HR Entices Acquirers with Diverse, Fragmented Market

A tight labor market and dramatic shifts in employee behavior have shot human resources services and technology to the top of operators’ priority lists in recent years. In this post-Great Resignation environment, talent attraction and retention remain critical to sustaining growth across virtually all industries.

The HR solution landscape has responded accordingly, blossoming into a multifaceted, fragmented market that M&A experts say is primed for consolidation and expansion.

“The biggest driver of M&A interest and activity is the increasing realization that HR is strategic to the success of any organization,” says Jon Bunt, a partner at PE firm FFL Partners, which has so far completed six investments in the HR services and software space. “Attracting, retaining and upskilling talent is critical to driving the outcomes you want.”

The HR staffing and executive search market is expected to surpass a $1 trillion valuation by 2028, and that’s not taking into account the variety of ancillary services that HR innovators have embraced. For potential acquirers, private equity and strategics alike, the opportunities in HR investments can be found across a wide array of enterprise touchpoints, from DEI initiatives to payroll to talent-related legal disputes.

Building Out

According to Bunt, private equity sponsors have a particularly large opportunity with HR platforms to broaden their offerings in response to growing demand from customers for additional services and support, both organically and inorganically.

That diversification strategy was what attracted Levine Leichtman Capital Partners (LLCP) to Resolution Economics, a dispute, investigation and advisory firm specializing in labor and employment law. LLCP acquired the company in 2020, and has since broadened the platform’s reach within several pockets of HR services, in part via add-on acquisitions.

Matt Rich, a partner at LLCP, says ResEcon initially operated within the niche of providing statistical analysis in support of large, class action litigation cases across labor, discrimination, wage and hour complaints. But it was the company’s ancillary offering of pay equity analysis—a “burgeoning” revenue generator, he said—that caught LLCP’s attention. “They were providing a lower-ticket technical service that had a huge impact on these multimillion-dollar lawsuits [and on] the recruitment of talent,” Rich says, “which is such an important thing for every business in this labor-based market.”

Seeing the potential for ResEcon to use its legal and analytics expertise in other areas of human resources, LLCP supported the company’s growth into new segments of the market: ResEcon acquired Berkshire Associates, an outsourced Affirmative Action Plan consulting and software service provider, in 2022. And last year, ResEcon added the affirmative action plan, DEI, pay equity training services group of Biddle Consulting Group.

“We essentially started out in pure litigation,” says Ali Saad, ResEcon’s managing partner. “But increasingly, clients would ask us to give them a little advice on things that were not related to litigation—for example, studying the data on a proposed downsizing.” As the company expanded its offering, Saad said it continued to recognize “a unique opportunity in the space of labor and employment more broadly,” and LLCP’s support gave the company the capital it needed for that diversification.

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Today, ResEcon’s data analytics services have also expanded into pay equity analysis, as well as workforce demographic analysis to support affirmative action. It also established a Human Capital Strategies Group to support clients’ labor and employment compliance and workflow efficiency needs.

Having identified additional areas of human resources it would like to expand into, including employee training, ResEcon has several add-on acquisitions in the works, all of which Saad says he considers to be “adjacencies” to the company’s flagship employment-related legal consulting and data analytics offering.

Considering how multifaceted and saturated the HR services and technology space is, dealmakers say there is plenty of room to get creative in how to build out a platform and create value. “Given the fragmentation of the market, dealmakers can identify and deploy a rollup strategy that often realizes both revenue and cost opportunities for platform investments,” says Thomas Bailey, a managing director within the Business Services Group of Houlihan Lokey, which advised ResEcon on its sale to LLCP.

Motivating Factors

Strategics are playing a prominent role in HR-related M&A, too: Capstone Partners analysis released last May found private and public sponsors accounted for 55% of HR-related deal volume in 2022.

For strategic acquirers like Workplace Options, a provider of bespoke workforce wellbeing and mental health solutions, broadening service offerings is also an essential component to acquisition strategy.

Last November, Workplace Options acquired The Diversity Movement, a tech consulting firm specializing in DEI. The deal added valuable intellectual property to Workplace Options’ portfolio, and strengthened its position in an area of human resources witnessing spiking demand among employers: McKinsey forecasts company spend on DEI-related initiatives to reach $15.4 billion by 2026.

Workplace Options President and CEO Alan King says he is “incredibly bullish” on the company’s acquisition strategy moving forward, with investments motivated directly by client demand. “The questions they’re asking us, what they’re challenging us to do and deliver for them is really exciting and healthy,” he says. “It’s about growth, it’s about opportunity.”

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Going further, King also notes that deal sourcing is also guided by a variety of other factors, including geographic expansion and international compliance. Labor laws across state and national lines not only vary significantly, but are frequently changing. Strategic acquisitions support a company’s ability to step into a new market without having to navigate local compliance requirements from scratch. “If you see by our recent acquisitions, many of them have been companies in countries where we either have a growing presence or where we want to sustain an immediate presence,” says King, adding that, Workplace Options currently has service centers in 18 countries.

For other HR investors, a major opportunity exists in the growing pocket of solution providers offering industry-specific services—a demand likely to intensify among HR solution clients moving forward.

Neil Goldfarb, a partner at Orangewood Partners, says that the firm’s 2022 acquisition of Barrington James reflected this focus. Barrington James offers global recruitment services specific to the pharmaceutical, biotechnology and medical devices sectors. “Ultimately, companies want vendors or partners that understand their needs and can fill vacancies quickly,” says Goldfarb. “This is becoming ever more important as specialization becomes increasingly common, non-competes are facing legal challenges and employees are willing to leave roles quicker. Finding the right candidate from a skill and culture perspective is vital to not only filling a vacancy, but to keeping both the employer and employee fulfilled over the long-term.”

Dealmaking Shifts Alongside HR Trends

As businesses’ HR needs change rapidly, the emergence of new industry service and solution providers will further add to the pool of potential acquisition targets. Each quarter, it seems, a new HR-related catchphrase (“Great Resignation,” “quiet quitting”) emerges, urging employers to respond quickly to evolving hiring trends and employee demands. As a result, new HR service providers will surface to fill the demand gaps, while existing ones will be seeking out ways to broaden their offering and capture market share.

Strategics and PE sponsors today recognize these factors as creating an M&A-friendly environment. Capstone data signals strong valuations for the space as well, with purchase multiples from 2020 through May 2023 averaging 9x EBITDA—outperforming multiples seen in the broader business services category.

While human resources is fairly recession-resistant, experts warn that the industry isn’t immune to continued macroeconomic pressures. Bailey points to the ongoing headwinds HR management services firms face as clients lower demand for job orders amid rising layoffs (just this month, Paramount Global announced plans to cut about 3% of its workforce, while Spotify cut 17% of its workforce in December).

Even so, says Bailey, Houlihan Lokey expects more HR-related deals to come through the investment bank’s doors this year, with growing interest among both PE and corporate acquirers. “We closed several deals towards the end of 2023, but I think there will be substantially more activity in the second half of 2024,” he says.

FFL’s Bunt remains optimistic as well. “I don’t think HR is going anywhere from a strategic perspective,” he notes. “It’s only becoming more important. You’ll continue to see more services and more software, and also a blending of services and software as it is ultimately around the outcomes you’re delivering.”

“HR tech in general tends to be recession-resistant and enjoys compelling industry drivers,” echoes LLCP’s Rich, pointing to tailwinds including regulatory and litigation trends and rising demand for pay equity. “We continue to expect strong organic growth for these sorts of businesses-and a lot of opportunity for us as investors to consolidate and create diversified service providers that can help companies navigate a complex marketplace.”

Carolyn Vallejo is Middle Market Growth‘s Digital Editor.

Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.