We have regularly commented that recruitment agency owners spend too much time discussing valuation multiples and not enough time discussing deal structures.
The multiple is easy to discuss. Deal structure is a much harder conversation because it involves a discussion of time, risk, trust, control and personal objectives.
Yet it is often the structure of the transaction that ultimately determines how much wealth is created and under what conditions. In our experience, deal structure is the most important conversation.
One of the more common questions we hear is: “What is a normal deal?”
The reality is that there is no normal deal. Transactions vary enormously because buyers differ, owners differ and circumstances differ. The same business may result in:
a complete sale;
a minority investment;
a staged acquisition;
a long transition period or a short transition period;
different working capital arrangements;
deferred payments;
earn-outs; or
combinations of all of these.
None of these structures are inherently right or wrong. They are simply different ways of sharing risk and reward and meeting each party’s objectives.
Eventually Every Transaction Becomes a Discussion About Risk
In the early stages of a transaction process, the conversation is mostly about the future vision of the two companies working together.
Is there a benefit in joining together? Do we like and trust each other? Is the future plan logical and positive for both parties? Is the transaction good for clients, staff and shareholders?
Only later does the discussion turn to value. And as the conversations become more detailed, they gradually evolve into something else entirely. Eventually, almost every transaction comes back to one question: who carries the risk?
The buyer is asking:
Will the clients stay?
Will the profits continue?
Is the leadership team strong enough?
Will the founder remain involved?
Can the business continue to grow?
At the same time, the owner is asking:
Is this the right time?
How long do I want to stay?
Can I work for somebody else?
How much uncertainty am I comfortable with?
How much risk am I prepared to retain?
These are very personal questions. And they often have a greater impact on outcomes than small differences in valuation multiples.
An earlier article discussed the importance of “knowing yourself”. Perhaps nowhere is that more important than in an equity transaction. This is the time where your personal and business objectives are on the table and need to be aligned for the transaction conversation to continue.
Some shareholders are ready to leave and have no interest in another chapter. Some enjoy building businesses and are excited by the opportunity to become part of something larger. Some are seeking certainty. Some are seeking growth. Some want to maximise wealth. Some want to protect culture and people. Some want to ensure long-term opportunities for their leadership team. Others simply want more balance in their lives.
These objectives are all legitimate and they help explain why different owners accept very different structures.
This alignment of personal and business objectives is naturally made more complex when there are multiple major shareholders in a business that is entering a sale process. The alignment of shareholders entering a transaction is a topic in its own right and adds another layer of complexity to any process.
No approach is right or wrong. But understanding yourself and your objectives has a significant impact on the type of transaction that may suit you.
Sellers sometimes assume that the buyer’s role is simply to pay the highest possible price.
In reality, buyers have their own objectives and constraints. Private equity firms have investors. Corporate buyers answer to boards and shareholders. Entrepreneurial buyers have their own ambitions and financial limitations.
Different buyers will see the same business differently.
One buyer may want the founder to stay for five years. Another may be comfortable with a twelve-month transition. One may be seeking immediate control. Another may be happy with a staged approach.
This adds to the complexity of a sale process for the selling shareholders. If they are in serious conversations with more than one buyer, they are likely to have multiple deal structures being discussed that are substantially different. Comparing these structures is rarely straightforward because each proposal allocates risk and reward differently.
This can be a difficult idea for owners to accept because multiples are easy to compare. An offer may have a defined profit multiple higher than another offer’s multiple. It sounds better, but the decision is rarely that simple.
A transaction with:
a high multiple;
a long earn-out;
extensive conditions; and
several years of required employment,
may ultimately prove less attractive than a lower multiple with:
more cash up front;
fewer conditions; and
greater personal freedom.
The highest multiple does not automatically create the best outcome.
Owners often search for the perfect deal. In our experience, perfect structures rarely exist. Instead, successful transactions are usually built around alignment:
risk and reward;
buyer and seller;
time and money;
expectations and reality.
There is an old statement that a successful deal is one where both parties end up slightly disappointed. That makes sense when you consider the process of finding a middle ground from both party’s personal and business objectives.
There is no perfect structure. There is only the structure that best aligns the objectives of buyer and seller. And after all the years of advising recruitment business owners, we’ve become convinced that this is the most important conversation in the transaction process.
HHMC Global operates within the staffing and recruitment industry on equity transactions, market valuations and business growth advisory. Contact us to discuss further.