Recruiting and Staffing Company Valuations – December 2022
The labor market underwent exciting changes in 2022. On one side, the Great Resignation and War for Talent began in early 2021 and continued to plague specific industries through the end of the year (accounting and financial services being one of them). The labor shortage was a boon for staffing and recruiting firms. On the opposite end is the emergence of “quiet quitting” amid what many believe to be the beginning of an economic recession. Many larger firms began cutting workforce as they saw demand for their products and services weaken. In these clashing trends, valuations of publicly-traded recruiting and staffing companies generally declined from December 2021 to December 2022. This article will briefly examine how recent and expected financial performance has impacted valuations in the industry.
Important notes: This article examines potential driving factors for recruiting and staffing company valuations from a financial statement perspective. An actual business valuation requires an in-depth analysis of the business operations and associated risk factors that are only sometimes evident from the data on financial statements. Also, to keep the length manageable, this article will focus on what the author interpreted as the primary value drivers. It will only touch on some observations in the data. For a quick read on the basic concepts of risk and return and how they apply in the context of this article, please visit: What is Value? and Risk and Return in the Market Approach.
The industry constituents for this analysis are listed below. The effective date of this analysis is December 27, 2022.
Figure 1 summarizes three items for the publicly-traded recruiting and staffing companies:
- Market value of invested capital (“MVIC”) calculated as the sum of market capitalization and interest-bearing debt;
- Median revenues; and
- Median earnings before interest, taxes, depreciation, and amortization (“EBITDA”).
The latest fiscal year is abbreviated “LFY” (2021), while the latest 12-month period is abbreviated “LTM” (the latest available information as of December 27, 2022).
Figure 1 shows that the public recruiting and staffing firms generated impressive financial performance in 2021 and 2022. These improvements in financial performance make sense, given the substantial increase in demand for recruiting and staffing firms over the last few years. Despite solid revenue and EBITDA growth, the industry’s valuations declined from December 2021 to December 2022.
Digging deeper into the data, all but one company (Staffing 360 Solutions, Inc.) experienced a decline in MVIC between December 2021 and December 2022. Seven of the 13 industry constituents analyzed posted valuation decreases of approximately 20% or more.
Valuation Multiples
Figures 2 and 3 present the industry’s historical trend of revenue and EBITDA multiples.
Figures 2 and 3 show that revenue and EBITDA multiples declined through December 2022. The median revenue as of December 27, 2022 was 0.50x, while the median EBITDA multiple was 6.2x. We will examine what may be impacting the valuation multiples next.
The Growth Story
Growth often strongly influences how multiples differ among companies in an industry. A summary of the consensus forecasts for each group is presented in Figures 4 and 5 below (note that “NFY” means next fiscal year and NFY = calendar 2022 for most companies).
The orange line in Figures 4 and 5 represents data as of December 2021. NFY projections for the industry called for sharp increases in revenue and EBITDA. Actual results in 2022 fell in line with or exceeded these expectations, as seen in the blue line, and increased revenue and EBITDA from LFY-1 to LFY.
The public recruiting and staffing companies are expected to generate solid single-digit revenue growth in 2022 though that growth is lower than previously projected as of December 2021. In NFY+1 (2023), revenue and EBITDA are expected to decline. This reduction in growth expectations may be the culprit of the recent market value declines. We looked to identify a meaningful correlation between growth and observed revenue and EBITDA multiples. These observations are summarized in Figures 6 and 7.
In our December 2021 update, we could not identify a meaningful relationship between growth rates and valuation multiples. However, as of December 2022, it appears that growth expectations have a meaningful impact on the valuations of publicly traded staffing and recruiting firms.
See also: Need to prepare financial statement projections? See A Practical Guide to Financial Statement Forecasts for Business Valuations.
The Size Story
Larger companies are generally perceived to have lower levels of risk relative to smaller companies due to improved product or geographic diversification, deeper management teams, access to a variety of distribution channels, and better availability of capital, among other factors.
Figure 8 presents the public recruiting and staffing companies’ size (measured by market capitalization) and LTM revenue multiples.
We did not discern a meaningful relationship between valuation multiples and size.
The Profitability Story
Revenue multiples are typically heavily influenced by profitability. We usually observe higher revenue multiples in companies with higher levels of profitability. This relationship holds true for the recruiting and staffing industry, as shown in Figure 9 below.
Based on the data presented in Figure 9, EBITDA margins significantly impact the magnitude of revenue multiples in the recruiting and staffing industry.
The Leverage Story
Debt usage tends to increase financial risk to equity holders. Debt holders have a senior position within a company’s capital structure, and debt servicing occurs before any cash flow benefits (i.e., dividends) are issued to equity holders. Greater levels of perceived financial risk to equity holders tend to reduce valuation multiples. In Figure 10, we plot LTM EBITDA multiples against their associated debt-to-total capital ratios (where available).
The debt-to-total capital ratio measures the magnitude of a company’s use of debt. The higher the ratio, the greater the company’s use of debt. In Figure 10, we did not identify any meaningful relationship between valuation multiples and debt ratios.
Tying It All Together
The trends observed in this article suggest that valuations of publicly-traded recruiting and staffing companies are impacted by growth and profitability. A summary of these observations is presented below and compared to those made as of December 31, 2021.
Valuations in the recruiting and staffing industry rose precipitously in 2021 and have since corrected in December 2022. Deterioration in investor sentiment towards equity securities and an expected contraction in economic activity certainly have impacted valuations. However, based on our analysis, one of the primary drivers of the industry’s declining valuations is likely the broadly lower growth expectations among most industry players.
We hope this analysis is helpful to you. Any input, feedback, suggestions, and questions (including disagreements with my high-level analysis) are welcome! Thanks for reading.
