Equity Value – Drivers of Equity Value – Future Performance
Here’s something the accounting books don’t seem to talk about – the business value of a true services business.
How do you value a business that has few physical assets, often has little guaranteed future work, relies on its staff to perform day-in-day-out in a competitive and sales driven environment, and is subject to competitive change from every angle?
Welcome to the modern recruitment industry participant.
You certainly don’t value a business like this by just analysing past performance. In a business like this past performance is interesting, but not a good indicator of what might happen tomorrow, or next month, or next year. An average of the past three year’s profit is not relevant in this valuation discussion.
That does not mean that the characteristics of past performance aren’t important. Sales capability, mix and type of clients, performance and productivity of the delivery teams, and leadership all make a strong statement about the business.
But if we are going to buy the business then we want to know how it is going to perform in the future. What happened up until now is the domain of the existing owner. They have pocketed the profits. We are interested in how future profits are going to be generated.
The equity value of a recruitment business can be described as the risk associated with earning future profits.
For smaller businesses, this might be impacted by the actions of the owner, if they are the key biller, or hold the key relationships, or rely on a large client. For a larger business, this might be related to the margins of contracted clients and the efficiency of servicing those clients, or it might be competition from external sources, such as in-house teams or managed services.
The challenge for business owners is to demonstrate they have built a business that has a low risk of operating profitably in the future.
How do you assess this risk? You need to be able to see your business from the perspective of a potential buyer, and different buyers may have different views of your business.
In a business sale situation many business owners need to abate risk for the potential owner by taking personal action, This can be achieved by staying with the business for a period of time and ensuring that the characteristics of past performance are genuinely transferred to the new owners.
HHMC Global provides advisory services to the recruitment and staffing industry and is best known for its work on M&A transactions. HHMC is based in Australia and works with clients globally. To discuss your business future contact Rod Hore or Richard Hayward.