We are often invited to review successful growing recruitment agencies.
The owners can be disappointed when we rate them as “lifestyle” businesses with the subsequent valuation implications.
We have defined in our eBook “Business Valuations in the Recruitment Industry” Lifestyle businesses as being run for the benefit of the shareholders, while Owner-dominant businesses have the strategic intent to build the best possible business, and Corporate businesses are, well, very corporate.
Admittedly, the assessment can have some subjective components, but there are always clear indicators. And size, or growth, or profitability on their own do not change our assessment.
Two Indicators of Lifestyle Businesses
The following two indicators can give you a quick check of your business.
For this discussion, let’s assume we are assessing a recruitment agency of 20 staff with three founders working in the business. The founders have a stated goal of wanting the business to be the best it can be.
Indicator 1. The Shareholder/Director/Executive Club
If the original founders are the only shareholders, and are the legal directors of the business, and are the executive team, then the rest of the organisation will see that as an impenetrable “club”.
Board meetings are likely to be operational meetings, discussing Zoom etiquette or how to keep the kitchen clean.
Aspiring leaders in the business can feel excluded from executive meetings because the club makes the decisions. Or worse, they are invited to leadership meetings, but decisions are overturned by the club.
And culturally the club is reinforced, with the form of language (“I’m a shareholder and that’s how we do things around here”) and inconsistent actions around inclusion, values and career paths.
If you recognise this in your business, appreciate that it takes effort to break the club. Founders need disciplined activity over time to show staff that there are genuine growth opportunities for employees.
A rule of thumb is that founders should remember they are executives in the business most of the time (90%+), are legal directors of the business sometimes, and should rarely (never?) act like shareholders at work.
The best companies separate leadership and board meetings, with a separate agenda for each. Bringing aspiring leaders into the leadership meeting has many benefits. Bringing an external advisor to the Board helps with accountability and formalises separation.
Indicator 2. Employment Contracts
A sure sign of organisational maturity is for the HR policies and contracts to be universally applied.
HHMC strongly recommend founders who are employed by the business sign a standard employment contract, with a position description and performance objectives, and are paid the market value for that position. Yes, that implies founders are not paid the same amount as each other, as they are usually doing different jobs.
Further, the founders must comply with the policies of the organisation (including turning up to work and recording annual leave). They can be sacked for violating HR policies, or non-performance, just like other employees. There should be a Shareholders Agreement to manage such extraordinary situations.
“But if I pay myself through dividends, I pay less tax”, is the cry from the founders! Tax is important but is less important than your objective of building the best business you can. As employees the founders have the potential to earn through salary, individual performance, team performance, and profit share. And as shareholders they can be paid dividends.
It is wise to act as though your business is already a division of another company. The objective here is to run ‘clean’ accounts (where you are not misunderstanding the performance of the business), to build a culture where no-one is above the company values, where your best staff can legitimately aspire become part of the leadership team, and all staff are treated equally.
Benefits of an Owner Dominant Business
Organisations that genuinely act as an owner-dominant business reap rewards in many ways. They tend to have stronger growth through critical phases of the business (e.g., growing through the 20-person barrier), they tend to have a much stronger and sustainable culture, and they tend to be more profitable.
As external reviewers of businesses we can spot false claims within minutes. How do you rate your business?