Too many recruitment company owners take expert advice too late in their business’ lifecycle and so only achieve a fraction of the value that they should when they sell. Buyers of and investors in recruitment companies typically look back three years when assessing the value of a business and so you should take specialist advice even before that to achieve maximum value.
There are dozens of things that erode company value in an investor’s eyes but here are five of the most common significant ones:
1. Inconsistent growth or profit – predictability is highly valued by investors and they will pay more for the same business if profit growth is steady but on average 10% lower than if profits yoyo above and below target.
2. Unsecure revenue streams – the more dependent the company is on revenues from any one source the riskier the business. If one recruiter or client accounts for a disproportionate percentage of revenue then that increases the risk, especially if that revenue source isn’t tied in. For example, key employees should be tied by EMI share schemes (or other methods) and there should be succession plans in place to ensure continuity if they leave. Securing some clients on long term contracts can also help minimise the risk of the investment.
3. Lack of proven scalability – a proven ability to replicate the company’s success via increased market share, growth in their niche sector and/or geographic coverage demonstrates that the potential for growth isn’t limited and so will significantly improve the valuation.
4. Management records – the higher the risk of an investment the lower the company value as far as investors are concerned. While profit and gross margin are important to investors they don’t tell the whole story of the business. To assess the future potential of the business and the risk of the investment, investors want historical documentation covering other key areas of the business (finance, sales, KPIs, talent, operations, marketing, etc) covering the last three years.
5. Hiding or ignoring risks – when investors do their due diligence they want to feel confident that there aren’t hidden surprises. If from the records investors can see that the management team have proactively sought out and addressed risks then that reduces the likelihood of there being unidentified or hidden problems within the business. Board meeting minutes should take note of these.
Small errors when selling your business erode the multiple (of average profit across three years) that you will receive. Speaking with investors and advisors who know the journey you are embarking on will help you achieve the company’s true potential value. Their essential advice is a small investment compared with the uplift it will deliver.
Alex Arnot is non executive advisor to more than 30 recruitment companies.