December 1, 2020 – Make no mistake, these have been sobering days for executive recruiting firms around the globe. Most of them, regardless of size, location, or specialization were caught flat-footed by one of the most sweeping economic crises to ever hit the sector. As a result, the nation’s top search consultants have been resetting expectations throughout 2020 – and, in the process, setting a new course as 2021 looms.
Professional services firms – and executive recruiting outfits in particular – have a long history of finding their way through tough times. The COVID-19 pandemic is no exception. Many search firms have used this time to dust off their own continuity and succession plans, or to reconsider that merger or acquisition which was something of a nuisance when times were flush. Others have taken a hard look at their capitalization strategies. This crisis, like no other, has driven many of the most well-known and respected brands in the recruiting business to reassess everything about their businesses, top to bottom.
So it is that Hunt Scanlon Media’s offering of a new set of solutions to assist recruiting and talent solutions providers seeking mergers, acquisitions, or funding connections comes at an especially auspicious time. Armed with a decades-long foundation of market intelligence, insight, and analysis – as well as a long history of fostering connections – Hunt Scanlon now sits at the nexus of buyer, seller, private equity firm or investment bank, and client.
Recently, the Greenwich, Conn-based firm’s founders, Scott A. Scanlon and Christopher W. Hunt, sat down to discuss their new venture. Following are excerpts from that interview.
Hunt Scanlon Media pivoted into M&A advisory work this year. What led to that shift?
Scanlon: Our business has been aligning search firms for a long time. But increasingly we noted the need to create a singular platform dedicated to helping search firms buy, sell, or fund their businesses. The first acquisition we were behind occurred close to three decades ago when Lester Korn asked us at the end of a meeting in New York to help him identify acquisition targets in the tech space. The next day Hunt Scanlon suggested a small boutique called Deane Howard & Simon which was based up here in Connecticut. Howard Deane, the firm’s founder, had a distinct focus on technology searches and Apple was a key client. A few weeks later Korn Ferry acquired the firm. So, we have done this work for years. Last year, we designated a small team around M&A as our workload intensified and that led to the formation of Hunt Scanlon Ventures. Then the pandemic struck in March and by June the advisory business took off. Our team has now migrated the platform to include professional services firms in adjunct talent solutions verticals in addition to executive search. We are fielding calls from across the country as well as the U.K., Europe, and Asia. We are creating a dynamic new marketplace for our client base and we are far and away the best placed advisory firm to do this work. And it dovetails nicely with our brand management and integrated solutions-based media business.
Hunt: As Scott mentioned we have been active in this area for any number of years. There were several acquisitions that we managed following the Deane, Howard & Simon transaction but the work was sporadic and on an ‘as requested’ basis. A more formal structure here was created this past spring. Part of our expansion into this advisory work reflects some significant shifts taking place in the search industry itself. This is no longer a pure-play recruitment environment for one thing – search firms, wisely, have expanded their service offerings and that has made them generally much more interesting to private equity firms that see bigger potential in broader platforms.
What is the primary catalyst behind the calls you are fielding?
Hunt: In a word, survival. The pandemic hit the professional services sector like a tsunami back in March. It rushed in fast, created untold havoc, and now it is expected to slowly retreat out to sea. In its wake, there has been plenty of devastation. Many search firms are down 30 percent on the year and of course the large, public recruiting firms have taken a beating. But no matter the size, expense structures were not prepared for any of these businesses to be cut in half in the short time frame it happened in – and that is, more or less, what’s happened. Employees are being shed and those remaining are working remotely. Long term office lease payments have been the biggest challenge – and all this unwinding cost money. Search firms have come to us looking for merger solutions, acquisition consulting, growth planning, and re-capitalization. There is a mad scramble underway to find new pathways forward to survive.
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How does Hunt Scanlon Ventures assist recruiting firms and talent solutions providers specifically?
Scanlon: Our role in the past was to make simple introductions. Now, the work is much more intensive, with most of our team focused on basic, but important deal due diligence. Acquirors are requesting much more information up front – well beyond the financial data requirements. Buyers want detailed analysis on the leadership teams they are potentially buying. They want historical data on consultant productivity. They want insight on compensation plans and culture fit. They want us to advise on additional growth and expansion opportunities. They want information on key rivals. In some cases, they have requested warm introductions to potential clients and talent leaders who could support the new verticals they are acquiring. But before that, they might need us to help build out those verticals. And, of course, many buyers and sellers are seeking an entrée to funding sources. Hunt Scanlon sits at the nexus of buyer, seller, private equity firm or investment bank, and client. We are busier than we have ever been in three decades.
Hunt: Apart from the obvious, which is making key introductions and helping to manage the process from inception to conclusion, our role is also to act as a professional sounding board. When firms either look to acquire a business, or to sell their own, they need strategic advice and counsel. Our position in this sector is unique as is the type of intelligence we bring to the discussion. We have the benefit of over 30 years of discussing strategy with hundreds of search firm leaders and it is this vast wealth of knowledge that we bring to bear on the conversations we have. These also include thinking through strategies that might include private equity participation, rollups, or a short-term capital raise.
What are some of the more typical deals Hunt Scanlon Ventures is currently engaged in?
Scanlon: So far, nothing has been typical. Executive search M&A activity is the most intense we have seen in over 30 years. The pandemic has paused the flow of search assignments by as much as 25-40 percent, possibly as much as 50 percent, and that has forced recruiters to take a hard look at their succession and continuity plans as well as their capital structures. We have more than a dozen engagements underway at various stages. To give you some context, since January we helped facilitate three search firm acquisitions in the $3 million to $5 million range; we are facilitating a capital raise of $50 million; we are involved in two significant global roll-ups in two different verticals; we assisted in the valuation of a $40 million talent solutions provider; we have a $10 million-plus search firm acquisition underway, a $4 million sale that’s pending, and several significant transactions poised to close in Q1 2021. It is quite a range of activity and we are barely keeping up with the inflow.
Hunt: As Scott has outlined it really runs the gamut. Each deal is unique. The transactions have ranged from $1.5 million on the low end to eight and nine figures at the high end. And we believe the more that private equity firms and investment banks become involved the larger the scale and the more diverse these transactions will become.
For acquirors, what types of targets look most attractive?
Hunt: Targets that are likely to be most attractive are the ones deemed leaders in their space. And if they have a diversified platform that goes beyond traditional recruiting, that will add interest and value. Any search firm that has carved out a technology niche – anything tied to AI, for example – will add multiples to their value, especially if the technology has proven to accelerate the search process while reaching wider pools of candidates. Speed and efficiency reign supreme.
Scanlon: We are looking for well-run businesses, first and foremost. Well-managed, with consistent books of business and long-standing clients. And if you have done well during this pandemic year, even better. We like to identify sellers who own their markets, where little competition exists as possible. We also look at specializations that can withstand shocks to the system – for example, search firms focused on private equity and venture capital are booming; life sciences is muscling through COVID-19 – and that sector needs talent around the world. Case in point: Look at the recent Klein Hersh deal. They are a life sciences firm that has been producing double digit growth for years, it’s client base has been exponentially expanding, its founders remain active, it has one office so its cost of doing business is very low, it has high consultant productivity numbers, and it has an inviting culture and loyal people. Is it any wonder a private equity firm took a significant stake in that business? My question is what took so long?
Will M&A activity peak soon in the talent space or will it continue into 2021 and beyond?
Hunt: Although the pandemic was certainly a catalyst for the uptick we have seen in M&A activity, we believe this is a new dawn for the recruiting sector – and we expect the activity to continue well beyond when the pandemic dissipates. Larger boutiques will prevail. Branding will matter much more. Hunt Scanlon will continue to build integrated brand management solutions for search firms.
Scanlon: We believe the pandemic will be seen as having been the strong stimulant that motivated search firms across the sector to start a dialogue. But as news of a vaccine breakthrough has spread, we see no slowdown in M&A activity among recruiting firms. We are already involved in multi-year deal flows through at least 2023 and we expect that activity to keep us very busy. Before the pandemic, middle bracket firms were already beginning to line up financing to expand their footprint and to compete more effectively for business via M&A activity. Size matters, heft is important, especially for search firms in just one or two highly focused markets. Outside of the SHREK firms, we see at least a dozen search firms emerging in the $100 million-plus revenue range. That is a big shift. And it is happening now. That growth will be partly organic-driven, partly driven through merger & acquisition activity – and partly driven through roll ups that will be coordinated from entities outside of the executive recruiting space. PE firms have been circling this business for a while and so have talent solutions providers seeking access to the C-suite. They both will leave an indelible mark on this sector in the coming years.
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; and Stephen Sawicki, Managing Editor – Hunt Scanlon Media