The recruitment industry has a large percentage of micro agencies but when important aspects of the industry such as strategy, valuations and M&A are discussed, the smaller businesses are often ignored and the focus is on larger businesses.
A micro-business is usually defined as a business with less than 5 employees.
It has been well documented that the western economies will see a mass exit of micro and small business owners in this decade as baby boomers retire. What will happen to these businesses? Are the owners ready with an appropriate exit strategy?
During the life of a business all owners have choices to make about growth, size and sustainability. Many business owners, for good reasons, choose to build and operate a micro business (which would be categorized as a lifestyle business). But it is at business exit that the implications of those decisions are felt.
Value and Options
Often, as advisors to the recruitment industry, HHMC Global is asked about exit strategies and valuations for micro businesses. It is very important to have a clear understanding of value and options when considering an exit.
We recommend a business owner take the time to view and evaluate itself from the perspective of a potential buyer. What a buyer would see, when they look at your business and evaluate its potential and its risks, is something that should be kept in mind while forming any business strategy.
The value of a services business such as a recruitment agency is best thought of as the risk associated with earning future profits.
If the characteristics of the business will change after acquisition and the risk of earning future profits rises, then a buyer would consider and reflect this in any price and deal structure offered.
If the owner of a micro business is looking to exit immediately then the value of the business is likely to drop significantly as the drivers of revenue and profit are likely to be tied to the owner.
Once an owner has departed, what value is left? Possibly some client contracts; possibly some consultants; a candidate and client database. But the business position in the market; the key client relationships; the drivers of performance and productivity, and the key revenue generator are usually tied to the owner of a micro business.
Our advice to the micro business owners is two-fold.
Firstly, it is essential to concentrate on wealth creation on a continuous basis, as the lure of an equity transaction pot-of-gold may never be realised. Micro businesses have small equity value.
Secondly, when approaching an exit phase, the owner of a small business needs to position themselves to create a smooth handover. Their business is less likely to be sold as a formal sale process but is more likely to have its assets passed on in a friendly and less structured process. That takes time and energy to achieve. The value is likely to be dependent on the enthusiasm of the owner to stay and assist with a transition and the earning of future revenue.
Unfortunately, what you read in the paper about M&A transactions, about business valuations, and about business sale structures will be of little relevance to you.