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A brief introduction to selling a Recruitment Business

by MAX JONES / Wednesday 31st August 2016

A Big Fat Wallet

I’m sure you’ve sometimes wondered how it is that an apparently ordinary Recruiter can casually walk away, having sold a relatively small recruitment business (which they just so happen to own!), with literally millions & millions of pounds in their back pocket. I know I have.

& if you’re anything like me, you can’t sleep until you find out how they did that! How do these seemingly “ordinary” Recruiters go from nothing to £2/5/7m+ in the blink of an eye? How have they done it? Who actually buys recruitment companies & what do they actually buy? I know that sounds simplistic, but do they buy the recruiters, the database, everything? Where’s the hidden Aston Martin that makes the company worth millions?

Well you’ll be super pleased to know, that I am going to attempt to briefly explain how you might exactly go about doing this. & that’s not because I’m incredibly smart, but because here at SSG we’d have to be idiots not to have realised that there are clear patterns to building & selling recruitment companies. There’s quite a lot to take in, so I’ve broken it down into a couple of parts that will be published over the coming weeks.

Back to Basics…
The large majority of small Recruitment firms are generally purchased by one of three types of purchasers: either PLC Recruitment companies, Support service organisations or Venture Capitalists (a fancy word for your typical “Dragon” from BBC 2).

The Vendor (Mr or Mrs Recruiter lucky enough to be selling their business) will sell the equity of ABC Recruitment in exchange for a multiple of the profits of their company.

The magic lies in the multiple. The multiple used in the valuation of the company is generated by the purchaser once the “mob with the cash” have looked closely into the business & have accurately estimated what they believe that company will generate in the next few years. 

Let’s say ABC Recruitment currently generates £300,000 of profit per year. A purchaser, let’s call him Bill, might look into the company & conclude that he’s pretty confident that ABC Recruitment will continue to make at least that over the next 5 years.

Bill has made what is known as the estimated Future Maintainable Profits of the company – the FMP (which we will talk about next week!).
So on Bills judgement, easy maths would suggest that the multiple to get to the valuation of the company should be 5. Therefore Bill, the would-be purchaser, would be looking at around about £1,500,000 for ABC Recruitment.

Unlocking the true value…
Three vendors walk into a bar. Tony Soprano, Taylor Swift & Peter Jones (what a combination!), all on cloud 9 having just sold their recruitment businesses for some “top dollar”.
Vendor 1 (Tony Soprano) sold his business to a PLC for £1,500,000 (with a multiple of 5), whilst Taylor Swift (Vendor 2) traded her niche recruitment firm for £1,800,000 (a multiple of 6) & Peter Jones (Vendor 3) pocketed a hearty £2,100,000 (a multiple of 7) in exchange for his IT recruitment business. 

Not only does each individual’s personality vary drastically, but also this is a good indication that, should the purchasers apply different “multiples” to the valuation of their businesses for any reason, the physical hard-cash that each vendor walks away can also vary drastically. Essentially showing the influence a purchaser has upon the sale price of each business.

Each vendor made the same profit, yet the sale price ranged from £1.5m - £2.1m which shows it’s clearly not just the profits of a business that influences the valuation. While Tony Soprano’s business may not have been as squeaky clean as Taylor Swifts; equally Swifts Company may not have had as strong an internal infrastructure as our friend Peter Jones’. Much like the number of bedrooms in a house does not solely influence the valuation of a mansion, there are a number of other significant factors that will ultimately influence the judgement of a business’s worth.

If profit represents our metaphorical number of bedrooms, then let’s think of the following list as the business equivalents of things like location, access to schools, garden size, number of bathrooms & so on:

  • Market sector
  • Management structures
  • Accounting standards
  • Social reach
  • Legal compliance
  • Employee attrition rates
  • Personality (although not officially a factor)
  • & so on

In other words to sum up “Part One” of this mini-blog series, when a potential purchaser examines the accounts of ABC Recruitment, they may well be looking first & foremost at the “bottom line” (profit or number of bedrooms), but that’s only one aspect of the story. That’ll get them through to door, but what might influence them more is the access to local schools, the Wi-Fi accessibility, the garden size & much much more.

In next week’s instalment we will look to explore the magical world of FMP (Future Maintainable Profits) & jump into the real challenges around valuation & the mystical purchaser…