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Why Acquisitions Make Sense

M&A Activity in recruitment

There is an old adage that there are no shortcuts to growing a business; it comes through hard work and keeping your customers happy. No arguments there, hard work and customer satisfaction are essentials; however, there can be short cuts to growth.

Often business acquisitions are considered the domain of the largest companies, though the benefits of rapid expansion can be achieved by small and medium sized organisations who can gain achieve far greater growth than otherwise. Sensible, strategic acquisitions by SME recruitment companies will often prove to be not only a quicker route to growth but more cost effective than the traditional ramping up of marketing and sales efforts and setting up new offices.

Strategic or synergistic acquisitions may be in related or complimentary activities that capitalise on distribution channels. For example, in Recruitment; access to corporate HR decision-makers. Other strategic acquisitions often include buying in to new regional markets by acquiring a similar business in a different state. Or they may be in logical add-on sector of recruitment within the same geography.

Not long ago, HHMC assisted a Sydney based recruiter sell their business to a Melbourne based buyer who had a very similar client profile. The Melbourne business had trouble servicing their clients in NSW and had made no significant in-roads organically. Through the acquisition this company has gained access to rapid growth opportunities in this large new market and it has also seen accelerated opportunities in Melbourne with the Sydney company's own clients based there.

So many businesses struggle to start and maintain offices in other states that it can sometimes feel like one step forward and two back. The difficulties in finding the right staff and in managing new office start ups from interstate has challenged many otherwise successful recruitment companies. It is distracting to SME recruitment managers to have their focus split between existing offices and new interstate operations. Not surprisingly this can lead to a decline in the performance of the home office not to mention the toll it can take on the manager as well. Acquiring a business that meets defined criteria should result in a return on investment that adds profit, clients and competent staff experienced in working in their location or industry sector.

Related: Growing by Acquisition

The primary source of organic growth lies in the people a company hires (and keeps). Finding quality people in Recruitment and maintaining a quality team with a successful culture requires real effort. According to many business owners and managers in the industry it is harder than ever to find and hire the people who they feel can take the company forward.

In addition to strategic benefits, almost immediate financial gains can accrue through an acquisition via savings in back office and procedural costs as well as potentially from economies of scale in purchasing.

Not many business activities are risk free and of course that applies to a business acquisition. For SME Recruitment companies it does make business sense to buy another company if:

  • It results in the acquisition of a strategic asset or capability that (looked at realistically) is too difficult or costly to build internally
  • It enhances growth beyond what the core business can deliver on its own
  • It can be acquired at a realistic market price and deal structure

The risks in acquiring any service business that is as heavily dependent on key people as Recruitment start with the obvious; what happens if the key people leave? Outgoing owners can be tied in through the deal structure for a period of time, however, that is not so easily done with staff. While every buyer wants to have the key staff remain on board, the insecurity that the prospect of change creates can drive people to look elsewhere. The loss of key people can mean the subsequent loss of clients or at least a reduction in business volume.

Acquisitions can be demanding events for a period of time. They don't always run according to plan and can become a distraction on the management team. Acquisitions need to be managed well with post- acquisition activities just as important as the deal negotiations that take place beforehand.

The issue of paying a fair market price is sometimes treated a little subjectively when two parties are negotiating directly with each other. What is "fair" in a buyer's mind can be quite different to a "fair" price to a seller. This is often best determined with appropriate third party input.

Although many of the pitfalls associated with making a business acquisition can be overcome with planning and access to the right professional advice it is important that any process commences with an understanding of the outcome that is desired. It is critically important to be able to visualise and describe the way you want your business to be after an acquisition. That way finding the right target companies becomes a lot clearer.

eBook - Business Valuations in the Recruitment Industry

Originally published in Recruitment Extra August 2012

Categories: M&A

Tags: Strategy, Recruitment, Staffing, Mergers and Acquisition, Buy and Sell Business, Business Valuation, Acquiring Recruitment 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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