Every recruitment director dreams of one-day selling their recruitment business and making an amount of money that they can hopefully retire on.
However, this is not always the case with only 0.3% of recruitment agencies selling every year due to only 30-40% of agencies who start the sale process ending in a sale.
Oftentimes, this is due to an agency not understanding the factors that can affect the value of their business and will often follow an unguided path which will not give them the sale amount they need in order to exit.
Below are 3 factors which can increase the value of a recruitment agency:
GROWING EBITDA AND BALANCE SHEET
Understanding the financials is a key part of growing the value of a recruitment agency and will be the basis of how an outside party will value and eventually pay for the business. Understanding the current EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortization), how to grow this and show a growth pattern over the next few years will be valuable in helping to increase the value and appeal of a company. Doing the same with the balance sheet to show an amount of retained earnings and held value within the business over the same period is also vital.
MIX OF CONTRACT AND PERMANENT PLACEMENTS
When selling a business, the multiple of the EBITDA is determined by various factors but within recruitment it is the mixture of contract and permanent placements that has the biggest impact. A permanent only agency may only see a multiple of 1-3 times EBITDA, but a contract business may see a multiple of between 3-6 times EBITDA. Having a spread of gross profit based on contract and permanent placements can ensure a higher multiple and in turn a greater return.
LONG TERM CONTRACTS OR PSL AGREEMENTS
When another business looks to buy a recruitment agency, they are looking to see what profit will be generated once they purchase the business. If the business is engaged with clients on long term agreements for their contractors or if the agency is on preferred supplier lists (PSL agreements) with sought after clients, then this can increase the value of the company they are buying as well as provide future income for the purchaser.
Below are 3 factors which can decrease the value of a recruitment agency:
DIRECTOR IS INTRICAL TO DAY-TO-DAY BUSINESS OPERATIONS
Often agency directors will wear many hats within a recruitment business to run the company on a day-to-day basis. This can be detrimental to the company value if the director does not implement plans to step away from these day-to-day tasks or if they have the relationships with key clients instead of passing them to internal staff. This could mean that the director may have to stay on within the business should it be sold, which can be an added cost and burden to the new owners.
NO KEY STAFF TO CONTINUE ONCE BUSINESS SELLS
An ideal sale would occur with the agency owner leaving the business and the business continuing to trade with the current internal staff continuing to make placements following the purchase. If the staff are not informed or brought into the knowledge of the sale, then this could mean that the key employees may also exit the business leaving the new owners to try and salvage the relationships with clients and candidates.
POTENTIAL LIABILITIES THAT MAY IMPACT THE BUSINESS IN THE FUTURE
When an agency has found a potential buyer for the business, the purchaser will appoint a company to perform financial due diligence to ensure that the company has the right value and that the numbers are correct. As part of the due diligence the appointed company will be looking at client and candidate contracts, compliance and adherence to industry/HMRC legislation such as IR35, AWR, Code of Conduct regulations and GDPR. Any non-compliance of these could be deemed to be a potential liability and a liability provision may be included which will decrease the value of the company.
MAYACHI Ltd works with numerous recruitment clients who are either currently selling or planning on selling in the next 3 years. MAYACHI helps to assess the current value of the business, look at possible factors that could decrease the agency worth and put plans in place to increase the current EBITDA and multiple to gain the best possible price.
