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Article written by Rod Hore and originally published by NPAWorldwide
A micro-business is usually defined as a business with less than 5 employees. The recruitment industry has a vast percentage of agencies at this micro level. Though, the irony is, when important aspects of the industry such as strategy, valuations and M&A are discussed, the smaller businesses are ignored and the focus is on larger businesses.
It has been well documented that the western economies will see a mass exit of micro and small business owners in the next few years as baby boomers retire. What will happen to these businesses? Are the owners ready with the appropriate exit strategy?
During the life of a business all owners have choices to make about the growth, size and sustainability of the business. Many business owners, for good reasons, choose to build and operate a micro business. But it is at the business exit that the implications of those decisions are felt.
Often, as advisors to the recruitment industry, we are asked about exit strategies and valuations for micro businesses. It is very important to have a clear understanding of value and options when considering an exit.
We recommend a business owner take the time to view and evaluate itself from the perspective of a potential buyer. What a buyer would see, when they look at your business and evaluate its potential and its risks, is something that should be kept in mind while forming any business strategy.
Related: The Best & Worst Business Exit Strategies
The value of a services business such as a recruitment agency is best thought of as the risk associated with earning revenue and profit into the future. If the characteristics of the business change after acquisition, then the risk of earning future profit is likely to fall; and this is something that a buyer would always consider and reflect in a price and structure offered to acquire a business.
If the owner of a micro business is looking to exit immediately then the value of the business is likely to drop significantly as the drivers of revenue and profit are likely to be tied to the owner.
Once the owners have departed, what value is left? Possibly some client contracts; possibly some consultants; a candidate and client database. But the business position in the market; the key client relationships; the drivers of performance and productivity, and the key revenue generator are usually tied to the owner.
Our advice to the micro business owners is two-fold.
Firstly it is essential to concentrate on wealth creation on a continuous basis, as the lure of an equity transaction pot-of-gold may never be realised. That is particularly true for micro business owners as they have made the conscious decision to build a business that has a small equity value.
Secondly, when approaching an exit phase, the owner of a small business needs to position themselves to create a smooth handover. Their business is less likely to be sold as a formal sale process, but is more likely to have its assetspassed on in a friendly and less structured process. That takes time and energy to achieve. The value is likely to be dependent on the enthusiasm of the owner to stay and assist with a transition and the earning of future revenue.
Unfortunately what you read in the paper about M&A transactions, about business valuations, and about business sale structures will be of little relevance to you.
