Over the past decade or two there has been little change in valuations of recruitment agencies. One could even argue that at the top end valuations have fallen as there has been less enthusiasm for public companies from investment analysts.
Over this period there has been a huge variation in profits being generated in the industry and varying enthusiasm for acquisitions as economic conditions and business confidence has fluctuated. So profits have varied and there have been more or less transactions, but the underlying profit multiples paid in the industry have remained constant.
During this period, a key determinant of sustainability has been the presence of temp and contract revenue. In most sectors, acquirers are looking for a 50% contribution at gross profit level from temp and contract, and maybe 70% contribution in the IT sector. While this is still very important, other factors are now at play.
Related: Trends Impacting Staffing Industry
The determinants for valuations are changing. The industry now has characteristics more like other maturing industries. Those that can show leadership at a volume/cost level or a genuine niche level are rewarded. Those that show investment and leadership in new industry services will be positively assessed. Those that cannot show leadership see diminishing profits and tumbling valuations.
Greg Savage recently commented that 50% of the recruitment companies in the industry are in danger of failing, or returning negligible profits, or being reduced to “built myself a job” status. HHMC agrees – the only discussion is if that number is 50% or higher. That’s the impact of changes in the industry.
Small companies, lifestyle companies, and owner dominant companies that are not adding value to their clients or justifying their area of specialisation, will see a continuing fall in enthusiasm from acquirers, and in some instances may not be able to be sold. That is an emerging reality. The owners of these businesses should not rely on equity transactions to create wealth.
But at the other end of the scale, the rare companies that find and implement the strategies that add value, build new solutions, win customer loyalty and generate above average returns will see increasing value in acquisition discussions.
The presence of temp and contract services continues to be important for recruitment agencies due to the recurring nature of the revenue and the confidence it gives the acquirer in future profit projections.
But there are new emerging services provided by recruitment agencies that provide similar sustainability attributes. Providing solutions such as RPO, SOW, or HR consultancy can have a positive impact on both the desirability of the organisation as an acquisition target and the potential value of the organisation.
The industry is moving to a period of divergence in equity values. It is more important than ever for business owners to seek advice on their position in the market and to plan their business strategy and personal circumstances accordingly.
HHMC Global provides advisory services to the recruitment and staffing industry and is best knownfor 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.