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Reviewing the ANZ Recruitment Industry - Low assessment of risk
The strong economy combined with growth of the recruitment industry prior to the financial crisis allowed many risky decisions to be hidden by positive results.
But each market has at least one spectacularly bad acquisition result from the period prior to the financial crisis that serves as a lesson to future acquirers. In HHMC’s experience that usually is related to a “shooting star” – a young recruitment agency that has an outstanding few years of growth and catches the attention of an acquirer, but the business proves to be unsustainable and risky. The risk can come from a heavy reliance on the founders, or a key client, or a business model subject to economic variations (such as perm-dominant recruitment).
The financial crisis taught many lessons, and the core sustainability of recruitment agencies is now very well understood by acquirers.
Even though corporate managers are sometimes accused of having incentives to adopt too risky projects, most managers are prone to risk aversion and tend to avoid risks when making business decisions.
Directors of acquiring companies are well served by more extensive reporting to the Board regarding risks associated with the target company's business and the acquisition, including an evaluation of the target's risk identification and management processes. This assessment, when presented in terms related to the acquiring business’ strategy, can be a meaningful barometer of the potential for unexpected issues to arise, which helps protect the company and directors from financial cost and “opportunity” cost. However, completing such an assessment bears its own difficulties.
Small to medium agencies
There are significant implications for the owners of lifestyle agencies and smaller owner-dominant agencies.There is an increasing gap in business valuation between those companies that can pass a sustainability test and those that do not pass this test. In the past this gap was small, now it is clearly identifiable and, we believe, getting larger.
Transactions are often conducted quickly. Management faces challenges in obtaining risk-related information during an acquisition. Targets are not always forthcoming about the management of risks facing their business. Information is frequently presented in the most positive light and can downplay the probability and magnitude of potential risk, or oversell the effectiveness of risk management processes. Furthermore, management championing a transaction may underestimate the risks of the acquisition and of the target's business, or assume that directors are already aware of the risks facing companies within the industry of the acquirer.
Related: Build Trust and Mitigate Risk in a M&A Transaction
All recruitment agencies have a value and there is probably a buyer for all recruitment agencies that are seeking a sale. But the value applied to each recruitment agencies is the key issue. Buyers are better informed and are carefully assessing the risk of companies from their perspective. It is a buyers’ market.
Hence owners of small to medium recruitment agencies need to educate themselves on how they will be perceived by a potential acquirer of their business. It is the director’s job to ask sceptical and penetrating questions of management and advisors, particularly during a major business decision such as an acquisition. Assisting this assessment is the key motivation for this series of blog articles by HHMC.
Previous articles have discussed business valuation, normalised profit, net working capital, and sustainability.
It is important for business owners to have a clear understanding of their business value as this can be a major input into business strategy planning and also personal wealth creation planning. However, there is no single “right” approach or strategy for a business.
Sometimes building a business to maximise equity value is not the right solution – many successful and profitable businesses have little equity value – but it is important to understand the implication of strategy decisions and be prepared for discussions with potential acquirers.
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.
