Recruiting and Staffing Company Valuations – June 2023

The recruiting industry has seen wild swings in hiring trends over the last few years. The Great Resignation in 2021 was followed by the War for Talent, and then the tech layoffs of 2022 and 2023. Current concerns seem to revolve around slowing economic growth and general market uncertainties.

Looking forward, some have identified a new trend: “labor hoarding,” which has seen companies retaining as much of their existing workforce as possible despite economic headwinds. This may create some overcapacity within companies that reduces demand for the recruiting industry in the near term.

As will be seen in this analysis, the values of publicly traded recruiting and staffing companies have generally followed these trends through June 2023. This article will briefly examine how recent and expected financial performance have 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 not always 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 not touch on every observation 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 June 30, 2023.

Industry constituents analyzed in this article.

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” (2022), while the latest 12-month period is abbreviated “LTM” (the latest available information as of June 30, 2023).

Fig. 1 - Trend of historical enterprise values, revenue, and EBITDA

Figure 1 shows us that the public recruiting and staffing firms generated impressive financial performance in 2021 and 2022. Valuations for these firms increased significantly in 2021 (LFY-1) but declined in 2022.

In previous analyses around this industry, we noted that the growth expectations associated with the public recruiting companies moderated in 2022. This likely resulted in a pullback in valuations. Through June 2023, valuations generally held as financial performance stagnated.

Digging deeper into the data, nine of the 13 industry constituents experienced a decline in MVIC between December 2022 and June 2023. Six of these companies posted decreases of 10% or less. Only one company saw a decline in MVIC of more than 20% (BGSF, Inc.).

Valuation Multiples

Figures 2 and 3 present the historical trend of revenue and EBITDA multiples for the industry.

Fig. 2 – Trend of historical median revenue multiples
Fig. 3 – Trend of historical median EBITDA multiples

In Figures 2 and 3, we see that revenue and EBITDA multiples declined in December 2022 but stabilized through June 2023. The median revenue as of June 30, 2023 was slightly greater than 0.50x, while the median EBITDA multiple was around 8.0x. We will examine what may be impacting the valuation multiples next.

The Growth Story

Growth often has a strong influence on 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 2023 for most companies).

Fig. 4 – Comparison of historical and projected revenue growth: prior year vs. current year
Fig. 5 - Comparison of historical and projected EBITDA growth: prior year vs. current year

In Figures 4 and 5, the orange line represents data as of June 2022. NFY projections for the industry at the time called for sharp increases in revenue and EBITDA. Actual revenue growth in 2022 fell in line with expectations, while EBITDA growth fell short as is seen in the blue line and increase in revenue and EBITDA from LFY-1 to LFY.

Going forward, the public recruiting and staffing companies are expected to see a decline in revenue and EBITDA for 2023, before increasing again in 2024. This seems to make sense given the current economic uncertainties.

We looked to identify a meaningful correlation between growth and observed revenue and EBITDA multiples. These observations are summarized in Figures 6 and 7.

Fig. 6 – Chart plotting revenue multiples against projected revenue growth rates
Fig. 7 – Chart plotting EBITDA multiples against projected EBITDA growth rates

In our December 2022 update, growth appeared to have a meaningful impact on valuations of publicly traded staffing and recruiting firms. As of June 2023, we did not identify the same trends.

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.

Fig. 8 – Chart plotting revenue multiples against market capitalization

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 appears to hold true for the recruiting and staffing industry, as shown in Figure 9 below.

Fig. 9 – Chart plotting revenue multiples against EBITDA margins

Based on the data presented in Figure 9, EBITDA margins appear to have some impact on 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) 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).

Fig. 10 – Chart plotting revenue multiples against debt to total capital ratios

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, there appeared to be a correlation between debt usage and valuation multiples. Those companies with the lowest debt ratios tended to trade at higher valuation multiples.

Tying It All Together

The trends observed in this article suggest that valuations of publicly-traded recruiting and staffing companies appear to be impacted by profitability and leverage. A summary of these observations is presented below and compared to those made as of June 30, 2022.

Summary of how the various factors analyzed in this article were observed to impact valuation multiples

Interestingly, the lack of correlation between growth and valuation multiples may indicate a stronger focus on risk-related factors (such as leverage). This would make sense, given the high degree of economic uncertainty as of June 2023.

We hope you found this analysis helpful. Any input, feedback, suggestions, and questions (including disagreements with my high-level analysis) are welcome! Thanks for reading.