The term ‘market cycles’ typically refers to fluctuations in the stock market that occur over time, sometimes due to outside economic forces; but in reality can refer to anything that goes a cyclical set of stages.
They can happen at any time and on any scale, with periods of growth or decline lasting anywhere from several months to several years, and generally follow an orderly progression of four stages: Expansion, Peak, Contraction and Trough. When planning to complete a deal and exit a recruitment business, understanding these market cycles and being able to plan around them can not only influence the ability to complete a deal, but also the price/multiple that can be commanded.
The recruitment sector is a highly cyclical industry and is heavily influenced by the ups and downs of market cycles. When market conditions are favourable, there is typically an increase in corporate activity such as mergers, acquisitions and new business ventures, which can lead to a greater demand for firms providing recruitment services (and there attractiveness to investors too). Conversely, when markets become more challenging, corporations may become risk-averse and seek to cut costs, resulting in fewer opportunities for those providing recruitment services.
Take a look at the different stages of market cycles to understand what this might mean for the price multiple you can command, or the appetite of the market to complete a deal.
The different stages of market cycles
The cycle of expansion and growth is a process that typically involves a period of rapid expansion (of businesses, industries and the broader market/economy).
During the period of expansion, businesses may start new projects, expand their operations and increase their production, which often leads to an increase in jobs, incomes and spending power.
This market cycle stage is the one that we want to target for completing deals, as it’s where the market sentiment is more positive, money is more readily available, and the appetite to complete deals is often highest.
The plateau stage of the market cycle is defined by a period of relative stability, where there are no significant price fluctuations and demand remains steady.
During this period, there is often consistent demand by investors for business deals to be completed, but there is often a lack of urgency in the market. The appetite for completing deals tapers off towards the end of this market cycle stage, as investors anticipate the coming contraction in the market.
During the contraction market cycle stage, there’s typically weakness in the broader macro economic environment that influences the availability of investment funds, the multiples being commanded, and the volume of deals being completed.
During this market cycle stage, few deals are typically completed and it’s a period where many recruitment agencies typically look more inwardly, in terms of controlling overheads, improving efficiencies, and retaining clients.
The recovery stage of the market cycle is a very important period in which the economy starts to pick up (typically after a downturn or recession). During this time, businesses begin to restructure, spending by consumers increases, and the appetite to complete business deals improves.
The period is typically characterised by an increase in job creation as well as a decrease in business bankruptcies, and this stage can last anywhere from 18 months up to several years.
When markets are on the rise, there is often an optimistic sentiment that encourages companies to pursue investment, deals, or merger and acquisition activity. Companies have access to larger amounts of capital which allows them to expand their operations by merging with or acquiring another business.
During these times, existing companies may seek out similar businesses in order to gain a larger market share or gain access to new technologies or products that would benefit their own business practices. This could be beneficial in terms of achieving economies of scale, gaining access to new customer bases and increasing profitability.
On the other hand, when markets are declining, M&A activity typically shifts towards consolidation. Companies under financial stress may be more likely to merge with larger firms with more stable finances in order to cut costs and retain valuable assets necessary for long-term survival. Companies may also seek out distressed firms that can provide them with needed products or services at discounted rates due to their weakened position in the market.
How we plan around market cycles at Bluestones
As we grow our divisional businesses and balanced portfolio, we’re mindful of the broader market cycles and macro-environment in which we’re trading as it directly influences our ability to raise capital, plan investments, and scope out exit strategies.
For investment businesses, it’s just another thing that the Group looks after so you can focus on your core recruitment business without issues such as this distracting you from your day to day growth activities.
To find out more, or to have a confidential discussion with us about you investment needs, please contact us today.
