Here’s something the accounting books don’t seem to talk about – the business value of a true service business.
How do you value a business that has few physical assets, often has little guaranteed future work, relies on its staff to perform day-in-day-out in a competitive and sales driven environment, and is subject to competitive change from every angle?
Welcome to the modern recruitment industry participant.
Evaluating a business of this nature goes beyond simply examining its past results. While historical performance holds some interest, it doesn't reliably foreshadow future performance, whether in the short, medium, or long term. Calculating an average profit over the last three years doesn't hold significance in this context of assessing value.
However, this doesn't imply that the attributes of past performance lack significance. The business development proficiency, client composition, variety, the effectiveness of its delivery teams, and the quality of leadership all contribute significantly to forming an accurate impression of the business.
But if we are going to buy the business then we want to know how it is going to perform in the future. What happened up until now is the domain of the existing owner. They have pocketed the profits. We are interested in how future profits are going to be generated.
The equity value of a recruitment business is tied to the level of risk connected to its potential for generating future profits. This assessment goes beyond mere financial metrics and requires a deeper understanding of the company's operational dynamics and market positioning. In the context of the recruitment industry, where the landscape is constantly evolving, accurately gauging the risk factors involves considering a multitude of variables.
For smaller businesses, this might be impacted by the actions of the owner if they are the key biller, or hold the key relationships, or rely on a large client. For a larger business, this might be related to the margins of contracted clients and the efficiency of servicing those clients. You would also consider competition from external sources, such as in-house teams or managed services.
The challenge for business owners is to demonstrate they have built a business that has a strong opportunity to operate profitably in the future.
The value of a recruitment business can be described as the risk associated with earning future profits.
How do you assess this risk? You need to be able to see your business from the perspective of a potential buyer, and different buyers may have different views of your business.
In a business sale it is often necessary to mitigate risk for the buyer by actively taking measures. This often involves the seller committing to remain involved with the business for a period, assisting the smooth transition of the attributes inherent in the company's historical performance to the incoming owners.
Staying engaged in the business during the transitional phase serves multiple purposes. First and foremost, it enables the transfer of critical knowledge and expertise that might not be readily documented in official records. This knowledge can encompass client relationships, operational intricacies, and industry nuances, all of which contribute to the business's ongoing success.
Beyond the operational aspects, the outgoing owner's continued involvement can also settle a period of change with staff, suppliers, clients and even candidates.
How would future profits in your business be viewed from an external perspective? What are the risk factors? How smoothly can current success be transferred to a new owner?
HHMC Global operates within the staffing and recruitment industry on equity transactions, market valuations and business growth advisory. Contact us to discuss further.
