Should staffing company owners consider selling before the next recession?

By Neal England
Practice Leader — Human Capital Management

Several experts have chattered and opined over the possibility of a global recession on the horizon since the beginning of the year.

While it hasn’t happened in 2016, we know our economy is cyclical and impacted by global events. We also know that we are late into the recovery cycle — seven years, which could translate to being closer to a downturn than an upturn.

As we prepare for a potential slowdown coupled with the advent of a new president, it’s important that staffing company owners contemplating a sale plan ahead to time the market to receive the best possible valuation. It can take six to nine months or longer to properly prepare a company for a successful go-to-market.

Once a downturn begins, it becomes increasingly more difficult for sellers to realize yesterday’s robust valuations and safeguard exiting on their own accord. That means they could enter a downward trending economy with a less than optimal strategy. That’s not the ideal mix of events to produce an exciting valuation to fulfill the vision of an entrepreneur who has worked hard for years and even decades to build what is arguably their most important asset.

First let’s look at what’s happening in our economy and abroad.

U.S. sustains growth with some challenges

Stateside, our nation’s recovery from the Great Recession has been long and slow. That made it feel like the recession was still here for several years past the official “end.” Housing, for example, didn’t bottom out until 2012, as the foreclosure overhang depressed home prices.

Current U.S. economic challenges include an overvalued dollar that has grown the trade deficit and a presidential election adding uncertainty to the mix.

On the positive side, we’ve seen oil prices stabilize, wages grow and employers continue to hire. Manufacturers report that production and new orders rose in September.

The relatively positive economic news has pushed out the timeline for when economists predict the next recession. While economists in The Wall Street Journal’s latest monthly survey of economists put the odds of the next downturn happening within the next four years at nearly 60%, they only see a 20% chance of a recession within the next year. The odds rise as the window gets longer.

An economist recently quoted by CNBC said a recession in 2017 is unlikely while according to the Business Insider, Savita Subramanian, who heads U.S. Equity and Quantitative Strategy in Global Macro Research at Bank of America Merrill Lynch, said the U.S. may enter a recession in the second half of 2017, if data continues to weaken.

Abroad, we’ve seen some cracks in global economies that bear watching, including China and Europe.

Implications for staffing M&A

According to Staffing Industry Analysts (SIA), 72 domestic M&A staffing transactions were made through the third quarter. These numbers are tracking similar to last year, when SIA reported 92 transactions during 2015, with the greatest demand in healthcare and information technology. Demand this year appears to be high for professional staffing companies across a broad range of traditional and specialty staffing companies, including healthcare, finance and creative.

Staffing companies in the Federal Reserve’s most recent Beige Book reported mixed results, with several districts reporting modest growth and others reporting no change or mixed reports, according to staffing excerpts provided by Steinberg Employment Research. The Dallas firms, however, reported very strong increases in demand in nonfinancial services sectors, and Houston also reported a pickup in demand.

Preparing for the eventual downturn

Because we know a downturn is likely coming within the next four years, it’s a good idea for companies planning to sell to begin the preparation process now. This way, a seller enters the market on his or her terms, with a high degree of confidence and a cooperating economy to support a stronger potential valuation. If the market weakens, multiples will flatten or fall, causing an uphill climb for sellers as they try to grow their business to overcome softening valuations. If this happens, sellers may face a tough choice — either wait out a recession until the stronger valuations return, or settle for a lower-than-desired purchase price.

It’s a good time to be in staffing. Staffing and GDP are closely correlated and GDP is predicted to head up during the fourth quarter. After achieving financial success from building a business, knowing when to sell and adjusting to take advantage of current market conditions and opportunities are equally crucial. Bad timing in the exit can erase years of hard-earned growth valuation potential.  To earn the highest valuation, company owners will want to sell at the top of the market, if they can.