Solving The Value Equation

Workforce Compliance Industry M&A Deal Summary Update

August 2024 update on investments, M&A deals, and profit strategies to capitalize for screening and verifications workforce compliance industry. 

Placement funding and financing Investments Deals 

• More than $1 Trillion to be deployed by USA private credit and equity investors; tech innovation and platform consolidation to continue at a faster pace in Q3 and Q4 than previous 6 quarters 
• More than 20 USA acquisitions on average per year since 2020 for workforce compliance
• Category leaders command 2x the profitability of the average services provider
• Deal trending categories include: AI, Intelligent Automation, Embedded Experience In-the-Flow-of-Work, Post-hire Compliance, continuous Compliance, Professional Due Diligence, Verification including security Access Management Identity Management, Employment and Credentialing and Licensing Verification

Profit Considerations

• Valuations at all-time high for Workforce Compliance in 2021. First half of the 2024 year revealed declining valuations for service providers, with widening valuations for software splitting firms into either below historical average or above average premium valuation
• Increase in competition from non-traditional industry Vertical SaaS solutions as well as global leaders
• 30% YoY revenue growth for niche industry vertical specialists (versus single digit growth for generalists)
• Nearly 1 in 5 organizations conducted post-hire background checks in 2023

Industry Landscape Summary. While there are hundreds of local specialists, the market is dominated by a few large global leaders, with emerging modern leaders backed by investment sponsors. 

• Private Bootstrapped Industry Landscape. The market for USA private (excluding globals, enterprises, and investor backed) workforce compliance services is estimated at $1B in annual revenues based on market share analysis of the top 250 providers.  
• Investor Backed Industry Landscape. The USA workforce compliance for screening and verification covers 84 investor sponsored companies in various segments, with an average revenue size of $72M and total revenue size of $4,032M. The average age of companies is 24 years old, with an average employee growth rate of 0.08% (not growing via adding employees as focused on tech-enablement and automation) and a total employee count of 96,715. The estimated total funding amount is $820M since 2020 to investor backed workforce compliance.

 

• The global workforce compliance market beyond the USA screening & verifications market (including payroll, benefits, and other workforce compliance) is valued at more than $100 billion, with niche and enterprise solutions growing at double digits.

Investment Trends. Billions in capital deployed to Workforce Compliance Verifications and post-hire workforce technology investments.  Majority of the recent investments focused on either platforms, vertical niche industry specific SaaS, or enterprise solutions. More financing and capital options with an abundance of capital available from Private Credit and Private Equity. More deal types and options than ever before…

 

Deal Themes include industry consolidation into platforms (“Platformization”) and Verticalization (Vertical SaaS Industry Solutions).

Deal Summary Snapshot.

Corporate Compliance Industry M&A Deal Summary Update

August 2024 update on investments, M&A deals, and profit strategies to capitalize 

Placement funding and financing Investments Deals 

• More than $1 Trillion to be deployed by USA private credit and equity investors; tech innovation and platform consolidation to continue at a faster pace in Q3 and Q4 than previous 6 quarters (PitchBook) 
• More than 500 acquisitions since 2020 for compliance solutions 
• Category leaders command offer 2x the amount of products/solutions
• Deal trending categories include: AI, Intelligent Automation, Embedded Experience.  M&A deals to consolidate and integrate the backoffice across accounting, compliance, finance HR, payroll, and corporate governance and records.
  
  
  

Profit Considerations

• Valuations higher in 2021 as private equity investment sponsors entered the industry. The first half of the 2024 year revealed declining valuations for service providers, with widening valuations for software splitting firms into either below historical average or above average premium valuation
• Increase in competition from non-traditional industry Vertical SaaS solutions as well as global leaders.
• 30 to 40% revenue growth for niche industry vertical specialists (versus single digit growth for generalists)

 

Industry Landscape Summary.  While there are hundreds of local corporate record filing specialists, the market is dominated by a few large global leaders, with emerging modern leaders backed by private equity.  The market for USA private (excluding globals, enterprises, and investor backed) corporate compliance services is estimated at $1B in annual recurring revenues based on market share analysis of the top 125 providers as well as average spend per business. 

Investment Trends. Billions in capital deployed to Compliance investments.  Majority of the recent investments focused on either global platforms, vertical niche industry specific SaaS, or enterprise GRC EHS or RegTech solutions. Deal Themes include industry consolidation into platforms (“Platformization”) and Verticalization (Vertical SaaS Industry Solutions).

Strategy to Capitalize. More expansion deal types and options than ever before… And more financing and capital options with an abundance of capital available from Private Credit and Private Equity.

 

Deal Analysis. Significant product expansion across compliance and backoffice governance.  

WFM HR Tech Software Deal Summary midyear Update

Workforce Management Work and HR Tech & Payroll Services Industry Investment and M&A Deal Briefing August 2024 update on investments, M&A deals, and profit strategies to capitalize. 

Placement funding and financing Investments Deals 

• More than $1 Trillion to be deployed by USA private credit and equity investors; tech innovation and platform consolidation to continue at a faster pace in Q3 and Q4 than previous 6 quarters (PitchBook) 
• More than 1,000 acquisitions since 2020 for work tech  
• Category leaders command 2x pricing premium (and ½ the cost of customer acquisition)
• Deal trending categories include: AI, Intelligent Automation, Embedded Experience, Talent Intelligence, Upskilling, WFM

Deal Considerations

• Valuations at all-time high for Work Tech in 2021; first half of the year revealed declining valuations for service providers, with widening valuations for software splitting firms into either below historical average or above average premium valuation
• Increase in competition from non-traditional industry Vertical SaaS solutions as well as global leaders
• 30 to 40% revenue growth for niche industry vertical specialists (versus single digit growth for generalists)

 

WFM Industry Landscape Summary

More than 2,000 payroll service providers in North America across various models: payroll, HR, accounting, software, EORs, PEOs, BPOs, Benefits, etc.. Payroll add-on products and services are numerous across the  backoffice, tax, compliance, HR, and FinTech solutions. The majority of the market is narrowly segmented by size and/or vertical.  Valuations near an all-time high for premium providers. For solution providers, Digital Transformation (Platformization, Embedded, Verticalization, AI, Intelligent Automation), represents a BIG value opportunity, but also a rising cost and risk. Rising costs of compliance and the rapid pace of technology R&D investments, coupled with non traditional well-funded entrants into the market; and the payroll industry is at the early stages of a seismic market share re-alignment.

• Pre SaaS, the majority of the market share dominated by the top ten payroll providers. In the near-future, the top 10 payroll providers will not resemble the current logos. 
• In 2010 the public payroll providers controlled 80% of the market.  Today, they still control 80% of the market but the % per public firm has been diminished.  Market size and growth by segment available upon request. 

Investment Trend. Billions in capital deployed to WorkTech investments across global payroll and EOR software, earned wage access, expense management, vertical WFM SaaS. More financing and capital options with an abundance of capital available from Private Credit and Private Equity.

Deal Theme. Consolidation into platforms (“Platformization”) &/or Verticalization (Vertical SaaS WFM) driving M&A deals. Also, significant market share expansion and consolidation underway by industry leaders across Payroll, PEO, EOR, and Vertical SaaS models adding WFM capabilities such as labor analytics, advanced scheduling, AI workflow solutions, and niche solutions. 

 

Conference speaker session recap: Mastering the right KPIs to manage today’s firm and create great value for tomorrow’s transition

About. Rightworks hosted its annual Inspire Conference Thursday November 30^th 2023 at the Ritz-Carlton Sarasota with an audience of hundreds of CPA professional partners and owners from Rootworks members and RightNetworks clients from across the country.  The conference featured CPA industry thoughtleaders, speakers, vendors, and created a number of peer networking opportunities.

 

Mindful Metrics for the Right Exit
presented by Charles Bedard

 

First, the Good News.  Firms are worth a range of values and more options exist than ever before. A few factors/drivers determine if your business is worth a premium valuation if you exit to strategic buyer or investor.

But, the bad Ugly News.  Every owner exits their business, but not every exit is planned.  Because the majority of owners do not have a plan to transfer the business more than 80% are dissatisfied by the outcome.  And less than 1% of owners create wealth from their transfer of the business because they fail to put a plan in place.  

For more information on Mastering Mindful KPI Metris that Matter for a premium Transition, contact Charles Bedard at ERGO Comps here:
https://www.ergocomps.com/contact-ergo.html

To learn more about your firm’s valuation and how
it compares to your peers visit here:
https://www.rightworks.com/community-academy/

Buyside Deal Sourcing Origination Sources News

There are a number of sources for deal flow ranging from (1) building your own target list using a number of database sources, (2) building relationships with intermediaries financial sponsors, and private equity firms and/or (3) outsourcing to a vendor partner to build proprietary deal flow.

Pre 2020, building proprietary deal flow was primarily a labor intensive manual research process. However, with advanced search and marketplace technologies emerging there are now a number of firms leveraging these emerging technologies to search and source more efficiently and effectively. 

Since 2020, eight (8) firms have been funded with more than $121m deployed (more than $300m deployed to the top 25 B2B database providers since 2010). 

With the increase in capital “dry powder” readily available and the changing ownership demographics and psychographics, the long-term forecast is for an increase in deal volumes.    

Given the increasing competitive deal environment; it’s become even more important to  develop proprietary deal flow.  In 2023 the competition for the best deals will be more intense. As such, firms want first dibs on prospective sellers—often ahead of a formal auction or investment bank hiring will need to develop proprietary deal flow.

Capitalizing on 2023 deals means leveraging these advanced search technologies to identify these deal opportunities before others and partnering with seasoned industry executives to build a pipeline of proprietary deal opportunities.

As a number of entrepreneurs in 2023 face uncertainty and decide liquidity is a better option than doubling down on their existing business; buyers will have a number of available deal options that were not prevalent in recent years.

M&A CorpDev Buyside Deal Sourcing Origination Sources List

Logos Market Map of M&A Corporate Development Software List

Marketing during a downturn

The brutal fact is we’re still in a market downturn, and we may be for a while. Rather than fight it, embrace it. Great brands are built in down markets.

To help you find your way, The Starr Conspiracy is offering a fireside chat series for the month of December on how to win with CX during the downturn. We’ll be talking to Work Tech pros who made big moves during the last downturn to get their perspectives on what to do today.

FYI: The marketing in a downturn webinar will answer the following questions

• How to market HR Work Tech in 2023
• How to re-allocate marketing and sales spend in 2023

Hope you can join us!

Webinar registration at

https://secrets.thestarrconspiracy.com/marketing-during-a-downturn-fireside-chat-series?

Webinar replay podcast link at

https://tinyurl.com/WorkTechMarketinginadownturn

Sources & Uses Planning for 2023: Budget & Spend Management Considerations

For many institutional investors, the #1 priority for growth firms has shifted from revenue sales growth to capture market share at all costs to longer-term metrics such as R-Value and NRR.

• R-Value is the percentage of combined profitability and growth rate (practically calculated as YoY growth + adjusted EBITDA profitability).
• Gross Profit Net Revenue Retention (GPNRRR) is the percentage of ross profit recurring revenues retained from existing customers over a period of time (practically calculated as the gross profit from the recurring revenues for the existing customers after accounting for churn and revenue adjustments year-over-year).

As you plan for 2023 consider the following:

R-Value Impact on Valuation for B2B firms with North America HQs

Key takeaway: Determine your R-Value growth by each industry vertical, each product and by cueach stomer persona and plan S&M programs and spend accordingly.

Supporting resources about Value driven by planning around R-Value include:

1. OpenView – SaaS Benchmarks Report
2. SaaS Capital – 2022 SaaS Company Growth Rate Benchmarks
3. TSC – marketing in a downturn fireside chat series
4. Forbes – Don’t pull the plug, shifting marketing in an economic downturn

 

2022 OpenView SaaS Benchmarks Report

Valuation driven by R-Value

If you can achieve 120% NRR: Your revenue doubles in 5 years even with no new customers

SaaS Capital Benchmarks

Value based Revenue Multiple Range of Value for private B2B tech-enabled and SaaS

YE 2021 Deal Stats for B2B Technology Enabled Business Services

• 2021 was a record breaking deal year for both capital funding as well as the quantity of deals completed. Valuations increased for premium firms. 

 

The following deals stats update focuses on B2B technology-enabled services businesses with USA HQs.

Deal Stats

Small Business: While overall valuations appear to have increased, close inspection shows that “K shaped” multiples are the reality; i.e. BIG premium for top performers and discounts for average businesses. 2021 valuation multiple discounts for average performers as much as 30% and premium for top-quartile best-in-class performers range from 50% to greater. Owner to Owner Financing via SBA Financing for FY20 of 42,302 7(a) loans, and for FY2021 51,853 deals with an average of  less than <$250,000 per deal. 

Institutional Midmarket ($10m to $250m EV)

• The US PE middle market had its busiest year on record in 2021
• Increase in the quantity of institutional deals (i.e. EV>$10M) from an average of 15k per year last decade to more than 21k per year over the past 2 years is a 42% increase

Public Companies: There were 1035 IPOs on the US stock market in 2021, an all-time record. It was 120% higher than the 480 IPOs in 2020, which was also a record. 

 

Deal Trends

• Capitalize on the As-A-Service Economy. The rate of investment flowing into US tech-enabled service providers more than tripled over the previous decade yearly average. Premium multiple for tech-enabled providers that deliver recurring subscription solutions are often double traditional business services and professional services 
  
  
• Capitalize on the abundance of deals and low interest rates.
  • $1.7 trillion in capital deployed in 2021
  • Increase in the volume of M&A deal transactions across all sizes driven by aging boomers, abundance of capital, and changing service models
  • Proliferation of deal structures and types beyond venture and traditional buyouts driving increase in private equity financings

Strategies to Capitalize

Service leaders are leveraging one or more of the following trends; which on average have resulted in DOUBLE their profits and valuation.

• Industry consolidation
• Vertical or horizontal expansion
• Profit expansion through tech-enablement as-a-service model servitization
• Capitalize on low interest rates and abundance of capital to secure long-term deal financing
• Capitalize on the abundance of capital and the increase in private equity deals to recapitalize your business and setup a wealth transfer strategy to take advantage of “Multiple Bites of the Apple”
• Capitalize on the growth in multiple niche and industry verticals
• Take advantage of multiple “Routes to Market” beyond traditional referrals and partners

Wealth transfer starts with a plan to get to the next stairstep stage of your profitability as defined by the financial markets highlighted in the chart above.  The best strategic plan takes into consideration your industry Comps and how you compare to industry peers as well as these financial inflection points. 

Contact ERGO for a complimentary industry deal briefing on your CorpDev options which will include review of buyers, investors, multiples, and valuation drivers and terms, as well as discussion about your comps and how to capitalize upon the current industry deal trends.

 

Buyside Deal Sourcing Origination Sources News

Sourcing Industry Deal News since 2020

• 7 database/sourcing firms funded since 2020 with more than $96m in financing capital deployed (more than $300m deployed to the top 20 data sourcing firms since 2010).
• 21 – Apollo.io raises $32m Series B.
• 21 – Grata raises $6.3m seed from Accomplice and other investors.
• 21 – SourceScrub raises private equity from Francisco Partners.  
• 21 – HG Insights raises private equity round from Riverwood Capital.
• 21 – ZoomInfo [Discoverorg subsidiary] acquires Ringlead, Chorus.ai, and Insent (in 20 acquired Everstring and Cllickagy).
• 21 – Slintel (technographic intent powered data) acquired 6sense, B2B account engagement platform.
• 21 – DemandBase (ABM marketing platform) acquired InsideView (B2B database) and DemandMatrix, technographic data provider.
• 20 – CB Insights acquired Blockdata, market intelligence platform for blockchain and VentureSource, profiling and equity estimation software.

Deal sources for M&A transactions, deal intelligence, M&A deal price multiples, deal sourcing, deal research, and deal support services snapshot: 

ERGO corporate development buyside deal sourcing best practices:

1. Sourcing sources include professional networks, marketplaces, databases, and modern tools to build a complete understanding of the landscape, trends, signals, and options;
2. Proactive monitoring; and
3. Quarterly engagement communications based on specific investment, buyer deal strategies with targeted qualified private companies.

Let's Connect in 22!

Let’s connect in 2022 online virtually or via an industry conference event to discuss industry deal trends and corporate development deal opportunities.

18th annual ACG Texas Capital Connection Conference – Dallas Texas March 23-24 2022. Focused on driving midmarket growth representing 100 firms representing $100b in capital investment InterGrowth ACG Conference – April 25-27 2022 Las Vegas NV.  The premier deal making M&A conference.

AM&AA Winer Conference – February 2-4 2022 Charleston SC.  Join industry influencers and dealmakers.

Exit Planning Institute Summit – May 1-3 2022 Scottsdale AZ. The Exit Planning Summit is like the Super Bowl for the exit planning profession.

MA Source fall Conference – Nov 15-16 2022 San Diego CA. The best education for midmarket M&A advisors.

Industry Conferences

June 2020 New Orleans – SHRM Annual Conference & Expo
The largest HR professional organization in the world with 300,000 members in over 165 countries
#SHRM

September 2022 Las Vegas  - The HR Technology Conference
The world’s largest HR tech marketplace
#HRTech

September 2022 Palm Dessert CA – NAPEO
Annual PEO Conference
NAPEO.org

September 2022 Aurora, CO – PBSA Annual Conference
Professional background screening Association
@PBSA

October Honolulu, HI - NPRRA
National Public Records Research Association
NPRRA.org

December 2022 Austin, TX - Digital CPA Conference
Digital CPA is for practitioners focused on technology and its impact on the accounting landscape.
#DCPA22