M&A Terminology and definitions - Type of company: Corporate
Many recruitment agencies are driven to become “more corporate” and are investing in their business to achieve this. The reason for this is more easily understood if we are clear on the characteristics of a corporate agency.
To contrast with our discussion of recruitment agencies that are characterised as lifestyle or owner dominant this article specifically focuses on the characteristics of corporate recruitment agencies.
Our simple definition is that corporate businesses could, if they so desired, undertake an Initial Public Offering (IPO) to become a publically listed company. They are “pre-IPO”.
The characteristics of a corporate agency would then include:
Size – Size does matter. Without scale of operations then management structures, diversity of services, diversity of clients, great technology and robust processes cannot be sustained.
Predictable revenue and profits – having the size and capacity to win the type of work with the type of clients that leads to greater predictability of both revenue and profits is a key corporate characteristic.
Less reliance on founders – The founders have either removed themselves from the operational management of the business or are surrounded by a competent and delegated management team. The business is not run in the founder’s image.
Multiple Shareholders – It is rare for a corporate business to have a single shareholder or just a few shareholders. There are usually multiple shareholders, not all of them holding executive positions within the business, and there will be mature processes for dealing with the requirements and needs of shareholders as well as changes in shareholding.
External Board – Corporate agencies will have a formal Board of directors that include a number of independent non-executive directors. This will be reflected in formal strategy and strategy review processes, as well as improved corporate governance and risk management.
Strong Management Team – A strong management team that has been empowered to manage the business is a key risk mitigation factor for corporate businesses. The business must not rely on individuals for its decision making or overall leadership.
Externally Audited Accounts – Running the financial processes of the organisation in a manner that stands up to external audit ensures that the characteristics that are allowed in smaller business are replaced with professional, non-personal, business processes.
Strong Corporate Governance – Corporate organisations are aware of, and supports, all stakeholders in its business in a moral and ethical manner and usually have a highly developed corporate responsibility within its community.
A great understanding of risk – Corporate organisations are able to assess risk clearly and make decisions that manage exposure to risk to ensure consistent performance into the future.
In the recruitment market, there is a very small percentage of companies that meet these characteristics. Many agencies that display these characteristics, especially in the US and the UK, are those that have Private Equity investment. It is the preparation and execution of the investment process that often drives these characteristics.
One of the significant features of an owner dominant business is that they are striving to become a corporate entity, and are investing in their business to build these characteristics, as they find it advantageous from both a business perspective, an equity value perspective, and an “attractiveness” perspective.
The valuation of corporate agencies is different to lifestyle and owner dominant agencies as the corporate agencies have reduced the risk associated with earning future profits.
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.