October 7, 2022 – What makes one recruitment business more attractive to an investor than another? Investors have their own strategic agenda; they may seek to invest in a particular sector or region and will measure value in their own unique way. But a “buyer’s” checklist will always be built on key principles.
It’s important to focus inward first; your aim is to build a comprehensively structured business that holds value – not just in terms of income and profit but across all areas of the business, according to a new report from Recruitment Entrepreneur International’s James Caan. “The strength, depth and resilience of a business’ infrastructure, governance and internal processes is integral to its value – so strengthening all elements of a recruitment business immediately diversifies the potential buyer portfolio,” he said.
Every strategic decision affects the way a recruitment business grows. In addition to aiming to increase top-line internal performance Mr. Caan says that you should work towards minimizing risk factors that may be detrimental to the end sale/purchase. He offers 10 drivers of a recruiting firm:
Core value drivers of a recruitment business
1. Credibility and confidence: Does the leadership team have a strong track record?
Understandably, buyers are keen to see a robust management structure and evidence that the leadership team has the capacity and experience to execute a growth plan post investment, according to Mr. Caan. “Buyers want to see the track record of the people running daily operations (including tenure, recent performance, future targets) and will be encouraged to see training programs for further learning and development. This needs to be evaluated alongside any over-dependency on the founder, who may or may not remain with the business post-transaction; any buyer will look to the team around the founder for its ability to continue to deliver results.”
2. Staff tenure and long-term commitment to the business
The average length of time that key people have been in the business is important, as the longer the tenure, the more value a buyer will put in the business, according to Mr. Caan. “The most important assets of a recruitment business are its people, so the ability to show that these individuals are aligned with the long-term future of the business, enhances the value that a buyer places on the company,” he said. “Linked to this, any financial lock-ins with senior members (for example, incentives, stock options, remuneration packages) which are designed to keep people post-transaction are important.”
3. Ability to attract and retain talent, leading to size and scale
The leadership team’s ability to attract and retain talent is at the core of the valuation as buyers are looking for potential future growth to justify their investment. Mr. Caan explains that the ability to demonstrate how many consultants have been hired in the last three years, what they have billed and if they are still with the business helps build the credibility of any further growth potential. Generally, successful transactions are for businesses which demonstrate a steady headcount of more than 20.
4. Specialism and strength of brand
Some buyers are looking to develop into a niche market sector. “They often want assurance that your business is truly a market specialist, led by an expert team with a strong brand and reputation,” said Mr. Caan. “Demonstrating strong relationships within your field and being well positioned against your competitors will give a potential buyer more confidence that they are investing in a market leader. Evidence of a strong brand within the market, a comprehensive marketing strategy and successful execution of digital communications allows the business to communicate this specialism.”
Recruitment Entrepreneur International is a private equity firm with 30-plus recruitment companies in its portfolio, covering numerous recruitment sectors, at various stages of growth. Founded by international businessman James Caan CBE it provides talented individuals with funding, best-in-class operational infrastructure, coaching, and management advice. Its success lies in its ability to provide the knowledge and hands-on know-how to help start-ups and scale-ups grow, scale, and materially increase profit – ensuring that its portfolio partners can achieve a high equity value on exit.
5. Compliance and governance
Robust systems, processes, and procedures are one of the first areas that advisors look at when doing due diligence for a prospective buyer. Being able to support any financial or business information is paramount to ensuring that the buyer is confident in the data they have received, according to Mr. Caan. “A recruitment business that operates without necessary compliance frameworks can be exposed to risk and this can potentially make a business unsaleable,” he said. “Corporate governance procedures should be distributed among the senior members of the team with responsibilities and oversight to ensure the business infrastructure can deliver long-term success. Combined with accurate management information, it gives buyers confidence that the business has the platform to scale further.”
6. Temporary/contract vs. permanent split
The nature of recruitment services offered is a fundamental element, linked to a buyer being able to see continuity and predictability of income, arising from length of contracts with clients. Mr. Caan explains that diversified revenue offers a potential buyer more stable profit and cashflow, ensuring a more predictable performance outlook. A blend of income sources, whether it is a split of executive search, contract, permanent, or RPO can be attractive.
7. Client spread and income concentration
Income concentration measured by both client and consultant can be a significant risk in the long term. In terms of clients, a buyer will need to understand the spread of revenue across the customer base, to ascertain what percentage of revenue comes from the top 5/top 10 customers, according to Mr. Caan. “The ability to demonstrate low reliance on a small number of customers is key to show a diversified revenue stream,” he said. “Similarly, understanding the percentage of net fee income generated by the top three consultants enables you to evaluate the risk to the profits if someone was to leave. Buyers tend to find a business that has a net fee income balanced across a team of consultants more favorable than a business that consistently depends on its top three performers.”
8. Accurate budgets and forecasts
The ability to show that historic budgets have been accurate (within a reasonable range of five to 15 percent) is important to further support the credibility of the forecasts provided for future business growth. “Budget accuracy is seen as a strength in setting realistic and appropriate targets for income and expenditure and being in control of the business performance drivers,” Mr. Caan said. “The ability to be on top of costs, both in terms of consultant remuneration, operating costs and any other business costs is fundamental to ensure that the infrastructure is in place that will allow for cost-effective scaling.”
9. Sustainable profits over the last three years
Being able to demonstrate a positive trend of sustainable profits over the last three years is a key investment driver and adds credibility to the forecasts and future growth potential. Mr. Caan explains that the sustainability means that the business is not reliant on one-off positive events that may skew recent trading performance and demonstrates the ability to win/retain clients and maintain performance into the future.
10. International presence
Demonstrating that the business has ventured into markets outside its home territory demonstrates the potential available for further growth. This can present buyers with an attractive framework to scale their client base and develop with the current management team and resources available, according to Mr. Caan. “Private equity firm and industry expert Recruitment Entrepreneur International works closely with professionals looking to set up their first business and existing businesses that want to scale up to build real value. The business works with recruitment owners to strengthen and enhance their current infrastructure towards attaining an exit event with maximum value.”
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; and Stephen Sawicki, Managing Editor – Hunt Scanlon Media