increase value to make them attractive to acquisitive players:

1. As a business owner, having and creating a succession plan with regards to your own objectives and timetable is key unless there is a desire to remain with the company as part of the enlarged group. In addition, as it is likely that an interested party will focus on where the current owner or owners envisage the potential growth of the business, and their own individual intentions, it is important to have a plan and review it regularly.
2. As part of the above, demonstrating that there is a robust management team delivering the plan and effectively managing all aspects of the business will drive value to an acquirer. In most instances the management team will hold the key client relationships, therefore, being able to provide comfort to a purchaser that the management team and client relationships will remain in place post completion is vital.
3. Nurturing a niche service offering together with creating a reputation and/or brand in a specialist market/sector is more likely to attract interest from potential acquirers as proven in the recent examples. In addition, it is common for such business to potentially attract a higher price especially if competitive tension can be created between acquirers seeking to expand into new markets to complement their existing business than purchase generalists to increase volume.
4. Continual investment in maintaining IT security infrastructure and database will provide greater opportunities to scale the business either as a standalone or as part of a larger group. Having the ability to efficiently identify suitable candidates to each job, e.g. required qualifications or experience, will add value as this reduces the exposure that the knowledge is retained with the staff.
5. With people comes personal data and taxes with recent changes to legislation which have impacted the sector in the form of the General Data Protection Regulation (“GDPR’), the proposed changes to the off payroll reform (‘IR35’) to large and medium sized private sector businesses and the increasing complications of trading overseas as companies follow work in new geographies. Therefore, being able to demonstrate a proactive approach to compliance and protection to potential cyber security threats, will be paramount to a successful transaction.

This is an exciting and positive time for the Scottish recruitment market, and I anticipate further deals to flow as active buyers seek to continue to undertake acquisitions in pursuit of achieving their own strategic goals. That said, business owners should be vigilant to the increasing scrutiny placed on the various industry and statutory compliance requirements as this will be a key focus as part of any negotiations.

If you have any queries please do not hesitate to get in contact with Callum Gray, Corporate Finance Partner, or your usual AAB contact.