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Some M&A Basics

M&A in Asia Pacific

At HHMC we are in discussions on a continual basis with potential buyers and sellers of businesses. This can be from the larger publicly listed or major private companies through to the small business enterprise with three or four people. What is often apparent from these discussions is that many capable business owners and company executives are frequently under-prepared to undertake a company sale or acquisition.

Once business owners start out on a sale or acquisition process without adequate preparation or advice they can end up making critical mistakes that lead to what should have been a good deal falling over.

This is a topic we have covered before in Recruitment Extra, however, there are some key points that are worth reviewing again. Much of what we will cover in this article will focus on the perspective of a seller, though many of the key points are also relevant for buyers.

Be Prepared

Before starting a sales process for your business make sure that you understand your motivations. Why do you want to sell? Do you have a clear plan for what you want to do post-sale?

If there is more than one shareholder be sure that you both agree on the goal, price and acceptable price structures. You should have an appropriate Shareholders Agreement in place that underpins the way you make your decisions and the actions you take.

Once committed, think carefully about the timing of selling your business. Many business owners are surprised at (a) how long it takes to finalise a sale and (b) how long they need to remain with the business to achieve any earn-out provisions of the sale.

Related: Deal Structures in M&A

If you are in a hurry then you may be disappointed or may have to compromise significantly on price. It is not unusual for an earn-out period to be for twelve months or more. This means that you do not receive the full amount of the price until you achieve an agreed target which is usually financially based.

So a decision to start a sales process may see you involved with your business for perhaps another two years. As earn-outs are clearly based on future performance and it may take a few months to finalise a sale before that, you need to be reasonably confident about the market and economy.

There have been examples, particularly in the early 2000's of companies selling at the peak but trying to achieve a good portion of their potential pricing payment in a flat market. Needless to say there were some disappointed sellers.

Before embarking on the sales process another important point is to recognise that a potential buyer has a reasonable right to have access to information about your company. Honest disclosure is not only fair it helps to build the trust that is important to concluding a satisfactory deal. Be prepared then to open the curtains a little or you will send the wrong message to any serious suitor.

It is also at this stage that you should consider engaging appropriate external advisors to help you achieve the outcome you want.

The Process

If you are selling you will need to prepare a summary of the  key attributes of your business. This will include the market you are in, what you do, where your revenue comes from, how many employees you have, and importantly key financial information. This document is usually referred to as an Information Memorandum and will be supplied under Non Disclosure terms to potential buying companies.

If you are using an external M&A advisor then they will research and identify potential target companies to discreetly approach. If their contacts are well established then they should be able to work out quite quickly whether some of the major buyers are interested in pursuing this type of acquisition. This should happen without your company name being disclosed.

A secondary list of target companies also needs to be researched and agreed on. It is often not direct competitors that become buyers but companies that want to be in your particular sector of the market and may find your business an attractive opportunity.

Experienced M&A advisors who have a contemporary understanding of the recruitment industry can also provide you with an idea of the attractiveness of your company and the likely price range and structure.

Once there are genuinely interested buyers confirmed the negotiation process will begin. This is the time to leave your emotions at the door! It can be easy to let your emotions get the better of you, but the simple message is don't . Understanding the perspective of a buyer is a valuable asset. Do your best to put yourself in their shoes. Potential buyers will only be able to asses the value of your business based on the risk of them being able to repeat a similar level of profit next year and the year after. They will not be too excited about all the hard work you have put in to the business in years gone by. Nor will they be too concerned about your promises of future success. We have not heard many Recruitment companies ever say that they won't do better next year!

Using an external and experienced M&A advisor is often valuable at this stage. They can manage the negotiations without the risk of personal affront. This is an important consideration as we know of many negotiations that break down over minor upsets.

Time can run away from you at this stage as it is often the Principals from both sides that become involved in negotiations and usually they have many other work distractions. The aim of the negotiation is to reach a commercial agreement that has both sides relatively happy. This agreement still has to be concluded via a legal contract and the buyer will reserve the right to withdraw if the company financial position is not what it appeared.

Know your financials

Anyone selling their business should have a strong understanding of their company's financial position. This is important in terms of both the Profit and Loss reports and the Balance Sheet.

The Recruitment sector does not always have the same terminology for accounting terms and there are differences in how certain items are treated in the P & L. An example is the use of the term Net Disposable Revenue for Gross Profit. The term Gross Profit is also sometimes simply misunderstood. Some owners we have encountered have become quite disappointed when they realise that a buyer's proposed multiple is based on the net profit before tax (PBT) and not gross profit (GP).

Make sure you are well informed and go through your financial data with your accountant and understand the way it is composed.

The Contract

When you are at the stage of having your lawyer review a contract for the acquisition of your business it is important that you brief them appropriately. Lawyers of course aim to minimise your exposure to risk throughout the contract. While this is entirely appropriate it is also in your interest to let your lawyers know that you want to do this deal. It is not a time to renegotiate the commercial agreement, unless there are very good reasons to do so. Your lawyer's brief should be to ensure that the commercial terms are embodied effectively in the contract and your interests are protected. An overly adversarial approach by your lawyer towards your buyer can lead to protracted delays and even the deal falling over.

Once you do achieve a legal agreement it is then time to re-focus on your business and make sure you achieve the results you need.

Article Written By Richard Hayward of HHMC

Categories: M&A

Tags: Acquire, Acquisition and Divestment, HHMC, Valuation, Advisors, Divest, Recruitment, m&a due diligence, m&a transaction, Buy and Sell Business

Picture of Richard Hayward

Richard Hayward

Richard has 35 years of experience with outsourcing, recruitment and advisory firms. His record of achievement includes national recruitment management roles, and executive search and selection across the ICT, banking & finance and sales & market sectors. Since 2003 Richard has been a principal of HHMC, guiding recruitment agencies through acquisition and exit assignments. Located in Sydney, Richard works with private and public recruitment agencies globally. HHMC’s innovative business strategies and well-grounded guidance result in clients realising their personal and corporate goals.

P: +61 2 9221 8285 M: +61 411 488 544

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