The US economy has just celebrated a decade operating in a bull market, while the Australian economy has a 28 year winning streak of positive economic growth.The real question at this part of the cycle is “will this growth continue”? If you are contemplating the sale of your business in the next decade, what should you do and when should you do it?
There is an argument for continued growth. Think about the following:
- We do know that there is a direct link between continued economic growth and the performance of recruitment companies. You just need to see what has happened since 2013 where operating performance and increasing business confidence have combined to see the size and profitability of many recruitment companies expand considerably.
- Assessment of the value of recruitment companies, like all other companies sold in the market, will always consider the risks associated with earning future profits. For those recruitment companies who have positioned themselves as a true strategic partner alongside their clients and have a strong temporary/contractor or an RPO/MSP orientated model can demonstrate a recurring income that makes them a lot more attractive to recruitment company investors.
- If you provide recruitment services into sectors that are growing and becoming key to economic growth and social cohesion, you will always have more future opportunities than those dependent on declining industry sectors and functional specialties that were at the fore in the 1990s. Look at the growth of the IT and Health and Community Care sectors over the past decade.
- If you are growing your market share in the local market and your team is on a roll, if you truly believe that you have something special with a good succession plan and the human capital that will continue to deliver the energy, then you can continue to outperform the market.
An interesting observation has been relatively consistent earnings multiples have been achieved over the past decade. Those businesses that have sold at great prices have demonstrated strong growth and internal business strength.
There is also an argument for potential economic decline or slower growth. Will these factors dominate?
- A recession or slower economic growth will lead to lower employment growth (or even a reduction) leading in turn to fewer transactions and lower levels of recruitment agency profitability.
- The employment industry today operates off a relatively high fixed cost base and will always be impacted by changes in marginal revenue. Significant falls in profitability can result from minor changes in revenue profile.
- Many economists have noted we are getting close to an inverted yield curve, which may or may not indicate a slow down or even recession is on the way.
- If you believe in the theory of investment cycles, having had a bull market in global equities for the past 10 years and positive economic growth in Australia for the past 28 years; what goes up must come down.
- If a downturn hits, we know from history that we take quite a bit of time to adjust our approach as we naturally protect ourselves, our business and our committed team members. Nobody likes taking a business to market when profits are going backwards and buyers have a lack of confidence about the future. Changing gears in a turbulent economy is no fun as in many cases we do not have the capability to control our own destiny.
The recruitment industry is over represented by baby boomer owners. Many of these owners have read the HHMC blogs and taken on board our advice and started transitioning their business from being lifestyle focussed to a more robust and sustainable entity. These owners need to assess the amount of energy they have available to continue to operate their business while transforming to succeed in an ever changing market.
What do you do? Is it time to review your business and consider where your company is at and its ability to handle the economic cycle? HHMC Global would welcome the opportunity to review your business and discuss future strategies that will enhance operational performance and long-term shareholder value.