How to...Attract investors to your business
Published: 11 June 2008
A buyer is always at risk that key personnel may resign postacquisition, and this can erode the value of the goodwill it paid
If you are looking to make your recruitment business attractive to external investors, there are four key areas you need to focus on.
- The sector
The sector in which you operate can have a significant impact on how your operations are run and the potential growth prospects.
Many recruitment businesses have been built based on exploiting a significant demand and supply imbalance in a sector. For example, in the late 1990s the fear of Y2K computer issues provided many IT recruiters with significant growth prospects that ultimately disappeared.
A key decision is whether to remain a specialist or diversify into other areas. While diversifying may spread the risk for the owners, as the business is not focused on one niche sector it can ultimately make the business less attractive to a buyer.
- Build the brand
This area is often ignored when a business is started, but it says everything about the business to clients, candidates and consultants. The brand needs to make a statement about the intent of the organisation that sets it apart from the other 15,000-plus recruiters in the UK.
A brand that is synonymous with a particular niche will attract both clients and candidates as the best resource to find or fill a position, and can significantly increase the value attributable to a company.
- Reliance on key people
Recruitment companies are 'asset light', and the value paid for the company will include a significant amount of goodwill. The smaller the organisation, the more this goodwill is attributable to the people within the organisation.
A buyer is always at risk that key personnel may resign post-acquisition, and this can erode the value of the goodwill it paid. The larger the organisation, the less reliance there is on key people, and hence the risk of loosing the goodwill reduces and can lead to higher prices being paid.
This reliance could be measured on the revenue generated from key clients or number of top billing consultants.
- Understanding the dynamic of clients, consultants and candidates
Having the right balance and chemistry between clients, consultants and candidates can lead to a business model that drives growth.
Managing consultant-churn in the organisation will help determine the stability of the business and ensure there is a consistent 'feel' or culture that means people want to work there. Consistency of staff means less time is spent on training, consultants are focused on delivery, and that fee-generating capacity should increase.
A recruitment company that is able to have high-level discussions and influence may be worth more than an agency that is one of 100 on a preferred supplier list.
Another key measure of the relationship is how much the client is willing to pay for the service. A low-margin business usually indicates that the power is with the client, and they perceive the value of the service as low.
The size of the database is often quoted as a metric by recruiters to emphasise their importance in a particular sector. However, in only a few niche sectors, or those with hard-to-fill positions, will a database have any real value.
The ability to attract candidates has become a prerequisite, and attracting candidates has become a lot easier with the use of the internet.
The ability of the consultants to filter this list to a shortlist has become the skill, rather than simply attracting applicants.
Top Tips
- Exploit a supply shortage — operating in sectors where there is a supply shortage for key staff will drive value
- Build a recognisable brand — build a brand that is recognised by clients, candidates and your consultants
- Don't put all your eggs in one basket — reliance on key consultants, owners and clients can reduce value
- Keep your top performers — a stable base of high-performing consultants will significantly increase value
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