You could ask why that is so? The economic outlook appears just as cloudy as this time last year, although many companies are reporting improved trading conditions. Recent RIB Report data shows that agencies recorded increased average sales and increased average profits in the financial year ending 30 June 2014. However 21% of agencies still traded at a loss in the year, which, however, was an improvement on the prior year.
Part of the rise in activity can be explained by natural market forces. There is no doubt there is pent up demand for activity from both buyers and sellers after a number of quiet years following the financial crisis. And we cannot dismiss the real presence of baby boomers transferring their equity and seeking new roles or preparing for retirement.
We also get a feeling that executives are just keen to “get on with it” after a few years of cost cutting and looking inwardly into their business.
Related: Some M&A Basics
Anything we have discussed about industry change in previous years is being amplified and hastened now.
Smaller companies are, largely, finding business conditions tough as they struggle to develop a winning strategy. Access to traditional markets is difficult. New services are required to prove value to clients and earn new revenue streams. Contingent perm work is no longer sufficient.
A recent presentation by HHMC explored the gap that is opening in market valuations between desired acquisition targets and those that are struggling to attract interest.
It’s not just about size, but that is important. Nor is it just about the perm/temp mix, but that is important as well. The number of companies performing poorly is reflected in the RIB Report data, where productivity is at a 10 year low as measured by the Gross Profit generated for each $1 of salary.
Buyers tell us they are looking for management capability, certainty of customer relationships, value added services that demand client attention, a model that has the ability to grow, and business development capability.
Agencies that cannot show these characteristics may prove to be less attractive, or command less value, in today’s market.
But those agencies that can display these characteristics are attracting strong attention and occasionally being surprised with the valuations on offer.
HHMC works with organisations to prepare them for growth or exit via trade sale.Talk to us about our assessment products.
Article is written by Richard Hayward HHMC Australia