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It seems that nearly every conversation we have with recruitment company owners and senior managers will include the topic of selling.
This must be a clear indication that times have changed and that the market and confidence has improved, after all 2010 saw a return to reasonably healthy profits for many. But when we think about it, some have been talking about selling incessantly and probably will do so for many years to come; some don't think about it until some unexpected external or internal event makes them consider it and only a few run their business while planning for this major event.
Having been involved in quite a number of transactions over the years the ones that stand out for the right reasons were the deals that were able to be completed in a prompt and timely manner.
Those transactions all involved company owners who had a fair and reasonable expectation on the value of the business; had worked hard to present an honest and reflective Information Memorandum; had a clear understanding of the intrusion caused by the Due Diligence process and importantly had the right professional advice well before going to market.
Related: The Biggest Obstacles to Selling a Recruitment Business
More often than not, the deals that fell over were because little preparation had been done and some pretty poor advice had been taken from lawyers who just didn't understand the way our industry works with these transactions.
Emotional Preparation
Maybe those that achieved a timely and successful outcome were the best prepared mentally. As an owner, have you honestly asked yourself why you are selling? Do you have your personal next step clear in your mind and is it realistic? Can you work for someone else during the workout period? Are you prepared to walk away after its over? Importantly, are you emotionally prepared for the inevitable questioning of your business model and your business performance during due diligence? Are you ready to watch your business change brand, staff, processes and procedures? Have you considered that the business might be significantly more successful under new management?
You may need a strong external advisor to help you through this process because this is not a transaction that can be casually approached and the best results rarely happen without serious preparation.
Big, important transaction
For many business owners, selling their business is the biggest financial transaction of their life. It often determines how a person will spend their retirement, or determine where they live, or determine what they are able to undertake in their next career.
We say that selling a business requires a five-year plan two years to get organised, one year to run the transaction, and two years to complete the earn-out and wind out of the business. While this comment may be a little excessive, the principal is correct. All phases of preparation, execution and completing a transaction take a surprisingly long elapsed time and need to be consciously planned in advance.
There are two areas that require significant time, and possibly expense, to implement so that you are best positioned to maximise your company value.
Business Preparation
Firstly, a review of your business from a sustainability perspective is important. How will your business be viewed from an external perspective? How will the market value your business? The risks will be clearly visible when buyers analysis your business. In a services industry like recruitment, buyers are assessing the risk associated with earning future profits. Buyers are looking to acquire a machine†that has a reason to exist in the marketplace and where future revenue is not subject to single points of failure.
Shareholder involvement is important. If shareholders are intimately involved in the winning of new business, ongoing client relationships, or earning substantial revenue, then the business will be viewed as unsustainable in the short to medium term.
Similarly, if any consultant or any client is excessively important to the ongoing revenue and profitability of the business then the future profitability will be seen as unsustainable.
The GFC reinforced the importance of revenue mix for all sectors in the recruitment industry. A healthy temp and contract contribution is essential to cushion any economic changes that may impact the business. Perm-only businesses are still assessed as being a higher risk.
Once the sustainability of the business is manageable, owners need to remember that they are eventually paid a multiple of profit, no matter what desirable features the business may have. Therefore unemotional benchmarking of productivity and profitability is essential to ensure the business is performing at a level that rewards the owners correctly.
The final step in looking at the internals of the business is to make the business “cleanâ€. The items in the accounts that are not related to the efficient running of the business should be removed so the accounts are in pristine condition and require little normalisation.
Shareholder preparation
The second major area of preparation is for the owners themselves. Understanding the likely tax implications of a business sale and the potential to maximise the cash return from a transaction is important and time consuming. A tax consultant and financial planner are the professional advisors that are needed to educate you and structure your affairs to ensure the most positive outcome. This advice and any structural changes that may be required can take six months or more to complete so it is not a task to leave until the last moment.
The GFC has also shown that the best plans in the world need flexibility not many recruitment company owners completed a sale transaction over the past few years.
Those owners that carefully prepare themselves and their business for sale are often seen as being lucky by their peers. We hope that this article shows there is no luck involved - just good planning, good preparation and sound management.
Originally Published in Recruitment Extra
