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  • Writer's pictureCharlie Watson

What kills deals?

For most that have experienced any kind of M&A activity, they will have learned that during the process, for many reasons a transaction can fall short of completing. This article highlights some of the key reasons why it can happen with regards to Recruitment and Staffing agency deals.

By no means solely related to the recruitment sector, the valuation of an acquisition target is one of the most common reasons deals don’t materialise. A misalignment between a seller’s expectation and the buyer’s perception of value can be a difficult balancing act. The structure of the deal and how the subsequent valuation payments are due to be made form an integral part of the negotiations. Earn outs and deferred consideration methods are common levers utilised to bridge a valuation gap and still proceed with a deal.

Leading on from the above, agreeing a working capital level and debt items is something that can result in deals falling down. This is prominent when an agency is supplying a high volume of temporary staff and utilising an invoice discounting facility to fund their working capital cycle. It forms a key part of the M&A negotiation and if both parties don’t land on a mutual understanding early enough, it can become an issue which ultimately changes the fundamentals of the valuation and deal terms for the vendor.

As with all transactions, due diligence is an imperative part of the process. Many questions arise when a buyer is appraising a target company, if issues are not openly highlighted by the seller, the trust and faith starts to become eroded and can cause hesitation towards completing a deal under such circumstances. Should a buyer feel the seller wasn’t as forthright as they could have been with key details of their business activities, it often results in strict warranty clauses being included as a protection mechanism from the buyer in the legal documents. If these requests are too onerous it can obviously change the landscape of the sale for the seller and sometimes deals fail to complete because the perceived goalposts move too much from the original outline. A common recruitment example of issues which need resolving during DD are the use of mini umbrellas, IR35 and temporary workers holiday pay.

Acquisitions can be funded in various ways, when a third party is utilised for the lending requirements of a transaction, this can cause additional complexity during negotiation and diligence phases. When using an external finance provider, the buyer must satisfy the lenders that their intended investment is deliverable under their terms and risk parameters by which they operate. Through no fault of the seller, the terms of the agreement can change as more information comes to light and pressures on the lenders risk tolerance becomes tested. Quite often, this can increase the timeframes of a transaction which can become tedious for the vendor and occasionally deal fatigue can be a catalyst for transactions to be terminated.

Maintaining momentum during a deal, is one of most important things that increases the likelihood of completion. The phrase “time kills deals” is even more prominent in M&A and the need for deadlines to be met and consistent communication throughout the various checkpoints of a deal is essential. If a deal starts to drag on without clear reason, both buyer and seller may start to tire. This is particularly relevant now, as the average time a deal spends in exclusivity is increasing.

The final factor that’s caused deals to fall over in recent times, is the state of the economy, both regionally and globally. 2023 has seen considerable change in interest rates and global inflation, causing issues with financing and appetite for investments. This economic situation exacerbated by the geo-political instability seen through wars in Ukraine and Gaza has sent shockwaves across industries and caused appetite from trade and financial M&A buyers to subside, certainly until the global scene becomes more stable.

The above coupled with recruitment agencies performance being in a state of flux following the positive trading period in 2022 is making transacting even harder. 2024 is certainly going to be an interesting year for M&A with buyers and sellers having to adapt to a new world without low interest rates and an increased scepticism about deploying capital into acquisitions.



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