It is pleasing that the industry press and the mainstream press is promoting the good news M&A stories that show our industry has a positive and vibrant life.
And there is no doubt there is more to come. A set of positive conditions, not the least which is the latent demand for equity transactions following the global financial crisis, means that industry buyers, industry sellers and financial institutions are seeking to execute transactions.
We have seen some transactions at the top end go through an approach, negotiation, agreement and settlement in very quick elapsed time. And sometimes for valuations that make us look.
HHMC is often asked to convey the implications of the headline deals to the owner-operator in the industry. What similarities can be drawn from the large global transactions? What can we learn about buyers, about valuations, about deal structure that is applicable to smaller privately owned companies?
The good news is that there is increased interest in M&A transactions at all levels of the industry. Small, medium and large recruitment agencies are experiencing an increased demand for equity transactions.
But that is about where the good news ends. Here are five issues that smaller agencies need to consider when contemplating an equity transaction in today’s market:
1. Size and corporate sophistication. Bigger companies have different characteristics to smaller companies, attract a different buyer, demand a different valuation, and are usually “sale ready” – physically and mentally equipped to manage an approach from a buyer. The characteristics of these larger companies and the deals they undertake do not translate to the smaller companies.
2. Global v Local. It is unusual for a global company to acquire a smaller company unless it is to be a direct integration into an existing team. Smaller companies are a potential risk from a medium term perspective, especially is the smaller company is a long way from the corporate headquarters. Smaller companies should not have high expectations of selling to an overseas organisation.
3. Strategy. A portion of the larger deals are occurring to position companies for changes in the marketplace – larger companies do not want to be left behind in terms of new services offerings and specialisations. Smaller companies often do not have the leading edge capability being sought, or do not have the sustainable size that enables a rapid scaling of a service. There are exceptions to this of course!
4. Timing. We are in a cycle that is conducive to M&A transactions – low interest rates, global industry changes, distance from global recession are just a few reasons business confidence for transactions is high. But business cycles will continue to move and evolve and these conditions will not last. If you are considering an exit in the next 2-4 years, now might be the time.
If you want to optimise your business or build characteristics that make you “equity attractive” then you also need to consider that willing buyers may be scarce when you are ready.
5. What if there are no buyers for your business? All business owners need to have a plan B. Research points to an excess of businesses for sale in the next decade as baby-boomers retire and industry changes rip through traditional businesses. It is prudent to plan incremental wealth creation as the pot of gold at the divestment may become harder to achieve.