FROM FRENZY TO FOCUS: WHAT PEO OWNERS SHOULD KNOW ABOUT THE M&A MARKET

From 2021 to 2024, PEO M&A was defined by record deal volume, premium multiples, and aggressive roll-up strategies as buyers pursued scale through acquisition.

John W. Allen of G&A Partners sums it up well: “Several more private equity firms have made investments in the PEO space. A major part of their investment thesis is the opportunity to grow through acquisition. The competition is driving up valuations.”

In 2025, acquirers continue to pursue deals, but the tone has shifted from frenzy to focus. The M&A surge left in its wake inflated valuations, limited deal inventory, and the risks accompanied by rapid expansion. As a result, investors are moving from speed to precision. Proven performance, operational excellence, and disciplined risk management have become defining priorities for leading PEO platforms.

APPROACHING THE TURNING POINT: WHERE WE ARE IN THE M&A CYCLE

After three years of strong deal activity, the PEO consolidation wave is approaching a critical juncture, marking a key shift for founders preparing for a strategic exit. The largest platforms have completed their headline transactions and are entering a period of integration. Post-merger fatigue, back-office centralization, and increasing costs are now putting strain on operating margins across the sector.

For the first time in the industry, the mega-rollup model is hitting a ceiling. The largest PEOs are at risk of becoming too big to exit, with their scale outpacing PE’s ability to monetize their investment. As a result, sponsors are pivoting from growth-by-acquisition to sales-led expansion.

The next stage of the M&A cycle will reward operators who prioritize long-term value creation through recurring earnings and expansion into adjacent service areas to create new revenue streams.

WHY BUYERS ARE MORE SELECTIVE THAN EVER

Acquirers aren’t slowing down, but they are becoming more discerning. Despite ample dry powder, the pool of highly qualified sellers has narrowed.

Macroeconomic headwinds, rising healthcare costs, and stricter deal criteria are forcing investors to trade deal velocity for deal quality. With the spree slowing, acquisitive PEOs must now defend EBITDA and scrutinize candidates with greater precision.

Ted Crawford of OneDigital PEO frames it well: “There are over four hundred PEOs in the U.S., but only three or four dozen truly fit what platform acquirers need. The roll-up runway is nearly gone, and PE-backed operators want long-term partners that can scale organically.”

NAPEO’s Financial Ratio & Operating Statistics (FROS) Report reflects this shift. WSE growth slowed from 10% in 2022 to 5% in 2024, with the largest PEOs growing by only 3%. Gross Profit is up in 2025, but Operating Profit is down, revealing thinning margins even though PEO revenue increase by an average of 8.5% in 2024. The latest data reveals a simple fact: revenue growth no longer compensates for weakening profit margins. Healthcare and benefits remain under the microscope as premium inflation and rising medical loss ratios directly threaten future earnings.

Although prices are historically high, this cannot be sustained without squeezing profit margins. Within the next 24 to 36 months, deal economics are likely to normalize as multiples soften and investors recalibrate their expectations. Only PEOs who demonstrate durable EBITDA and a clean risk profile will secure top-tier valuations.

WHAT BUYERS ACTUALLY WANT NOW

In today’s market, financial readiness and net-new revenue are currency. These two factors reduce risk and indicate scalability. Buyers today prioritize targets that signal cultural fit, integration readiness, and sales-driven upside potential. The most attractive sellers can show sustained expansion without leaning on projections or acquisitions. As Ted Crawford points out, “The targets that stand out today are the ones with a strong sales team, clean data, stable benefits plans, and consistent EBITDA growth. You can’t justify a high multiple without those fundamentals.”

Differentiation is becoming critical for small and mid-sized PEOs. Niche vertical expertise or strong client retention can make a regional PEO attractive even without size. John W. Allen reinforces this point: “We look for PEOs that are run by good people who share our values and objectives. We look for companies that have built a solid sales engine and are consistently growing year over year. We also look for companies who provide outstanding service as measured by client retention.”

THE SECRET SAUCE OF A SUCCESSFUL DEAL: CULTURAL ALIGNMENT

Financial performance influences purchase price, but cultural compatibility determines whether a deal succeeds. In today’s environment, savvy buyers scrutinize if a seller’s leadership style, core values, and service philosophy will support a long-term partnership.

As John W. Allen puts it: “Put People First. If the seller values his or her employees and clients and wants to make sure they are treated well as part of the acquisition, then we have a good indication that there will be a cultural fit. If all the seller cares about is the purchase price, then we are not aligned and generally walk away.”

Misalignment between the buyer and seller can “spell disaster” for a deal post-transaction, leading to talent flight and client churn. For PEOs contemplating an exit, these questions can help assess strategic and cultural alignment.

1. Is the buyer’s culture a good fit for my people and my clients?

2. Does their leadership style and client service model complement ours?

3. What legacy do I want to protect, and what role do I want after close?

Chemistry matters. Shared philosophy is a reliable value multiplier in today’s market.

HOW FOUNDERS SHOULD PREPARE: THE 24-MONTH PLAYBOOK

Founders planning a sale in the next two years should start now. The most successful results go to the sellers who understand their story and invest in readiness long before they enter the market. Engage a qualified M&A advisor early in the process. Thorough internal diligence helps PEOs to identify red flags, strengthen their position, and avoid costly mistakes.

Consider this 24-Month Playbook:

1. Audit financials, licensing, and reporting to present precise, up-to-date EBITDA and clean adjustments.

2. Demonstrate earned revenue by documenting past performance and reinforcing your sales team to highlight growth that has been built, not bought.

3. Fortify client relationships. Solid retention metrics strengthen your bargaining power.

4. Invest in compliance and risk management, especially Healthcare and Workers’ Compensation plan performance.

5. Prepare leadership and key team members. Buyers evaluate the full bench, not just executives.

6. Understand deal structure, particularly rollover equity.

Ted Crawford makes this clear: “High multiples can be deceiving. A buyer may offer 70% in cash but tie the remaining 30% to rollover equity based on future EBITDA. If growth stalls, the seller never sees that money. It’s a magic trick that protects the buyer and inflates the purchase price.”

7. Retain the three “A’s”: an expert Advisor, Attorney, and Accountant who can protect your enterprise value, ensuring proper tax treatment and legal structure.

Preparation creates leverage. Expert guidance lights the path and protects value.

CLOSING THOUGHTS: A MARKET EVOLVING, NOT ENDING

The PEO M&A landscape is evolving. Deal flow remains healthy, but the drivers of value are shifting. As the cycle enters its later stages, platform operators must justify every dollar they spend to their boards and shareholders. Cultural chemistry, operational compatibility, risk discipline, and sales performance now sit at the top of the list. With a limited supply of PEOs for sale and a higher bar for investment, capital is being deployed much more strategically towards sellers with clean financials and a healthy risk profile.

Three themes define today’s market:

• Readiness = Leverage
• Durable Growth = Leverage
• Alignment = Deal Multiplier

Founders who begin preparing now with expert guidance will be positioned to secure the best possible outcomes. The market is not slowing, but it is maturing. The next chapter belongs to operators who deliver strength, stability, and a story worth betting on.