Selling a Recruitment Business – Part 2…
If you can cast your mind back to last week for me just for a second, back to the latter stages of Summer 2016. Ah I miss it already…Not only was no one talking about Christmas (I think I saw a “meme” yesterday celebrating 18 Fridays until the fateful day which was slightly premature to say the least…) but we were also exploring the opening stages of selling a recruitment business (which you can read here). If you haven’t yet had a chance to have a look at that, please do. Make sure that before you delve into “Part 2” today you understand where we got up to when it came to selling your fantastic little recruitment company for literally millions of pounds.
We spoke about a few of the basics & some good opening thoughts about unlocking the true value of your company. In this section we will be exploring the basics of FMP & a brief introduction to the real world of Valuations. Sounds exciting, I know.
Last week we briefly mentioned Future Maintainable Profits (FMP) & we discussed how the multiple that any potential purchaser might use to generate a valuation of ABC Recruitment was really a reflection of how many years they believed that business would continue to churn out at least their current profit level. Pretty basic stuff for you achievers types out there I know. But how does a purchaser generate that multiple? That’s what we’re going to explore today…
FMP Basics (Advanced level)
Wouldn’t it be great if, as the owner of ABC Recruitment, we could influence the purchaser to apply a higher FMP to the business which would in turn generate a bigger multiple that would in turn lead to a high valuation figure? That would be perfect. By the way, let’s start talking about that multiple by its serious name shall we – a PE (Price Earnings).
So, what influences the Price Earnings ratio? Well, being blunt about it, if ABC Recruitment is a shabby little business with subject accounts & dodgy legal framework, our purchaser is likely to err on the side of caution & keep their offer relatively low if they’re going to make an offer at all. Therefore using a lower PE when thinking about ABC. However if ABC Recruitment is the best recruitment company there ever was with fantastic accounts, impenetrable legal framework & a clear management team in place, then it is probable that the purchaser will push the metaphorical boat out & offer lots and lots of cash to our happy soon-to-be millionaire.
OK let’s move away from ABC for a moment & take another example. Let’s take 123 Ltd. 123 Ltd makes £300,000 profit a year & the owner wants to sell up. Mr. Chubs wants to lose a few pounds & the only way he feels he can do this is by selling up & playing golf every day for the rest of his days. Chubs gets his accounts in front of a would-be purchaser (some tricky Dragon, Peter Jones perhaps?) & all goes well. Peter Jones decides it’s worth sending the team round to have a look at Chubs & his business in a little bit more detail…
Peter Jones sent round the “trio of terror” in the form of Sir Alan Sugar, Sir Richard Branson & Steve from the local estate. Three very tough, nosey, clever & respected men in their fields. They were tasked with giving Chubs the grilling of his life in three main areas:
Oh Chubs, poor poor old Chubs. He was doomed from the outset. Unfortunately under closer examination it was found that Chubs had spent too much time down at McDonalds & neglected his legal framework. He had also been over reliant on one or two customers to generate his placement figures & there wasn’t enough scope in the clients to make a purchaser really interested. But worse of all for poor old Chubs, he’d never paid any attention to the numbers & the economical truth behind how much money 123 Ltd actually owed the VAT man…
Oh Chub Chub, why’d you do it?!...Why!
Peter Jones & his tremendous trio weren’t best pleased & was therefore only happy to offer Chubs 3 times the profits of his business as a sale price. Peter Jones had applied this P.E of 3 based on the Due Diligence report of his team.
Chubs needs to re-think his strategy. He needs to have a long hard think about things & come back next week with some serious changes to his model if he wishes to get the elusive 6/7 P.E valuation he so desperately wants. Will Chubs survive, will he live to fight another day? Find out next week…