Selling a recruitment agency in today’s market

The majority of recruitment companies have suffered enormously during the recession, however whilst they are often the first to feel the effects of economic cycles they do tend to be the first out. Only time will tell if this well-worn cycle is repeated in 2011. However there are signs that confidence is returning.

On the macro level, the IMF has declared that “the UK economy is on the mend” and that interest rates would stay at a record low for the foreseeable future; balancing out fears of a double dip. Even more recent news is that for a second quarter, UK growth figures are more bullish than expected – indicating an overall positive economic view currently.

The micro view is interesting - having spoken to a number of recruitment companies, it appears they are broadly split into three groups. The first group are highly focused, having managed well in the downturn, and are growing and proactively building their brand and service offerings. These companies have taken the view that the downturn in activity has given them a chance to grab market share, which would not have happened in more stable times.

The second group of business owners have been deeply affected by the recession and are currently at a loss as to which direction to go. They’ve just about managed to hold onto core staff, have made big personal sacrifices; and are now having to change tack from survival mode to a more strategic way of how best to re-emerge as a stronger player in the marketplace.

The last group are those that have seen it all before and have a more laissez-faire view of their industries. They are less strategic - ebbing and flowing with the tide, and not really actively looking to change but rather waiting for the market to give them direction. There is a good chance that these are the businesses that will not survive longer term as the level of sophistication that both recruiters and candidates now expect will leave these ‘also ran’ businesses in the dark ages. Of course, some of these businesses have already failed in some way.

Those recruitment companies that understand that the road map has irreversibly altered will be the ones that will survive, thrive and grow. New technology platforms and social media are making it easier for employers to cut out the middle man and those savvy candidates can make themselves more available to employers than ever before by using online portals. Ignore these changes at your peril, rather look at how you can best embrace and leverage them.

In recruitment there is an emerging trend towards specialist agencies supporting specific sectors. Specialists are often highly sought after by purchasers. It’s an easy ‘plug in’ for a purchaser, especially if they are lacking in a specific discipline. In the past year there has been an increased focus on particular specialist areas by purchasers in areas such as HR, IT and engineering.

Permanent placements are still suffering as companies reduce headcounts and are reluctant to commit to permanent staff. However, this in turn creates a stronger demand for contractors. Historically, the staffing sector always attracts a lot of M&A attention as the market picks up. Recent deal activity, such as HCL’s acquisition of Redwood and private equity firm Graphite’s purchase of Teaching Personnel, reflects this.

The greater positivity in the economy and the fact that there is much ‘hidden wealth’, mean that looking for a decent return on investment has given rise to a noticeable increase in M&A activity in the recruitment sector. Values are improving as buyers and sellers realise that potential growth has now become an achievable reality. Sellers are now confident that tax will not significantly diminish their gains, while purchasers are finding that funding is becoming easier, with banks loosening their lending criteria on structured deals and private equity companies offering complete packages.

Business owners considering an exit, regardless of sector, will be looking for the highest possible value. In order to achieve this, you must first consider what your business is worth and then take steps to increase this.

Remember, a business is worth what a willing buyer is prepared to pay and a willing seller is prepared to accept, with the final value dictated by the buyer’s perception of desirability, comparative investments, risk and the assets transferring.

Generally, purchasers will calculate the value of a business using a multiple of the current adjusted sustainable operating profits. They will also factor in other elements such as savings they could make, cross-selling opportunities, intellectual property, brand and perception of risk.

Prior to the sale, you should be looking at strategic ways to increase the value and to address the “multiple” influencers that impact your company’s value. There are many ways you can increase your value, the key areas include:

• Minimising the purchaser’s perception of risk. For example, eliminate any dependencies on key members of staff, clients etc.
• Ensuring that you have a steady, recurring and forecastable income. This is a real incentive for both buyers and funders alike. Agencies with contractors can accurately forecast sales, which gives buyers and lenders confidence. Being on preferred supplier lists is also a plus.
• Ensuring your systems are in order. Although confidence is returning, buyers and lenders are still more careful and risk adverse, and will want more information before making a decision.
• Well-trained and motivated staff. For a buyer, an agency’s principle asset is the staff. A buyer will look hard at the people before making a purchase.
• Strategic plans for long-term growth. Agencies are easily scalable. Within six months the right sales person, with good training, can be generating significant revenue without the additional investment in marketing and premises.
• Technology. This is a constantly changing landscape in the recruitment sector and it is critical that you stay up to date.
• Consider sector and geographic diversification and specialisms. For example, having a Eurozone footprint is a real must have in certain sectors. Your aim should be to ‘own’ a niche marketplace.

Finally, if you are thinking of selling your recruitment business, it is essential you appoint the right advisors. They will help you prepare your business for sale, so as to achieve the highest possible value. Their role is to concentrate on the dealmaking, allowing you to continue to focus on your business. The best advisors will manage the whole process from initial strategic advice through to researching potential purchasers, creating a competitive market and supporting you through to completion.


A buyer's perspective...

Terry Brame successfully sold his recruitment business via Avondale. Here are his top tips to selling your agency and achieving maximum value.

1. Step away from the ‘frontline’ - This may involve less client contact, (an aspect of the business that you may enjoy the most) and promotion of personnel to key positions (the very type of expense you have tried to avoid). It is sometimes difficult to avoid the ‘hands on’ role as employees may never have the same attention to detail as the business owner, but careful management and regular appraisals will enable you to identify any potential weaknesses. The long-term benefits of owning a business that runs without you will soon be apparent.

2. Look after the pennies - One can become obsessed with the ‘big numbers’ and forget that small cost centres and income streams may be key areas when talking about value. Make sure you know all of the key figures in your business including forecasts going forward for at least three years. ‘Parrot fashion’ recital of these key numbers shows confidence in the predicted business performance.

3. Carry on as if nothing is happening - Even if negotiations are at an advanced stage you should continue to work as if nothing has changed. Budgets, forecasts, planning, team meetings etc, must continue regardless. The deal will not be complete until the ink is dry!

4. Honesty and integrity - Whilst you may not feel the need to involve every employee in your plans, it may be wise to speak frankly to a few key staff members about your plans. Your advisor can guide you in this decision. It may help reassure them about their future and will help the eventual buyer affect a smooth transition. Communicating your intentions to senior team members should be done carefully, though remember that honesty will be appreciated by all parties when any eventual acquisition is completed.

Also read: Private equity helps recruitment buck declining M&A trend

UK recruitment sector M&A remains buoyant in an uncertain economy br>
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