Will the Surging M&A Market for Executive Search Firms Continue?

September 20, 2023 – Over the past decade, a wave of consolidation activity across the executive search sector has profoundly changed the recruiting sector as we know it. And in the last five years, the role of executive search firms has fundamentally changed the look and feel of the sector even more. The industry has moved from simply identifying talent — which when you think about it is a single impact event — to managing a much more complex set of talent mandates around leadership development, assessment, coaching, interim solutions, culture fit, and people strategy. It is a powerful platform shift that will create a new paradigm for search firms in the coming decade and beyond.

Search firms along this journey have gone through quite a metamorphosis, bringing more tactical value to the table, and playing an increasingly larger role as strategic people partners to an ever-expanding client base. This shift in model is leading to one of the most extraordinary readjustments ever seen in this sector. And everyone, from SHREK firms to boutiques, is trying to figure out where they fit and how to capitalize on this once-in-a-lifetime change.

For search firms fortunate enough to have financial leverage — firms like Bespoke Partners, ZRG, and Kingsley Gate have attained their financial leverage by way of private equity investment — the opportunity to rapidly expand with sophisticated growth playbooks at hand is helping to fuel merger and acquisition activity like we have not seen in the sector before. High on the target list of these buyers, and many others like them, are specialist boutiques that bring a functional or industry specific niche, or an adjacency that might help to strengthen an existing platform or help launch a new one.

The latest examples stem from firms looking to expand their services within the interim and leadership advisory areas as well as organizations that want to expand into new regions.

Interim Services
Calls for interim leaders are gaining wider traction as demographics shift and talent needs change. The most sought after on-demand roles are increasingly found across the C-suite in every industry, making it one of the biggest growth areas of recruiting.

In August, ZRG acquired The Registry, a Peabody, MA-based interim executive solutions firm specializing in higher education. Since 1992, The Registry has helped colleges and universities across the U.S. and abroad during times of transition find experienced and diverse interim leaders. The firm has recorded 1,200 placements at over 500 institutions of all types. “This acquisition is a huge win for ZRG,” said Scott A. Scanlon, CEO of Hunt Scanlon Ventures, based in Greenwich, Conn., which helped facilitate the transaction and served as a strategic advisor to ZRG and The Registry. “It complements a fast-growing interim solutions platform that ZRG has been strategically building, but it also enhances one of ZRG’s key executive search verticals in higher education.” Mr. Scanlon said the acquisition is ZRG’s largest to date.

Korn Ferry, meanwhile, recently snapped up on-demand talent firms Infinity Consulting Solutions, Patina Solutions Group, and most recently, Salo LLC in Minneapolis, MN, a provider of finance, accounting, and HR interim talent. And earlier this year, rival Heidrick & Struggles closed on its acquisition of Atreus GmbH, a Munich, Germany-based firm that provides interim C-suite-level executives. Heidrick acquired BTG itself, a Los Angeles-based pioneer of the high-end independent talent marketplace.

Expanding to New Regions Via Acquisition
Acquisitions also often come about when search firms or global consortiums are looking to expand into new regions. Earlier this year, TRANSEARCH International expanded its reach in Asia with the acquisition of Asianet Consultants, an executive search firm in Hong Kong with offices in Shanghai and Guangzhou. Hunt Scanlon Ventures served as a strategic advisor to Asianet Consultants. “We are delighted to welcome Mark and the team to TRANSEARCH,” said Celeste Whatley, CEO of TRANSEARCH. “Not only do their values echo our own, but their in-depth understanding of the China and Hong Kong markets and steadfast commitment to exceptional client service further solidify our global approach.”

“By partnering with Asianet Consultants, TRANSEARCH will be able to offer its clients a wider range of services and resources and better serve their human capital needs in Asia and around the world,” the firm said. “TRANSEARCH International’s global footprint, worldwide search capabilities, and its Orxestra hiring methodology combined with Asianet Consultants’ local market knowledge and executive relationships will provide clients with powerful business growth solutions.”

Also, N2Growth, a Philadelphia-based management consulting and executive search firm, acquired Blacksmith, an executive search firm in Spain. The firm appointed Alberto Herrero as managing partner. Headquartered in Madrid, Mr. Herrero will be responsible for the firm’s operations in Spain and neighboring countries and will report directly to Kelli Vukelic, the firm’s chief executive officer. “This solidifies the firm’s commitment to serving our global clients and enabling greater access to worldwide premiere executive talent and leadership advisory services,” said N2Growth.

Firm Seeking Leadership Advisory Services
Firms have also sought to expand their leadership advisory services through acquisition. In August Russell Reynolds Associates (RRA) acquired Kilberry, a leadership advisory firm based in Toronto that serves investors, CEOs, and C-suite leaders across North America. Financial terms of the deal were not disclosed. “Bringing Kilberry into the fold will further bolster RRA’s top-shelf leadership advisory capabilities with some of the most talented consultants in the sector,” said Constantine Alexandrakis, CEO of Russell Reynolds. “Richard and the entire Kilberry team will be a huge asset to RRA thanks to the rigor of their methodologies, the depth of their relationships, and the quality of their insights. We can’t wait to start working with them and bringing their expertise to our clients.”

Kilberry was founded more than 10 years ago by CEO Richard Davis, a licensed industrial-organizational psychologist. The firm’s services include executive assessment, CEO succession, executive coaching, top team effectiveness, and private equity advisory. Mr. Davis joins RRA as a managing director. He and his team of 10 colleagues will join the firm’s Toronto office.

Earlier this year, Diversified Search Group acquired Yardstick Management, a black-owned management consulting firm. As a part of this acquisition, Yardstick Management Institute, a specialized leadership program designed for leaders and senior executives, also becomes part of Diversified Search Group. “With this acquisition, we are continuing to advance Diversified Search Group’s purpose and decades-long commitment to investing in our clients’ long-term success as they respond to the evolving environment with a focus on innovation, resiliency, and growth,” said Aileen K. Alexander, chief executive officer of Diversified Search Group. “Yardstick offers unmatched expertise and scalable, actionable solutions to clients who are looking to create more inclusive cultures and achieve higher levels of engagement and performance.”

Unlocking Value
“We see traction from three areas in M&A for search firms,” said Larry Hartmann, CEO of ZRG. “First, the new addition of PE-backed platform companies has created new buyers. Secondly, there has been steady activity from several of the legacy Big Five rounding out their offerings and regions. Lastly, M&A in the staffing/contingent sector has been very busy for years with many private equity-backed investments and those staffing firms seem to be always curious about moving upmarket and buying retained platforms, although the results there culturally have been mixed. We see the trends continuing although we have seen some slowdown in buyers’ enthusiasm and multiples given the pullback in the revenue base of many search firms in 2023.”

For years, owners of search firms had few options when they wanted to sell and often would try to find a successor to take over a business along with a management buyout, according to Mr. Hartmann. “This had mixed results, as the selling owner often drove significant revenues and leaving left a revenue gap and a new loan payment to buy out the business, which created less than ideal outcomes for the buyers,” he said. “Today, sellers can find a platform buyer and continue for several years during a transition and unlock value for a business that might have been hard to realize five to 10 years ago. That option is now on the table for many owners who have built great businesses but had no real exit strategy or plan. I think awareness of the alternative and the momentum of successful deals has created the driving force of deal flow.”

Mr. Hartmann said he has seen marginal successful boutiques unlock greater growth when merging with a partner who brings value to the table. “Our experience has been that boutiques can double or triple revenues with the right platform, value proposition and resources to grow, that when partnered with a parent company, can be unlocked,” he said. “We see instances where an owner has built a great $5 million a year business but struggles to scale it beyond a certain level and a PE-backed platform firm can help accelerate the growth and unlock the hidden potential within such a firm.”

“M&A activity has become a prominent trend in the executive search sector, primarily driven by two key factors,” said Nathaniel Schiffer, managing director of The Christopher Group. “Firstly, industry consolidation is a catalyst propelling M&A activity. Large executive search firms are strategically acquiring smaller counterparts to not only expand their market presence but also enhance their overall capabilities. This consolidation is a direct response to the necessity of remaining competitive in an increasingly competitive landscape. Larger firms can offer clients a broader spectrum of services, boast an extensive network of potential candidates, and often possess better access to global talent pools, aligning with the heightened client demand for comprehensive solutions.” “

Secondly, executive search firms are diversifying their services beyond the conventional domain of talent placement,” said Mr. Schiffer. The industry is witnessing a shift towards providing an array of services, such as leadership consulting, executive coaching, and talent management. To integrate these expanded service offerings efficiently, firms are turning to M&A as a strategic tool. By acquiring firms with specialized expertise in these areas, executive search firms can cater to their clients’ evolving needs effectively. This diversification is now a crucial aspect of staying competitive in the constantly evolving and fiercely competitive business environment.

What’s Driving Sellers?

M&A transactions offer a strategic exit strategy for many owners of executive search firms, says Mr. Schiffer. “After years of building successful businesses, these entrepreneurs often seek a transition out of daily operations toward retirement,” he said. “Selling their firm enables them to realize the value they’ve diligently cultivated while ensuring a smooth transition for clients and employees. Additionally, financial gains play a pivotal role in driving sellers towards M&A. Acquiring firms are frequently willing to pay a premium for well-established executive search businesses, resulting in substantial financial rewards for the owners. This financial incentive acts as a powerful motivator, enticing sellers to explore M&A opportunities.”

Mr. Schiffer also notes that private equity firms can play a pivotal role in aiding struggling executive search firms to bounce back. “A primary means by which they offer support is through a substantial injection of capital, which helps stabilize the operations of these firms, enabling them to pursue growth,” he said. “Additionally, private equity firms apply their operational know-how to improve the day-to-day functioning of search firms, streamlining processes, reducing expenses, and enhancing overall efficiency. Furthermore, they provide valuable guidance on the firm’s direction, drawing upon their experience to craft a clear growth strategy. This strategy may encompass exploring new markets, diversifying service offerings, or homing in on specific client segments.”

Suffice it to say, buyers are flocking to the executive search sector and that is good news for founders and their management teams seeking new opportunities and transitions for their businesses.

“As the market slumps, pricing for these firms drops,” said Juan Gaitan, CEO of TalentoHCM. “Those with cash have an opportunity to buy once higher priced assets at a discount. Owners start to feel weary as the economy fizzles and hiring is impacted as a result. This drives open minded-ness to a transaction of some sort. Those buying have a broader-lens to consolidate and attack functions, industries or particular geographies as they roll up.”

Mr. Gaitan said that owners are seeing a potential slow-down in business. “We see an aging owner-base who wants to protect their futures.” He outlines what else is driving sellers:

  • Weak succession or dependency on a few key people.
  • Multiples are sliding down – value diminishing.
  • Financing is much tighter.
  • Tired of the grind – you are flush when you are up but stressed when your down.
  • Relationships start to age or deteriorate on the client side.

So, how can a merger or acquisition help grow and support a struggling search firm? “Buying an asset and aligning it strategically with the right platform for growth,” Mr. Gaitan said. “Support can mean the transaction itself or an investment to bring in new leadership or invest in marketing or human resources — many times the story telling and the people side are not where they need to be to sustain the current book or drive growth. In addition, facilitating transactions to secure top value or preserve a legacy — every buyer has a price they are willing to pay — some more than others depending on what they think can do growth-wise.”

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