We see the word sustainable used a lot but what does it mean?
When HHMC Global is assessing a small to medium recruitment business to understand its positioning and value in the market, sustainability can be simply described as looking for the risk of single points of failure now or in the near future.
In smaller businesses this single point of failure can be related to the extraordinary reliance on the founding shareholder(s). Often the shareholders are the key revenue generators, hold the client relationships, are responsible for building the team, and fund the business.
If the shareholder circumstances change from a personal or business perspective, then the business is at risk. It is not an “engine” that will continue on; it is not sustainable. As a rule, if a business is less than 4-6 people then it could not be classed as sustainable. To extend this, a team that is less than 4-6 people cannot be considered a sustainable division/branch/sector within the business.
We also consider the age of a business. The recruitment industry has many businesses that start brightly but fail to sustain the performance. A business that is less than 3 or 4 years old has not proven its longevity and its ability to handle business, industry and economic changes.
As a business grows and more staff are involved then the risk of individuals impacting the business reduces. However, there are many aspects to a business that still need assessment. HHMC describes the value of a business as the risk associated with earning future profits.
Items to consider are:
- Who holds the client relationships?
- Who is responsible for generating sales?
- Who is responsible for generating revenue?
- Is the revenue reliant on continued sales (as for Perm Recruitment?)
- Does a lot of revenue or profit come from one or a few clients?
- Is the client base likely to change its procurement methods?
- What would happen if key staff or key clients left?
- How quickly can new staff be hired and become productive?
- Is the funding dependent on the shareholders?
- What if the funding source had to be renegotiated?
- Are the systems and processes manually held together?
- Are the systems auditable for compliance?
- Is there are strategy that can be articulated and is being executed?
Recent years have confirmed that businesses focussed extensively on permanent placements have achieved less value in a business sale. Although there are some exceptions to this, in general perm placement businesses have found it harder to demonstrate the sustainability required to achieve greater values at the time of a sale.
Why are they seeking this proof of sustainability? Organisations targeting acquisitions want to know that next year’s profit is reasonably predictable, and the year after.
The recruitment industry is increasingly complex. Market opportunities that provide annuity revenue are sought after. Temporary placements provide that increased certainty and a relative form of annuity income.
The changes in the market bring opportunities for companies who adapt best, as always. Many corporates have found new ways to address their human capital requirements: RPO, MSP, SOW projects and HR consulting provide opportunity to add annuity revenue to a recruitment agency.
We now see acquirers looking for revenue streams that come from these types of sales models. Why they seek it is of course; firstly, it provides annuity income and secondly it creates alternate ways of engaging with the client. Strategic acquirers are more attracted to a sales model that better protects the revenue stream rather than one that follows the traditional path to accessing a client’s job requirements. In short, they won’t pay as much for staffing agencies that operate in the same way they did a few years ago.
It is our experience that recruitment agency owners tend to overvalue their businesses. There is a tendency to focus on the past successes and not the positioning of the business for the future. Having an external view of the business from a buyer’s perspective is critical to understanding risk.
A sustainable business will have size but will have so much more. It will have a business-to-business approach to clients, be continuously refreshing the client base, build appropriate structure and quality into its processes, define and execute a strategy, and never take revenue streams for granted.
Proving sustainability over time and throughout business cycles is a key determinant of business value.
Article originally published in JobsatTeam.com written by Rod Hore