At some point, every recruitment agency owner will reflect on the future of their agency and decide whether they either plan for an internal management buy-out (MBO) or to sell on the open market. Recruitment agencies are very appealing businesses to buy and there are many individuals and companies interested in buying agencies, either to complement their existing agency or to add to their portfolio of companies. When considering selling, it is important to gain an understanding about what makes a company more desirable for a prospective buyer and how to get the most from the sale.
Below are some of the methods buyers will use to assess whether the value of the agency is correct and worthwhile buying:-
- PERMANENT AND CONTRACT/TEMPORARY RECRUITMENT
Having a recruitment book which is made up mainly of contract or temporary placements will dramatically increase the value of an agency compared to a permanent only agency. If your agency turnover is mainly made up of permanent placements, the value is significantly lower (maybe a 2-2.5 multiple) as your agency is only as good as its last permanent placement. However, contract placements with multiple clients where the contract still had a long duration left gives a much higher multiple (between 4-6) due to the continued profitability and turnover even after the sale of the agency.
- LONG TERM CONTRACTS AND PSL AGREEMENTS
When evaluating the strength of a contract or temporary recruitment book, it often depends on the signed contracts and if the agency is on any exclusive preferred supplier lists (PSL’s). These PSL agreements show that the buying agency can make more placements into the clients following the sale and the longer the agreements are, the more chance of future profits.
- INTERNAL STAFF AND MANAGEMENT TEAM
Having strong, long standing staff and a dedicated management team will make an agency more appealing to a purchasing company. If there is a solid team who understand the industry, clients and daily workings of the company then this can ensure that there is little disruption during and after the sale. It is important that the remaining staff are aware, understand and have buy into the sale to ensure a smooth transition for the new owners.
- INCREASING TURNOVER AND PROFITS OVER A 3 YEAR PERIOD
When deciding to sell your agency, there is an element of future planning to guarantee you are demonstrating a company that is growing and is profitable. Ensuring that your agency tells a story over a 3 year period on the accounts by showing increasing turnover and profits during that time will ensure that any company will easily see that the agency is a viable punt.
- ABSENCE OF THE DIRECTOR ON THE SALES MANAGEMENT
When someone purchases an agency, they are buying the company not the director so it is vital that the company directors have little day-to-day input into the running of the company, especially the recruitment sales and client management. It is always best for a director to distance themselves from the main client relationships and ensure these are handled by senior management so that when an agency is purchased, the ongoing business is maintained beyond the sale of the company. If all of the business is handled by the director who may be exiting the business, it doesn’t make it an attractive option for a prospective buyer.
- UP TO DATE HMRC LIABILITIES AND MANAGEABLE CASHFLOW
It goes without saying that every company should stay up to date with their HMRC liabilities, but the agency should also ensure that they are also complying with up to date legislation and not have any “skeletons in the closet” that may come out in the due diligence process. Cash-flow is also important to a prospective buyer as they want to know that the company can support itself with its obligations to its contractors, suppliers and HMRC. If the agency has a minimal reliance on invoice finance or bank loans, then this can make it easy for an agency to be bought as the purchaser can potentially leverage off the additional cash-flow that can be generated from the debtor book.
Over the years TBOS has helped its agencies to assess and buy other recruitment agencies and ensure that the price paid is correct by performing due diligence and advising on the heads of terms. TBOS has also helped with some of our clients to plan a future exit both on their financial figures and their internal procedures to ensure the maximum multiple at sale. In some cases, TBOS has also helped agencies in planning an internal MBO to ensure that the internal management team get an understanding of the financial figures and are adequately prepared for the move from manager to director.