Equity Value – Drivers of Equity Value – Sustainability including longevity
We see the word sustainable used a lot but what does it mean?
When HHMC is assessing a small to medium recruitment business it can be simply described as looking for the risk of single points of failure now or in the near future.
In smaller businesses this single point of failure can be related to the extraordinary reliance on the foundering shareholder(s). Often the shareholders are the key revenue generators, hold the client relationships, are responsible for building the team, and fund the business.
If the shareholder circumstances change from a personal or business perspective then the business is at risk. It is not an “engine” that will continue on; it is not sustainable. As general rule if a business is less than 4-6 people then it could not be classed as sustainable. To extend this, a business division that is less than 4-6 people cannot be considered a sustainable division/branch/sector within the business.
We also consider the age of a business. The recruitment industry has many businesses that start brightly but fail to sustain the performance. A business that is less than say 3 years old has not proven its longevity and its ability to handle business, industry and economic changes.
As a business grows and more staff are involved then the risk of individuals impacting the business reduces. However there are many aspects to a business that still need assessment. In an earlier article we described the value of a business as the risk associated with earning future profits.
Items to consider are:
- Who holds the client relationships?
- Who is responsible for generating sales?
- Who is responsible for generating revenue?
- Does a lot of revenue or profit come from one or a few clients?
- Are the systems and processes manually held together?
- Is the funding dependent on the shareholders?
- What would happen if key staff or key clients left?
- What if the funding source had to be renegotiated?
- Is the revenue reliant on continued sales (as for Perm Recruitment?)
- Is the client base likely to change its procurement methods?
- Is there are strategy that can be articulated and is being executed?
A sustainable business will have size, but will have so much more. It will have a business-to-business approach to clients, be continuously refreshing the client base, build appropriate structure and quality into its processes, define and execute a strategy, and never take revenue streams for granted.
Proving sustainability over time and throughout business cycles is a key determinant of business value.
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.