PEO Industry Statistics

PEO Industry Statistics & Commentary

Overview

The PEO industry has grown significantly over the last five years and has garnered attention from both investors and private equity firms.  The positive cash flow that is generated from PEO operations is, to an extent, somewhat predictable and therefore provides a viable option for long-term investment opportunities.  At a high level, we will cover the PEO industry statistics in this article allowing you to become more familiar with the industry as a whole.

 

Industry Size

As of 2015, the gross revenue for the PEO industry was $168.7bn[1].  The client WSE wage segment of this revenue came in at $146.4bn[2].  This represents an average pricing markup of 15.23%.  The net revenues for the industry were $22.3bn.  The net profit for the industry in 2015 totaled $843.3MM.  This represents profit as a percent of net revenues of 3.78%. There is estimated to be between 780 and 980 PEOs in existence today according to the National Association of Professional Employer Organizations (NAPEO).

 

Market Dominance

The PEO industry is currently top heavy with three players representing almost half of the industry revenue.  TriNet, ADP Total Source and Insperity are the market leaders with roughly 48%[3] of the industry market share.  The market has been one of consolidation over the last decade with larger players acquiring desired regional PEOs.  This trend is likely expected to continue in the foreseeable future baring any major economic downshifts.

 

Market Outlook

Historically, the PEO industry rebounded nicely from the 2008 collapse with only one year (2009) of negative revenue growth as seen in exhibit A.  [4]Historical gross revenue growth from 2009 to 2015 was almost 68%. The PEO industry is currently in a growth stage. [5]  Industry growth over the next five years is projected at an annualized rate of 3.1%. [6]

 

Exhibit A

YEAR REVENUE CHANGE
2007 3.6
2008 0.3
2009 -3.9
2010 5.5
2011 1.5
2012 7.9
2013 5.7
2014 20.8
2015 13.6
2016 7.4
2017 6.5
2018 3.4
2019 1.6
2020 1.9
2021 2.3

 

Major Industry Segments Serviced

The top industry segments serviced by the PEO industry are below.  Outlined is the macro industry description, segment revenue and percent of total PEO revenues.

 

  • Professional & Technical Services ($39.64bn or 23.50%)
  • Manufacturing, Retail & Wholesaling ($38.46bn or 22.8%)
  • Other Industries ($34.58bn or 20.5%)
  • Information Technology ($34.08bn or 20.2%)
  • Financial ($21.93bn 13.00%)

 

Regulatory Influence

As noted above in Exhibit A, the PEO industry experienced a large spurt of growth in 2014 and 2015 with year over year grow percentages at 20.8% and 13.6% respectively.   While the economy has rebounded from the 2008 financial crisis, the timing of this growth spurt suggests that it was, at least in part, driven by the regulatory changes in healthcare.  The Affordable Care Act (ACA) was officially signed in 2010 with the expectation for compliance beginning in 2014.  The administration delayed the start of compliance requirements for employers with over 100 WSE until January of 2015.  The following year, employers with a WSE count north of 50 would then be subject to compliance.

 

Industry Growth From Regulatory Compliance

When viewing the growth spurt in PEO revenues in 2014 and 2015, this is likely attributed, to a large degree, to the need for assistance with ACA compliance.  PEOs captured market share utilizing compliance and reporting assistance in addition to providing health insurane options to new clientele.  With a new administration in the Whitehouse and a Republican controlled congress outlining the plan of repealing or repairing the existing ACA, regulatory changes are expected.  As a result, this may provide increased growth above and beyond projected industry numbers previously illustrated, depending on how the new plan is architected.  If history is a past indicator, major regulatory shifts bode well for the PEO industry revenue growth outlook.

 

Additional Resource

Additional information on the PEO industry can be found from multiple resources.  IBISWorld is an excellent resource for macro trending.  NAPEO conducts an annual Financial Risk & Operating Survey (FROS) and some M&A firms provide market insight as well.  With the passing of the SBEA and the IRS now recognizing the PEO Industry as a standalone industry, increased data may be available in the future.

 

Author: Rob Comeau is the CEO of Business Resource Center, Inc.  BRCI is a management consulting company that works with PEO companies, investors, investment bankers and private equity firms.  For more information on BRCI, please visit them on the web at www.biz-rc.com.

[1] IBISWorld Industry Report 56133

[2] IBISWorld Industry Report 56133

[3] IBISWorld Industry Report 56133

[4] IBISWorld Industry Report 56133

[5] IBISWorld Industry Report 56133

[6] IBISWorld Industry Report 56133

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