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Tight labor markets and dramatic changes in employee behavior have made HR services and technology a top priority for operators in recent years. In a post-resignation environment, attracting and retaining talent will remain critical to sustaining growth in nearly every industry.
The HR solutions space has responded accordingly, evolving into a diverse, fragmented market that M&A experts say is primed for consolidation and expansion.
“The biggest driver of M&A interest and activity is the growing recognition that HR is strategic to the success of any organization,” said Jon Bunt, a partner at private equity firm FFL Partners, which has completed six HR deals to date. Services and software investment space. “Attracting, retaining and upskilling talent is critical to achieving the results you want.”
The HR staffing and executive search market is expected to be worth more than $1 trillion by 2028, and that’s before taking into account the variety of ancillary services employed by HR innovators. For potential acquirers, private equity and strategic investors, opportunities for HR investments can be found across a wide range of corporate touchpoints, from DEI initiatives to payroll to talent-related legal disputes.
Expansion
Bunt said private equity sponsors have a particularly large opportunity in staffing platforms to expand their offerings to meet growing client demand for additional services and support, both organic and inorganic.
This diversification strategy attracted Levine Leichtman Capital Partners (LLCP) to Resolution Economics, a disputes, investigations and advisory firm specializing in labor and employment law. LLCP acquired the company in 2020 and has expanded the platform’s reach across multiple HR service areas through add-on acquisitions.
LLCP partner Matt Rich said ResEcon’s initial scope of practice will be to provide statistical analysis to support large class action cases involving labor, discrimination, wage and hour complaints. But what caught LLCP’s attention was the ancillary services the company offers in compensation equity analysis — an “emerging” revenue stream he said. “The low-cost technical services they provide have a huge impact on these multi-million dollar lawsuits. [and on] Recruitment of talent,” Ritchie said, “is a very important thing for every business in this labor-based market. “
Seeing the potential for ResEcon to leverage its legal and analytical expertise in other areas of HR, LLCP supported the company’s growth into new market segments: ResEcon acquired Berkshire Associates, a provider of outsourced affirmative action plan consulting and software services, in 2022. Last year, ResEcon added Affirmative Action Initiatives, DEI, and Biddle Consulting Group’s Pay Equity Training Services group.
“We basically started out as pure litigation,” said Ali Saad, managing partner at ResEcon. “But more and more clients will ask us for advice on things that have nothing to do with litigation, such as looking at data on proposed layoffs.” Saad said that as the company expands its offerings, it continues to recognize “the broader workforce and unique opportunities in employment,” and LLCP support provides companies with the capital they need to diversify.
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Today, ResEcon’s data analytics services also extend to pay equity analysis and workforce demographic analysis to support affirmative action. It also established a human capital strategy group to support clients’ labor and employment compliance and workflow efficiency needs.
ResEcon is making a number of add-on acquisitions after identifying other HR areas it wants to expand into, including employee training, Saad said, all of which he sees as “adjacent” to the company’s flagship employment-related legal advisory business and data Analyze the product.
Given the diversity and saturation of the HR services and technology sectors, dealmakers say there’s plenty of room for creativity in how to build platforms and create value. “Given the fragmented nature of the market, dealmakers can identify and deploy aggregation strategies that often realize the revenue and cost opportunities of platform investments,” said Thomas Bailey, managing director of Houlihan Lokey’s Commercial Services Group, which advises ResEcon. Serve. Sold to LLCP.
Motivating factors
Strategy also plays an important role in HR-related M&A: Analysis released by Capstone Partners last May found that private and public sponsors accounted for 55% of HR-related deal volume in 2022.
For strategic acquirers like Workplace Options, a provider of customized employee benefits and mental health solutions, expanding service offerings is also an important part of the acquisition strategy.
Last November, Workplace Options acquired The Diversity Movement, a technology consultancy specializing in DEI. The deal adds valuable intellectual property to Workplace Options’ product portfolio and strengthens its position in the human resources space where employer demand is surging: McKinsey predicts that companies will spend $15.4 billion on DEI-related initiatives by 2026 .
Alan King, president and CEO of Workplace Options, said he is “very optimistic” about the company’s future acquisition strategy, with investments driven directly by customer demand. “The questions they ask us, the challenges they ask us and the services provided to them are really exciting and healthy,” he said. “It’s about growth, it’s about opportunity.”
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Going a step further, Kim also noted that deal sourcing is also guided by a variety of other factors, including geographic expansion and international compliance. Labor laws not only vary widely between states and countries, they also change frequently. Strategic acquisitions support a company’s ability to enter new markets without having to meet local compliance requirements from scratch. “As you can see from our recent acquisitions, many of these companies are in countries where we are either growing our presence or where we want to maintain our existing presence,” King said, adding that Workplace Options is currently in 18 There are service centers in countries.
For other HR investors, the growing number of solution providers offering industry-specific services represents a significant opportunity—and demand from HR solutions customers is likely to intensify in the future.
Orangewood Partners partner Neil Goldfarb said the firm’s 2022 acquisition of Barrington James reflects this focus. Barrington James provides global recruitment services to the pharmaceutical, biotech and medical device industries. “Ultimately, companies want a supplier or partner that understands their needs and can fill the gap quickly,” Goldfarb said. “This becomes increasingly important as specialization becomes more common, non-competes face legal challenges, and employees are willing to leave sooner. Finding the right candidates from a skills and culture perspective is not only important for filling vacancies but for is critical and is critical to maintaining long-term satisfaction for both employers and employees.”
Dealmaking evolves with HR trends
As enterprise human resource needs change rapidly, the emergence of new industry service and solution providers will further increase potential acquisition targets. Every quarter there seems to be a new HR-related buzzword (“the great resignation,” “the quiet resignation”), urging employers to respond quickly to changing hiring trends and employee needs. As a result, new HR service providers will emerge to fill the demand gap, while existing HR service providers will look for ways to expand their product offerings and capture market share.
Today, strategic and private equity investors recognize that these factors can create an environment conducive to M&A. Capstone data also shows strong valuations in the sector, with purchase multiples averaging 9x EBITDA from 2020 to May 2023, better than multiples in the broader business services category.
While HR is fairly recession-proof, experts warn the industry is not immune to ongoing macroeconomic pressures. Bailey noted that HR management services companies face continued headwinds as layoffs increase and client demand for work orders declines (just this month, Paramount Global announced plans to lay off approximately 3% of its workforce, and Spotify laid off 17% of its workforce in December).
Even so, Houlihan Lokey expects more HR-related deals to flow through the investment bank this year, with interest growing from both private equity firms and corporate acquirers, Bailey said. “We closed a few deals at the end of 2023, but I think activity will increase significantly in the second half of 2024,” he said.
FFL’s Bunt also remains optimistic. “I don’t think there will be any changes in HR from a strategic perspective,” he noted. “It’s only going to become more important. You’re going to continue to see more services and more software, and a mix of services and software, because it ultimately comes down to the results you deliver.”
LLCP’s Rich responded: “HR technology in general tends to be recession-resistant and has compelling industry drivers.” He pointed to regulatory and litigation trends and growing demand for pay equity as tailwinds. “We continue to expect strong organic growth in this type of business and there will be many opportunities for us as investors to consolidate and create diversified service providers to help businesses navigate complex markets.”
Caroline Vallejo yes Mid-market growthdigital editor.
Middle Market Growth is developed by the Business Growth Association. To learn more about the organization and how to become a member, visit www.acg.org.
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