What could 2025 bring for M&A deals in the UK staffing sector?

Merger and acquisition (M&A) activity, including private equity investment, is more cyclical in the workforce solutions sector than most other sectors, with the market obviously not at the top of its cycle at the moment. However, there has been some recent M&A activity and a likelihood of more dealmaking through 2025 and beyond.

What are the main features of current M&A and investment deals and what can be expected to become more prominent in the new year and into 2026? Who will be the buyers and sellers?

EOTs and PE in 2024

Employee-ownership trusts (EOTs) have emerged alongside private equity-backed deals as standout features of the current deals landscape for staffing companies and the workforce solutions sector. Some founders of UK staffing companies are currently derisking by setting up EOTs to which they sell some or all of their shares. Osborne Clarke advised on several EOT deals in the run up to the Autumn Budget on 30 October, with the timing of those deals affected by an expectation of changes to the EOT legislation.

EOTs are the right solution for many founders but may not be right for all. The big question for those who go down this route is what the next deal will be – assuming that one is wanted. How will shareholders in an EOT-owned company get an exit? And what type of investors will be interested in a company owned by an EOT where so many people's interests have to be taken into account in major decision making?

The other usual "game in town" is private equity (PE). One or two larger PE-backed deals have successfully completed recently, but the number of completions has been low by historic standards. The more typical picture emerging is one of large PE-backed deals starting but not proceeding to completion, often because trading has fallen off from post-lockdown highs and owners have decided not to do lower-priced deals and – with the characteristic pragmatism of the sector – instead, to wait another year or two for the market to come back before returning to it to find an investor.

Will the UK Budget drive further deals?

The Autumn Budget brought increases in the rates of UK capital gains tax (CGT) that took effect immediately and business asset-disposal relief that will take effect on a "stepped" basis on 6 April 2025 and again on 6 April 2026. The increases were not as significant as had been feared and the pending change to business asset-disposal relief might not be enough to encourage an undecided founder to push a sale through before the end of the 2024-25 tax year.

Harder to be smaller?

However, the picture could look very different for founders when these tax changes are taken together with the fact that life is going to get harder for many companies: might owners (especially of smaller companies) fear for future profits in light of the increase in the rate of employers' National Insurance (NI) and the lowering of the threshold at which it becomes payable, the increase in the National Minimum Wage (NMW), and the proposals in the Employment Rights Bill and relating to umbrella companies? These changes might give rise to some deals in coming months.

The potential squeeze on smaller companies became particularly apparent in October when the government unveiled its Employment Rights Bill, which may have extensive implications for employers and staffing companies. The plans include statutory employment law entitlements for employees from "day one" of employment including the right not to be unfairly dismissed and the right of so-called "zero hours" workers (including agency workers) to guaranteed working hours and to have notice of shifts and shift changes.

These proposals together with the increases in employers' NI and the NMW will put up employment costs significantly for all employers, especially in relation to new recruits and people who might otherwise only be engaged for a short time.

These changes might be good news for businesses operating legitimate self-employment models and staffing companies that are credible partners for "try before you hire" arrangements, as there is likely to be increased interest in these models. However, smaller staffing companies and hirers will be hit disproportionately hard. This could lead to forced consolidation in the market as owners see the benefits of being part of a larger organisation.

Might some sellers try to beat the rush?

While there was some EOT and other dealmaking in the lead-up to the Autumn Budget, many owners have postponed deals to allow for an improvement in financial position. This may create a rush of deals at some stage in later 2025 and 2026.

The focus here will be for companies to make sure they are ready for sale a bit earlier than others in the sector – if they go to market at the same time as dozens of others, it stands to reason (and is a firm lesson from history in this sector) that it will be harder for them to find a buyer or investor.

Tech-driven deals

Generally, there is more appetite for investment deals in platforms than in traditional staffing businesses.

There has long been interest from (institutionally backed) gig platforms in buying traditional staffing companies at the "high volume" end of the market. This is driven by these platforms' wish to buy their ways into markets. They may figure that they can pay an attractive price because, once they buy the traditional staffing business, they will be able to reduce its cost base and transform profitability by deploying tech, including artificial intelligence (AI). There were deals of this nature in 2022 and 2023 that were generally unpublicised, with this sort of deal flow expected to return in 2025 following a slight lull in 2024.

It will be interesting to see the extent to which the high-volume traditional staffing businesses adopt more effective technology. If tech does start driving substantial cost savings and efficiencies, it may be hard for the smaller market participants, who may have less capacity to invest in tech, to survive in some high-volume recruitment areas. This could lead to a series of sales that are more or less forced.

An issue for some owners is the extent to which, in their sub-sector, the market will come back. Are some sub-sectors going to find that tech or other developments mean that their particular area will never see the highs of the past again? Clearly, many recruitment and staffing sub-sectors will come back – as they often do – and some tech bets will fail, especially in those many areas of recruitment where a human touch remains important. There is strong anecdotal evidence in some job groups that, still, nothing beats a human phone call.

But some areas of recruitment activity may be in the process of a tectonic movement away from traditional staffing and recruitment businesses to tech-driven operators and platforms. And it will be particularly interesting to see whether and when tech, including AI, will play an increasing role in breaking down many traditional areas of contingent work into a series of "defined deliverable" outputs, making cost effective self-employment models more feasible. If so, tech-driven hiring solutions may not just make inroads in higher-volume "blue collar" situations.

Compliance issues for deals

Some recent staffing-company deals have failed because of compliance problems in the target company – it seems that during the economic downturn many staffing companies have cut compliance and, in some cases, have felt forced by competitive pressures to use the lower end of the "umbrella" market and highly risky tax-avoidance arrangements to maximise profits.

This is a standard trend in the sector in any downturn and particularly dangerous at a time of an increase in HMRC enforcement activity and in staffing company liability for what goes on in supply chains. Those tempted down this laissez-faire path, taking gambles to boost short-term profits, often find that they have made themselves unsellable for a period and may not be "top of the pile" when there is a deal rush in the 2025-26 period.

It may well be likely that risks with self-employment models and (in due course) avoidance schemes relating to the Employment Rights Bill will be taken and that some of those gambles will work – but many will not.

Will there be further consolidation in the UK umbrella market? There is increasing awareness among staffing companies and end hirers of the perils of using certain types of umbrella. Current enforcement action against umbrellas and government plans for new legislation will make life harder for the lower end of the umbrella market. This may mean that better-established umbrellas may be able to hoover up smaller umbrella companies – and there have been a number of deals of this type. Alternatively, they may just grow market share as the tax authorities and new legislation put operators of the more aggressive tax-avoidance schemes out of business.

AI risks as well as solutions

Over the next three years, AI will have started to make big inroads into many aspects of the recruitment process. Already 59% of staffing companies say that they use it for candidate sourcing and 18% for candidate screening, according to global research firm Staffing Industry Analysts.

Meanwhile, the EU AI Act and other legal initiatives are likely to make unlawful and irresponsible use of AI a dangerous approach. The use of AI in the recruitment process is under a particular spotlight amid the risk of large penalties if privacy, anti-bias, intellectual property (IP) and transparency rules are broken.

Any company that uses AI to cut recruitment costs and improve efficiency and profitability will likely face serious due diligence when it decides to go to market, with buyers and investors likely to be concerned about the risk of class actions by aggrieved individuals and IP owners.

Those looking to transform profitability through the use of AI will need to make sure that increased profitability is seen as investable by buyers and investors whose legal teams will increasingly be all over this issue.

Of course, insurance may be available to cover some of the risk areas that might otherwise deter buyers and investors; but insurance is rarely a simple and guaranteed solution (and certainly will not be available at an affordable price where a risk has a high chance of crystallising). There are also signs of insurer appetite waning in recent months.

Osborne Clarke comment

The year ahead may well become a memorable year for M&A in the sector. Many longer-term trends may start driving market consolidation and M&A, but all involved will need to work out what their appetite for risk is in these deals.

Buyers and investors will likely have a number of red lines they will not cross when deciding whether to close a deal with a particular seller. And the big challenge for many prospective sellers will be how to get ahead of the pack without crossing those red lines.

Jack De Beetham-Walton, a trainee solicitor with Osborne Clarke, contributed to this Insight.