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Acquirers looking at the Australian recruitment SME market increasingly want highly specialised businesses, but vendors have to ensure they're offsetting the risks that come with being too niche, says industry advisor Rod Hore.
Hore, the director of recruitment M&A specialist HHMC, told the NPA Global Networking Conference last week that buyers interested in the local SME recruitment market strongly favoured companies with a deep specialisation.
But SME recruitment companies should tread carefully when it came to selecting a niche focus, he told Shortlist, because Australia wasn't a large enough market to support widespread specialisation.
"It becomes higher risk if the whole company is in that very small niche, because nearly every sector of recruitment does have some cyclical nature to it," he added.
For instance, he said, a recruitment company specialising in doctors could support a locums business in the Australian market, but would be struggling right now if it focused purely on perm.
In order to balance some of the risks of specialising, Hore said recruiters could concentrate on several complementary practice areas, or look at expanding their geographic reach.
"If you are a very good niche organisation and you believe that's your way forward, you either open up another niche beside it, or you take that niche abroad - you go to Singapore or Hong Kong."
It was important for recruitment companies to do some risk analysis before entering a new area, said Hore, and if they were in a perm-only niche, he recommended recruiters keep up a small portion of temporary and contract work to maintain a reliable income stream.
Buyers more risk-savvy
Since the GFC, Hore said it was now rare for recruitment company vendors to get an EBIT multiple (excluding working capital) of more than three.
"Buyers understand risk so much better, and apply risk analysis better than they did before... They are really going to claw your business apart and make sure they understand it," he said.
Hore said acquirers were looking to identify any weak points that could affect the vendor's future profitability or the strength of its business model.
"The single points of failure can be reliance on one particular client, or maybe reliance on one particular person to either do your business development, or the bulk of the billing. One way of mitigating risk is actually to be bigger," he said.
Staff expenses should be reined in
Hore told the conference that RIB Report figures showed that recruitment companies' staff and management expenses, as a percentage of gross profit, had been steadily rising since 2010, and were now on par with GFC levels of about 65%.
He said recruitment bosses should be aiming for staff costs to sit between 45% and 50% of gross profit.
It was understandable that this figure was higher during the GFC, as it took time for businesses to adjust to lower revenue levels – but many agency owners were still not monitoring these figures regularly.
"As owners within the industry, they're not paying attention to their business and they're not taking action to look after it. If the business fails, everybody loses," he said.
Originally Published in Shortlist 21st May 2013. See www.shortlist.net.au for subscription details.
