This was another challenging year for the global recruitment and staffing industry, driven by macroeconomic issues including inflation, political instability and world conflict.
This 2024 rec-view highlights some key themes in the industry including: the necessity for agencies to pivot and adapt to the sluggish market, interest in good quality assets by international buyers, continued appetite for robust sectors like education and the rise of EOTs.
How recruitment agencies have adapted to market dynamics
This year’s stagnant hiring market has been exacerbated by the pandemic employment boom. In response, businesses have reduced costs by removing poor-performing billers, non-revenue generating employees, office space and all non-essential subscriptions.
Additional successful initiatives to combat the downturn include the constant review of clients and their subsequent markets. There has been widespread expansion or redeployment of recruiters into buoyant markets such as data centres, renewables and cyber security.
Agencies have continued to invest in AI technology, with a real focus on the screening and sourcing of candidates. According to the latest REC survey, 48% of UK recruitment agencies have adopted a form of AI tech to strengthen service offering - a 16% increase from two years prior.
Following October’s Budget and the rise in National Insurance, vacancy numbers, which were already in decline, have fallen even further. This is going to have a major impact on hiring. The FT recently reported that UK hiring is 13% below pre-pandemic level and 23% lower than 2023.
Prevailing investment from international buyers
Despite these tough market conditions and sentiment towards the UK recruitment market, well established agencies, have still attracted interest from International buyers. For example, Onex Partners’ took a majority investment in Morson Group, Oxford Global Resources acquiredLinksap, and AYA acquired ID Medical.
Examples like these transactions show that even in a turbulent market, well performing UK HQ’d companies can still attract interest from global trade and financial buyers.
Promising sectors and subsequent deal volumes
The supply of personnel to the Education sector is one area that has remained remarkably robust.
Compared to other industries, transaction volumes have remained high because of the essential nature of education. Trade buyers and investment houses have interest in this sector because they generate solid cash flows and have great visibility on earnings.
Notable deals include: the PE investment from Quad Partners into The Edwin Group, which will potentially kick-start a roll-up play, Now Education’s management buy-out, Pricoa’s investment in TeacherActive, and Three Hills’ investment into Operam Education Group.
Considerations for education recruitment owners:
New UK Government legislation and the Employment Rights Bill.
Rise of tech-platforms such as Zen Educate and Humly Education.
The move from agency to an ‘Education Services Group’ resulting in closer relationships with clients. E.g offering services for retainment, tutoring and scheduling.
The removal of VAT on private school fees and the knock-on effects to state schools.
The rise of Employee Ownership Trusts (EOTs) in Recruitment
We have seen a surge of EOTs in recent years, and this trend certainly continued in the recruitment industry this year.
Introduced by the UK Government in 2014, they offer business owners the opportunity to sell their shares to an employee owned trust, transferring a controlling interest to employees as opposed to giving them direct share ownership.
EOTs can offer strong benefits to both owners and employees, like substantial tax advantages. For recruitment owners, EOTs allow them to avoid capital gains tax, potentially boosting their final payout.
It offers a quick and simple exit opportunity that is not reliant on a third party buyer. These owners can still maintain a minority stake in their business if they wish. For employees, access up to £3,600 in tax-free annual bonuses provides a welcome boost to earnings, and these bonuses can be deducted from the corporation tax of the company.
EOTs are most effective where they can be used to incentivise employee performance. Recruitment provides a particularly effective environment for EOTs because people are the key drivers of these businesses.
In every EOT example below, empowering employees as stakeholders is seen as a way to deliver long-term growth. EOTs reward employees for their continued contributions and commitment to an organisation.
Notable UK Recruitment EOTs 2024:
Athona, a UK healthcare recruitment firm, transferred a majority stake to an EOT as part of a broader strategy to enhance employee involvement and long-term growth.
Montresor Legal, a London-based legal recruitment firm, sold a 100% stake to an employee trust. They will distribute 50% of profits to employees from the outset, ensuring they benefit from Montresor's success immediately, rather than the selling shareholder has been fully compensated.
Goodson Thomas, a Wales-based executive search firm, transitioned to an EOT to safeguard their values and drive future performance.
La Fosse, an IT talent solutions firm in London, moved from 40% employee ownership to a majority stake.
Challenge-trg Group, a Wigan-based recruitment firm, is now majority owned by its 400 full-time employees. The founders, Tom and Richard Cropper, will remain as part of the newly-formed board.
Hoop Recruitment, a leading Welsh recruitment firm, sees their transition to an EOT as critical for their future success.
The SWS Group, including the temporary workforce recruiter The Best Connection Group, moved to an EOT this year.
Neil Yorke, Co-Founder and Director of the SWS Group, said:
“The Employee-Owned Trust model will instill a sense of ownership, responsibility, and pride among our employees, fostering enhanced performance, innovation, and collaboration. This, in turn, will directly benefit our clients and temporary workers. Through this structure, employees will have a direct voice in the company’s decision-making processes, ensuring that their perspectives are valued and respected.”
The Autumn Budget made no changes to EOTs, and they maintain their tax advantages. In addition, the announced increases to capital gains tax amplifies these tax benefits for business owners, making EOTs an effective approach to maximising an exit payout. However, it is uncertain whether EOTs will remain untouched in the future. The UK Government is committed to ensuring that increases to employee engagement outweigh the tax advantages to owners.
Summary
Many agencies have had a tough time this year - you only have to look at the results of the PLCs to see how the market has performed. However, one thing is for certain, things will rebound, they always do.
Business leaders are rightly concerned about the lack of growth, the rising costs of employing people and impending employee rights legislation changes.
We anticipate the temporary market to recover in 2025. However, with job postings significantly lower than a year ago, it's hard to see the permanent market bouncing back as quickly as hoped.
This industry is renowned for being dynamic, and agility remains essential in these turbulent times.
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