How tech advances and new legislation are shaping UK staffing and recruitment valuations and deals

Merger and acquisition (M&A) activity has been relatively depressed in most parts of the workforce solutions sector in the UK and beyond since the post-Covid recruitment bounceback.

Economic and geopolitical uncertainty has affected hirer confidence. Many hirers are also exploring the extent to which vacancies and entry-level jobs can be covered by the use of new technology including artificial intelligence (AI) rather than replacement hires. And, in some sub-sectors in the UK, such as healthcare, there are hirer-orchestrated moves to reduce the use of agency staff.

All of this has had a predictable impact on recruitment and staffing revenues which has, in turn, reduced the number of M&A deals and new investments in the sector.

But a number of tech, legal and tax developments may now change these conditions for many workforce solutions companies. And some trends in tech M&A may give helpful pointers to how staffing and recruitment company M&A deals will play out into 2027 and beyond.

More discerning M&A in staffing and recruitment

Some specialists in good niches have, of course, had decent results and some have found buyers, while others will find investors in the same way that successful businesses always have. And the trend of transitioning to an Employee Ownership Trust (EOT) has continued with 560 transitions to EOTs in 2024 alone (including several workforce solutions sector businesses we have advised).

However, the overall picture has been depressed, and over the next two or three years when crucial legislative, tax and tech changes will affect hiring activity and costs, most staffing and recruitment businesses could well find themselves not so much in a "lost period" for dealmaking but in a more discerning one.

There will be investors. And buyers will commit where they see credible growth, operational clarity and structural resilience. This has been the trend in tech sector M&A in the last two years and the same will likely apply to workforce solutions sector M&A. And there will be particular interest in workforce solutions businesses that can show growth potential through tech changes and a credible response to associated compliance challenges.

What factors will drive dealmaking?

How recruitment and staffing companies use AI, without falling foul of client and investor compliance concerns, will be a key factor in some deals: there is widespread awareness that AI non-compliance fines could amount to 4% to 7% of worldwide turnover. Some companies will be in a better position than others to get on top of these compliance challenges when using AI, and this will have an impact on M&A.

Other key factors that will drive deals include how relevant parts of the staffing industry cope without the cashflow funding and cost efficiencies currently provided by certain types of "umbrella" company following the umbrella tax legislation scheduled for April 2026.

Many staffing companies can be expected to play a major role in the likely increased interest in self-employment "statement of work" (SOW) models and finding other solutions to higher employment costs and increased IR35 enforcement activity. They are also likely to be key partners to hirers who have increasing concerns about the day one rights and guaranteed hours proposals in the Employment Rights Bill (ERB). Staffing and recruitment companies that find solutions in these areas will grow market share, and those companies that grow market share in a sustainable and compliant way will attract investors. And these umbrella, SOW and ERB changes will have an impact on M&A.

Good news for some, not so for others

All this will be good news for some and not such good news for others: tax and legislative changes making hiring more of a headache for major organisations, alongside the transformational impact of agentic AI, will leave major hirers needing "partners" who can help them hire staff with relatively low risk and long-term commitment, train new staff with relatively little long-term liability where the trainee does not work out, reskill and redeploy existing staff, and generally continue to provide flexible resource for projects.

More sophisticated workforce solutions companies will be well-placed to provide solutions to this and grow market share, but these charges may be very hard for many less sophisticated businesses to cope with, and may drive a lot of market consolidation. There are already signs of some distressed deals in the market and we expect this to increase.

Given current economic and geopolitical uncertainty, the M&A market will take some time to return to some of the best levels of the last 25 years: and, in a more selective market, the question will no longer be whether deals can be done but whether a business is the kind that investors or strategic buyers will back.

Tech M&A weathervane

Deal trends in tech M&A may also be a strong indicator of what is going to happen in recruitment and staffing deals. Many modern workforce solutions companies are now more akin to tech companies than more traditional staffing or recruitment companies. There are obvious attractions for those companies that can achieve this recategorisation, because, usually, higher earnings before interest, taxes, depreciation and amortisation, or EBITDA, multiples are paid for tech businesses than for traditional staffing and recruitment businesses. In addition, becoming categorised as a tech company probably opens a staffing or recruitment business up to a wider range of potential investors.

After the sharp contraction in the first half of 2020, tech and broader TMC M&A activity rebounded dramatically through 2021 and 2022, as it did for staffing and recruitment. By 2023 and into 2024, however, the tech and broader TMC market had steadied and the energy that fuelled earlier years began to temper. Risk sensitivity gradually rose, particularly around deal structuring and operational resilience. As 2024 drew to a close, there was cautious optimism that this stable environment would continue.

Many investors anticipated at the start of 2025 another year of steady, if selective, M&A and investment deals across TMC sectors. Instead, the first quarter of the year delivered a sharp recalibration. Just as in recruitment and staffing, early shocks – including tariff announcements, stock market volatility and renewed geopolitical tensions – caught many parties off guard, disrupting deal processes and forcing a reassessment of risk appetite. Although transactional momentum remained steady – particularly across pan-European deals and cross-border activity from US-based investors – enthusiasm was clearly tempering compared with the sharp rebound seen in 2021 and 2022.

Familiar story for staffing and recruitment M&A

All of this may seem a very familiar story to those involved in staffing and recruitment M&A. Increased caution in TMC deals meant that parties turned more and more to "completion account" structures to ascertain price, rather than "locked box" mechanisms. Valuation gaps between buyers and sellers became more visible, prompting the wider use of deferred consideration and earn-outs to bridge expectations, which is also occurring in traditional staffing and recruitment M&A.

As with traditional staffing and recruitment, distressed M&A activity also began to rise as businesses under pressure from macroeconomic headwinds sought strategic exits or cost rationalisation opportunities. Even as appetite for quality assets remained strong, buyers were becoming more selective, placing greater emphasis on verifiable fundamentals and structural resilience rather than speculative growth narratives.

Lessons from tech sector M&A

There are lessons for staffing and recruitment companies from the tech M&A deals that still did happen in 2024 and earlier this year. In 2024, tech businesses offering transparent operations, strong market positioning and scalable infrastructure progressed more smoothly through due diligence and sustained stronger buyer interest.

Tech businesses with harder-to-price risks (which some may also say is a very strong feature in much recruitment and staffing M&A at the moment), by contrast, faced longer processes, greater scrutiny and valuation pressure. The disruption that followed in early 2025 accelerated and sharpened this cautious dynamic. 

In the current selective market for tech M&A, digital maturity, operational control and scalable business models are no longer just competitive advantages. They are increasingly decisive factors in shaping buyer confidence, pricing outcomes and execution certainty, and this may offer valuable signals of how investment priorities are likely to evolve in 2026 and 2027 in relation to recruitment and staffing companies which have become tech driven.

M&A and AI-driven businesses

In tech and broader TMC M&A, proprietary datasets and technical AI capabilities are playing an increasingly decisive role in due diligence and valuation. This will also likely become the case in staffing and recruitment M&A. TMC investors are gravitating towards businesses in which data ownership, regulatory positioning or analytics engines create defensible "moats". This is particularly relevant to higher volume staffing and recruitment businesses – for TMC businesses data and AI are recognised not just as growth drivers but as valuation protectors – critical assets likely to command premium multiples even in volatile conditions.

In TMC, M&A buyers are now looking beyond whether AI is present in a business model; they are assessing how it is deployed and what risks or advantages it creates. Ownership of proprietary datasets, the ability to explain and validate model outputs and clear alignment with evolving regulatory standards are becoming major differentiators.

In a market where regulatory pressure and heightened investor expectations around AI are shaping deal decisions, businesses that demonstrate control, transparency and compliance are gaining a clear edge. And, given the types of data recruitment and staffing companies are dealing with, this element of control, transparency and compliance is, if anything, even more crucial for a successful recruitment and staffing deal.

The impact of agentic AI risk on M&A deals

For staffing and recruitment companies, one of the main value battlegrounds will be the specific impact on risk of the use of agentic AI in relation to decisions affecting people's careers and livelihoods.

There will be many questions to answer as agentic AI becomes an increasing business priority. How will non-compliance look to the regulator and investors given the potentially enormous size of fines based on a percentage of global revenues? How can staffing and recruitment companies that rely on third-party systems make sure these have been checked and have the required levels of transparency in terms of how decisions are made? How can staffing and recruitment companies comply if they buy in third-party systems and do not have the market power to require appropriate terms as to transparency and compliance from those third parties? Will they need to look at M&A to get big enough to benefit properly from the AI transformation of staffing and recruitment?

Companies that are able to reassure investors about this will command premiums and reassure end clients. For others, this may cause serious valuation and deal-risk issues in future M&A deals – investors worry when a tech-driven business does not have all necessary rights over and control of business-critical technology.

The future of platform deals

Will platform deals in staffing and recruitment continue? In TMC, content-driven platforms with strong digital distribution models continue to attract sustained buyer interest, particularly where monetisation is tied to user engagement or proprietary ecosystems. These businesses are attractive to investors for being able to engage users directly, reduce acquisition costs and generate recurring revenue with minimal marginal cost, aligning well with both strategic and financial investor priorities in volatile markets.

For several years, there has been a trend of platforms buying the assets of volume recruiters or traditional recruiters that are buying up tech-enabled platforms. (Osborne Clarke has advised on four such deals in the last four years, all of which have been confidential.)

The idea is that tech buyers can transform the profitability of traditional staffing businesses by buying in a distribution model and applying tech systems to existing client relationships, with the automation of many processes promising higher profits (assuming the client relationships can be retained) and leading to high valuations.

Traditional staffing companies have, in some cases, bought tech companies in order to fast forward their plans to automate processes. So, as with TMC platform deals, this trend is likely to continue particularly in volume recruitment sub-sectors.

Deals caused by 'umbrellageddon'?

Tech and use of AI will not be the only factor affecting deals in the next period. Will the excessive reliance of some on certain types of umbrella arrangement lead to UK M&A activity in some staffing sub-sectors?

Many UK staffing supply chains rely on the use of umbrella companies to a greater or lesser extent. They provide efficient payroll administration services and, in some cases, effectively provide cost-effective payroll funding (under which the umbrella pays the workers before being paid by the staffing company or end client) for hirers and staffing companies. In some sub-sectors – but by no means all – there are umbrella companies that also offer tax avoidance schemes that can drastically reduce the cost of agency workers, indirectly boosting the revenues and profits of staffing companies that use them, with generous umbrella referral fees also being a significant driver of staffing company profitability in some cases.

So, on 21 July this year, the UK government announced new tax legislation which may effectively force many hirers and staffing companies to move away from many of these types of umbrella arrangement.

As a result staffing supply chains that rely on certain types of umbrellas to provide cashflow funding may need to find other sources of funding, with more expensive invoice-discounting arrangements likely to be part of the solution for many. In addition, staffing companies (and end clients) that have hitherto benefited from implausibly cheap labour supplies from certain umbrellas in sub-sectors such as healthcare and logistics, may, if they do not want to be landed with large tax bills, find their staff costs going up significantly and they may no longer be competitive in their markets.

All of this points towards likely consolidation in some parts of the UK staffing sector, with larger staffing companies probably more able to cope with the impact of the umbrella tax legislation, possibly sweeping up small competitors often via distressed sales. There have been a number of distressed sales in the last few months in which these umbrella changes seem to have played a part. This trend looks set to continue as the umbrella tax legislation continues to impact staffing supply chains.

Will the Employment Rights Bill trigger consolidation?

With the impending guaranteed hours and full employment rights for agency workers under the ERB due in 2027, will smaller staffing companies need to join larger groups to offer credible solutions?

In 2027, agency workers (including umbrella workers and, potentially, personal service company contractors) are, based on the current draft ERB, likely to have full employment rights once their right to guaranteed hours takes effect (which may only require a few dozen hours on assignment with a particular end user). The House of Lords tried to get a lot of these measures watered down but the House of Commons voted down those attempted amendments this month.

Personnel changes in the UK cabinet reshuffle in September appear so far not to have changed the government's plans in this area. Unless the proposals are significantly toned down (in a way unions and the left wing of the Labour party will vigorously oppose), end users may start to get very worried about hiring generally and using agency workers.

Recruitment and staffing companies will, therefore, need to do a lot of work to set up commercial models that reduce risk including increasingly sophisticated approaches to use of self-employment models, consortium arrangements, outsourcing arrangements and hire-train-deploy models, and they will need a thorough understanding of the likely complex web of exemptions and anti-avoidance provisions that the final legislation will include.

To be clear, good workforce solutions companies will find ways of handling the new legislation and will continue to thrive, but there will be changes in how they operate – and those changes may not be available to less sophisticated companies. Again, this may lead to larger players growing market share including by sweeping up small competitors sometimes via distressed sales.

Osborne Clarke comment

Obviously, over a period of legislative changes, alongside rapid technological advances, into 2027 and beyond, some businesses will find investors in the same way that successful businesses always have, and EOTs seem likely to continue not least because of recent rises in Capital Gains Tax.

Otherwise, deals seem likely to come to those that get AI and other tech-driven aspects of their business right in a way that is seen by investors to be sustainable and compliant. Less sophisticated operators may struggle to automate processes in a way that investors and clients have confidence in. And market consolidation may also follow the 2026 umbrella legislation and 2027 ERB changes, given the likely benefits of being 'bigger' once those measures take effect.

This will lead to "good" deals for some but, given also the difficult economic backdrop, will undoubtedly also lead to some distressed sales. And in relation to this, buyers need to be on top of the "dos and don'ts" of buying assets off distressed sellers – even asset-only deals (as opposed to share sales) can lead to the new owner inheriting liabilities relating to certain types of worker or inheriting a business which is dependent on payment models which are no longer lawful (if ever they were).

Notoriously in recruitment and staffing, there is also always the risk, with distressed sales, of the assets walking out of the door the day before or after the deal is done: it is very hard to retain value in a staffing or recruitment business where the key sales consultants feel they can carve out a better future for themselves by jumping ship and taking client connection with them. And of course many large private and public sector hirers will reserve the right to terminate on any sudden and unexpected change of control of their staffing company supplier.

So, if you are looking at buying assets off sellers who may be having trading difficulties, move early and quickly: potential buyers and sellers need to start talking now and not wait until there is obvious writing on the wall and make sure key staff and key clients are tied in so far as possible. Buyers and investors need to make sure the business they are picking up has some profit which is sustainable. Where this cannot be guaranteed, deferred consideration on an earn-out basis will, so far as possible, be a feature of many of these deals.

This Insight draws on work by Greg Leyshon and Dr Björn Hürten of Osborne Clarke's corporate team on TMC M&A trends and how resilience, scalability and discipline will define success. To read the rest of their predictions, as well as articles on the impact on business of agentic AI, please have a look at our recent digital publication Wave: emerging legal trends in digitalisation's section on TMC M&A trends.