Strong economic conditions for the past decade have boosted the confidence and coffers of many recruitment agencies. Has that resulted in a rise in recruitment agency valuations? Is your business more valuable than it was a decade ago?
There is no doubt that many recruitment agencies have grown in size. Indeed, there is a new crop of businesses that are replacing those that have been acquired or have reduced in influence. Profits have not been consistent over the decade since the financial crisis, but the last few years has seen Staffing Industry Metrics benchmarks reach new heights. For many, this is the best of times to be the owner of a recruitment business.
The visibility of the industry has risen from the global, large M&A activity that has been undertaken. For Australia and New Zealand, this has been highlighted by the expansion of the Japanese recruitment companies, acquiring a sizeable portion of the local market. Globally, there have been an increased volume of private equity backed transactions, and there has even been some stock market activity.
Some better companies in the market have been involved in very positive deals and sometimes the highlights of these deals are viewed as “the new standard”, especially when discussing the profit multiple that has been obtained.
Deal detail is hard to find
It is reasonable to state that the public knows little about any particular transaction. Where there is a press release it is designed to highlight certain points or to meet legal obligations, but each party’s criteria for the transaction and the compromises made to get the transaction completed always remain hidden.
M&A transaction announcements are deserving of a variation of the old statement “lies, damn lies and press releases”.
Looking beyond the media statements (or hearsay) on company sales can be difficult, as these are most often private transactions within the recruitment industry. Public information is hard to get. However, it is important to be guided by those with genuinely knowledgeable advice on recruitment industry M&A activity, rather than those who may tell you what you want to hear. Deals have variations on EBIT multiple, working capital requirements, earnout, and shareholder obligations into the future. What a shareholder decides to accept may not be the highest multiple, but the best solution to meet personal circumstances and risk/reward characteristics.
There are many variables in how recruitment companies operate and are perceived. The reasons any particular company achieves a certain multiple for their business is almost always the result of risk analysis that at its core, is based on the predictability of the business performance into the future. No-one buys a business just on what it has done in the past; that’s been banked!
Many recruitment owners assume that because another company of similar size and profitability receives a certain price that it means they will as well. That’s wishful thinking. Consider how sustainable and predictable your business really is to an objective external observer.
Deal structures are changing
We are finding more deals have the requirement for the existing shareholders to stay for a period with some ongoing shareholding. For the buyer, this is about containing risk and working towards achieving a future objective.
This continued involvement requirement may not be suitable for all shareholders. For those that are able to embrace new majority ownership and retain equity into the future the returns may well be more lucrative.
Alternatively, those owners seeking to undertake a sale and depart the business may need to accept a reduced transaction value.
Have valuations changed?
We contend that valuations have not changed much over the past decade. Profits have risen, and there is more variation in deal structures, but EBIT multiples have broadly stayed the same. If you are being told something different to that, further investigation might be needed.
Admittedly there is some granularity in the industry that did not previously exist. The recruitment industry consists of thousands of smaller lifestyle companies and few larger companies that show corporate characteristics. We believe there is a widening of the gap in valuations between these two – valuations of lifestyle companies may be slightly falling, while the rare, larger and more corporate recruitment agencies may be achieving slightly higher valuations.
We recommend owners seek external advice before making decisions based on the perceived value of their business. HHMC can assist with market valuations, growth strategy, buy and sell transactions, and ongoing advisory services. Further information is available on our website including a valuations eBook and market sentiment surveys to assist with self-assessment.