Strong periods of growth in the recruitment industry allow many poor business decisions to be hidden by positive results. We’ve seen that prior to the Global Financial Crisis, and we are seeing it now as we settle down after the Covid years.
We often see a conspicuously unsuccessful acquisition outcome from the era preceding a downturn, which functions as a valuable lesson for potential future acquirers. Based on our observations, this often involves what can be described as a "shooting star" scenario – a youthful recruitment agency experiencing remarkable growth over a brief period and attracting the interest of an acquiring entity.
However, subsequent events reveal the business to be unsustainable and laden with risks. These risks may stem from a strong reliance on the founders, a pivotal client, or a business model sensitive to economic fluctuations. An instance of this is the dominance of permanent-placement focused revenue.
All recruitment agency owners should keep the spotlight turned to the importance of risk mitigation within recruitment agency operations. As Covid has shown us, we don’t know what is around the corner and your business needs to be sustainable, or you need to understand the potential risks.
Acquirers now emphasize a comprehensive assessment of factors like quality of revenue sources, client dependencies, market volatility, and the adaptability of business models to economic shifts. Overreliance on a single source of revenue, or a particular client, coupled with business models sensitive to economic downturns, amplify vulnerability.
Acquiring managers are often accused of being susceptible to pursuing risky ventures, but most display a preference for risk aversion. Those involved in acquisitions usually analyse significant detail of risks tied to both the target company operations and the acquisition process. This analysis acts as a safeguard against financial and "opportunity" costs. Despite its importance, conducting this assessment presents its own set of challenges.
Small to Medium Agencies
There are implications for the owners of small to medium agencies. There is an increasing gap in business valuation between those companies that can justify their business strategy with re gards to sustainability and those that do not. In the past, this gap was small. Now it is clearly identifiable, and we believe it’s getting larger.
During transactions, speed is often a factor, posing difficulties for management to gather relevant data. Targets might not readily disclose risk management practices. Information is commonly presented positively, potentially understating risk probabilities and impacts, or exaggerating risk management effectiveness.
Furthermore, management championing the acquisition may underestimate the risks of the acquisition and of the target’s business or assume that decision makers are already aware of the risks facing companies within the industry of the acquirer.
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 agency is the key issue. Buyers are better informed and are carefully assessing the risk of companies from their perspective. With low barriers to entry to the recruitment industry, it continues to be a buyer’s market.
We do not advocate always having a sole focus in maximising equity value – short term wealth creation and work-life balance can be powerful strategies for smaller agencies.
For small to medium recruitment agencies, understanding how potential acquirers perceive their business is essential. Directors should actively inquire and be sceptical, uncovering hidden insights and risks from this “outside view” perspective.
HHMC Global operates within the staffing and recruitment industry on equity transactions, market valuations and business growth advisory. Contact us to discuss further.