By Brad Buttermore
Managing Partner and Chief Financial Officer
The past year was hot for merger and acquisition deal making across many industries, including the professional employer organizations (PEOs).
The fundamentals that make for a strong M&A climate remain plentiful in 2019. These fundamentals include a growing economy, low unemployment, rising wages, low interest rates, abundant capital and motivated buyers. Potential geo-political and economic headwinds could add risk to the mix but continued consolidation in the PEO industry is expected.
Many large PEO operators have been on an acquisition spree over the past few years and the pool of attractive targets for these larger firms is smaller. However, regional PEOs still have the capital and the appetite for acquisitions to augment their organic growth.
Last year saw a number of deals in the lower middle-market, including Houston-based G&A Partners’ acquisition of Dallas-based Zogg Benefits, which marked G&A’s fourth acquisition within 12 months.
Regional operator Resourcing Edge of Rockwall, Texas, bulked up in 2018 by acquiring the assets of Courtland Resources and Best Staffing to make its foray into the Beaumont-Port Arthur area of Southeast Texas. In 2017, Resourcing Edge bought Columbus, Ohio-based PEO Sequent. (Capital Alliance represented Sequent’s shareholders in the sale).
Opportunities in secondary markets
A study by economists Laurie Bassi and Dan McMurrer shows that businesses that use PEOs grow 7 to 9 percent faster, have 10 to 14 percent lower employee turnover, and are 50 percent less likely to go out of business than companies that don’t, according to the National Association of Professional Employer Organizations (NAPEO). This value proposition remains strong and has attracted new entrants into the PEO sector. PEO operators of all sizes will be looking at how last year’s industry consolidation affected them while strategizing on the best path forward.
For PEOs that are regional operators or even smaller, we see a fertile M&A marketplace in secondary and tertiary metro areas. Operators will augment organic growth through active M&A programs and will use such acquisitions to help scale operations, to expand their geographical footprint and to acquire hard-to-find PEO staffs and management teams.
Regional players will have the opportunity to become bigger fish in these smaller secondary or tertiary markets and to make their organizations more competitive. Some will acquire to make themselves more attractive to larger, national companies who may eventually come calling.
Why small and mid-sized PEOs should consider a strategic path forward
Smaller operators may find it difficult to compete against the majors in the primary metros. Majors have the size, scale and capital to offer substantive service offerings and have deployed expansive sales forces.
These smaller operators will need to forge a path forward. A professional PEO/M&A advisor can help PEOs look objectively at their strengths and weaknesses to fashion an appropriate strategy.
That’s not to say every smaller PEO needs to be acquired. Certain clients prefer the high-touch treatment they can get from a local PEO, but those operators want to be sure the service delivery model they offer is sustainable.
In this competitive world for PEOs, it will be important for all operators to know what they are good at, where they need to improve and what path forward holds the most promise. See my article in NAPEO’s PEO Insider magazine for more detail on the consolidation trend and what operators can do with their businesses to stay competitive and relevant.
Capital Alliance Corporation is a Dallas-based investment banking firm with a four-decade history and deep operational and M&A experience across many sectors, including human resource management. Capital Alliance is affiliated with Oaklins International, the world’s most experienced mid-market M&A advisor, with 800 professionals globally and dedicated industry teams in 40 countries worldwide. We have closed over 1,500 transactions in the past five years.
Industry: Human Resources
#staffing #NAPEO #PEO #MandA #HRO #mergers