Drivers of Equity Value

Performance in the recruitment industry is easy to see. Placements, revenue, gross profit, profit. 
These are immediate measures of activity and, in many cases, success.

But they do not fully describe the nature of the business that has been built. That is where sustainability and equity value become relevant.

Sustainability as a characteristic

Sustainability is not an objective that all businesses must pursue, but it is a characteristic of how a business operates.

Some businesses are built around the founder, which usually means relationships are personal, delivery is direct and revenue is driven by individual effort

These businesses can perform well, generate strong income, and provide long term satisfaction for the founder. But they tend to have certain characteristics such as variability in performance, reliance on key individuals, limited scalability, and limited transferability.

Some businesses are built differently. They place more emphasis on:

• shared relationships

• repeatable processes

• broader leadership capability

• consistency of delivery

   

These businesses tend to display more stable performance over time. Neither model is inherently correct, but they lead to different outcomes.

How sustainability influences value

Equity value is based on expected future performance. HHMC has defined the value of a recruitment agency as “the risk associated with future profits”.

That expectation is shaped to a large extent by how sustainable the business appears to be.

Where there is consistency of earnings, visibility of future revenue, depth of client relationships, and independence from the founder there is generally more confidence in what the business will deliver in the future. Where these are less evident, there is more uncertainty.

That difference in certainty influences value. 

Those that have observed or participated in the staffing industry for some time are sometimes amazed that one company appears to sell easily and for good value, but another is known to want to sell but struggles to achieve an outcome. While there can be a myriad of reasons for these circumstances, looking through the lens of sustainability assists to understand what affects the outcomes.

The drivers of equity value

The drivers are consistent across the industry. They include:

• Predictability of revenue

• Diversity of client base

• Quality and consistency of earnings

• Strength of leadership beyond the founder

• Clarity and reliability of financial information

• Evidence of repeatable processes

• Position in the market

These are not abstract ideas. They are observable characteristics of the business, and they are shaped by how the business has been constructed over time.

Different choices, different outcomes

Two businesses can look similar on the surface and be of similar size, similar revenue and have similar clients. But they may operate very differently underneath.

One may be dependent on the founder, concentrated in a small number of relationships, and variable in performance. The other may be supported by a broader team, diversified across clients, and more consistent in its results

Both are functioning businesses and both may be successful. But they represent different levels of sustainability. And therefore, different levels of equity value.

Building sustainability often involves trade-offs. It may require:

• investing ahead of immediate return

• introducing structure and discipline

• delegating activities previously controlled by the founder

• accepting slower short-term growth

These decisions can improve sustainability, but they may also reduce current profitability, increase complexity, or frustratingly alter the founder's experience of the business.

The role of leadership

One of the most understated drivers of sustainability is the leadership structure of the business.

A business that relies on a single individual will behave differently from one supported by a capable leadership team.

Leadership influences decision quality, consistency of execution, the ability to scale, and resilience under pressure It also influences whether the business can operate, and grow, without constant founder involvement.

This becomes increasingly important as the business grows and that aspect is explored in more detail in later articles.

Sustainability and equity value are not separate topics. They are the result of how the business has been built – founders values, size, and developing appropriate structures and disciplines. 

Looking forward

The purpose of this discussion is not to suggest that all businesses should pursue maximum sustainability or equity value. It is to make clear that different approaches lead to different outcomes.

Understanding those outcomes allows founders to make deliberate choices. Two of the most important components of those choices - how revenue becomes more predictable, and how leadership capability is developed beyond the founder - are the factors that most clearly define sustainability.

HHMC Global operates within the staffing and recruitment industry on equity transactions, market valuations and business growth advisory. Contact us to discuss further.