Initially this article was called “Why you wont get the big bucks when you sell” but we do try to be positive when talking to recruitment industry business owners.
It can be difficult for a business owner to reconcile the conflicting information that is in the marketplace about business valuations and what might apply to their circumstances.
Over the years HHMC has given numerous presentations and written a heap of articles on this topic. The most widely read was last year’s blog article "What is your business worth? Let's get realistic". In some ways this article is an extension of that one.
It is frustrating for owners when business plans and personal plans are made on incomplete or incorrect information.
We have heard some outlandish comments from owners regarding the perceived values of their business. Some of the misinformation originates from their advisors, such as external accountants, who do not understand the characteristics of the recruitment industry. Some come from a degree of wishful thinking from owners.
Maturing Industry; Changing Valuations
There has been a lot written about the changes in the global recruitment industry. In many ways the recruitment industry is now just like any other industry – it is consolidating, it is not growing quickly, it is subject to disruptive technology and practices, margins are shrinking, costs are rising, and buyers are increasingly mature in their purchasing decisions.
This has an impact on recruitment industry business valuations. Both positive and negative.
On the down side, some recruitment businesses may be valued more harshly now than they would have been prior to the financial crisis. If your business is small, owner dominated, offering generic services, not able to articulate a value proposition to the client, has high staff turnover, poor productivity, or is perm dominated then the market valuation may be harsh. Buyers of these business are usually other privately owned businesses and they assess risk very well these days. That’s why many wont get the big bucks they have been dreaming of.
But at the other end of the scale there is the potential for valuations to rise. The Asia Pacific region is important to the future of the global recruitment industry. HHMC focus on Australia, New Zealand, Singapore and Hong Kong but when the huge Japanese market and the emerging stars of India, China and the other south east Asian countries are added it makes sure our region is on the global radar.
We have previously categorised the industry into lifestyle companies, owner-dominated companies, and corporate companies. In our markets there are many lifestyle companies (maybe 70% of all companies), a healthy group of owner-dominated businesses, and unfortunately just a few corporate entities.
Those entities that display corporate characteristics, and can prove their future growth and profitability, will become positive targets in the future. These companies have the ability to solve a buyer’s problem.
Today we are in a situation of simultaneously rising and falling valuations and your situation depends on the category your business is in.
Characteristics You Need
It is inappropriate for every business to have corporate characteristics, which can most easily be summarised as saying that the business is positioned to become a public company, if it so wished, and would certainly attract Private Equity attention.
To achieve these characteristics you need size and you need time – the governance, financial sophistication, external board, provable strategy, constancy of results, investment in management, and sustainability of performance requires a big investment over a period of time.
But owner-dominated businesses do need to be making strides in that direction. Every business should have a “continuous improvement” attitude that is manifested by:
- a clearly articulated vision
- resilient strategies to achieve the vision,
- good budgeting and management reporting,
- developing a management team that reduces reliance on the founders
- subjecting itself to external review (for example, participate in the RIB Report or establish an Advisory Board)
- striving for above average productivity and profitability
- investing wisely in technology and marketing
- running an efficient back office
- being financially sound
- displaying sound leadership both internally to the business and externally to the industry and clients
The businesses that display these characteristics give themselves the best opportunity to build a better business and to achieve above average valuations.
Consider An External Review
What problem does your business solve for a potential buyer?
Is your business a safe pair of hands for geographic or market expansion? Does your business have a sustainable marketing, sales and delivery story to enable expansion into a new sector? Have you built a team that is committed to achieving shared goals?
HHMC undertakes many external reviews and market valuations for organisations. Included in this process is a risk assessment showing how your business would be perceived externally.