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What Makes A Recruitment Business An Appealing Acquisition Prospect?

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The recruitment industry is undergoing significant change, at the same time a massive number of businesses are going to come onto the market for sale. You need to be positioning yourself to achieve the best outcomes.

Changing Industry

Growth for recruitment companies has become more difficult, and it’s not just because of the economic conditions locally or globally.

Australia and New Zealand, like much of the global recruitment world, is experience a rapidly changing marketplace. Customers want different solutions from recruiters: value, speed, expertise, customised services, and specific knowledge of their industry. And technology and social media are tools that allow clients to operate differently from the way they have in the past.

Many recruitment companies realise that organic growth has limitations and often don’t have the internal capabilities to move into new markets successfully. Those organisations take a strategic decision to expand through acquisition and are guided by some key parameters that determine what type of business they target for acquisition.

Related: Acquiring a Recruitment Business – What are the Options?

Baby Boomer Influence

The landscape of the recruitment industry in both NZ and Australia is still dominated by small to medium businesses. While there are a number of sizeable local businesses, the pyramid is very flat and there are a vast number of small and very small agencies.

The demographics of business ownership in Australia and New Zealand, as in most western countries, is dominated by the baby boomer generation who are seeking to exit now or in coming years. This will mean a much greater supply of businesses for sale; many of whom will struggle to find buyers. Having the business characteristics that make an acquisition an attractive proposition is essential.

What’s important for buyers? 7 tips for sellers.

Buyers have choice when they consider a particular company for acquisition. They can look at your company, or another company, for acquisition. They can invest in organic growth as an alternative to acquisition. Or they can hold on to their assets and wait for market conditions to change.

The challenge for businesses seeking to sell is to make themselves as desirable as possible; to tip the odds in their favour.

These are HHMC’s 7 tips for selling organisations that wish to attract buyers AND achieve a strong sale outcome – you must consider how the buyer is viewing your organisation and what will improve the confidence of an acquisition.

Niche capability:

Does the business the buyer is considering operate in a significant niche that adds a new market capability to their current business? Can they understand that market?

Scalability:

Can this business grow? Is the market it operates in big enough to achieve growth? What is their current market share? Is there sufficient synergy between the markets/business to support growth? Are the systems and processes in place capable of scaling up?

Sustainability:

Meaning the predictability of the revenue stream. For recruitment companies this means the ratio of contractors/temps at the gross profit (gross margin level) and the number and quality of PSA’s with clients that actually produce placements.

Consistency of Profits:

An obvious factor but profitability and consistency of profit has to be considered. A business with marginal profitability (even allowing for normalised adjustments) is a greater risk even if there are contractors and potential. Are there obvious costs that can be taken out of the business without damaging sales?

Management quality and availability:

Is there a layer of management that can run the business now or is it dependent on the owner? Are they properly incentivised to grow the business further?

Company Structure:

Increasingly this is an issue. In Australia, it is common practice for many businesses to be owned through Trust structures and Partnerships of Trusts for a range of tax management reasons. While it may be advantageous for the operating entity to be structured this way, when it comes to selling to larger organisations, particularly more corporate structured businesses, having to buy into that type of ownership structure is not usually appropriate. There may be tax implications for the buyer if they have to plan to consolidate “messy” structures after the acquisition. If so, they will simply seek to pass those costs back to the seller as a price reduction or move on to an easier deal.

Transferability:

We often remind sellers that the buyer is acquiring an opportunity to make profits in the future. The profit generating assets of the business such as revenue streams, contracts, client relationships and committed staff are all assessed for their ability to be transferred to the acquirer.

Those business owners that address these issues will improve their chance of gaining a strong equity value for their business.
The Global Recruiter

Article written by Richard Hayward and originally published in The Global Recruiter March 2014

Categories: M&A

Tags: Acquire, Acquisition and Divestment, Recruitment, The Global Recruiter, Merger and Acquisition, Business for Sale, Buy a Business, Business Valuation

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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