Selling out or staying put?

5-Mar-2008

If you're thinking of selling up, should you let the state of the economy influence your decision? Colin Cottell investigates

There is a growing consensus that 2008 will see a slowdown in the economy. Nothing new there. With sectors such as retail, finance and banking, and property already suffering, recruiters are holding their breath. But with talk of recession in the air, one group of recruiters may be more nervous than most.

After years of hard work building up the business, recruiters who are looking to sell their company could see the value drop.

As Christopher Clark, corporate finance director at chartered accountants BDO Stoy Hayward, explains: "Buyers will be more cautious, and either won't want to part with their money, which they want to put into their own business during a slowdown, or they cannot raise the money. Either way, buyers are not going to be as aggressive in the price they are willing to pay, so from a seller's perspective they are not necessarily going to get value."

Clark says the clearest indication of a drop in valuations is in the share prices of recruitment companies, such as Michael Page, which have fallen around 50% in the last nine months. And although Clark says it is difficult to pinpoint falls of this magnitude in the valuation of private recruitment companies, he believes they will be reflected there "at some point".

John Toppin, a director of Nomizon, a consultancy that works with owners of managed businesses, adds: "If you are being bought on a multiple of future profits, then the valuation will be lower because there will be less business around. Some buyers may withdraw from making acquisitions for a period, and with fewer buyers in the marketplace the price is going to be lower." Toppin says that he has already noticed a reduction in the number of people wishing to buy. On the face of it, this is bad news for recruiters wishing to sell.

However, according to Toppin, recruiters shouldn't necessarily change their plans. "It depends on what sector they are operating in and where they are in the sales process," he explains.

For example, he suggests that anyone specialising in the financial services sector in the process of selling "might want to consider their options because the downturn in financial services might affect them a lot".

On the other hand, successful businesses that are confident of future growth, perhaps because of a particular niche they operate in, might be fine selling, he suggests. "People need to think about what might happen to their clients," he adds.

Clark agrees that sector is important, citing Michael Page, whose valuation he argues has been affected by its focus on finance and the City, which has been hit by a hiring slowdown and job cuts. Clark compares it with Morson and Matchtech, technical recruiters whose share prices haven't fallen as much.

John Bissell, senior partner at Lindsay Bissell Associates, who has worked on the sale of 140 recruitment companies, says the credit crunch has had an effect on buyers. "The buyers who were speculative buyers, who were looking for targets that they could take to market, and those who got funding from banks and venture capitalists have dropped out," he explains. Those remaining in the marketplace tend to be those with a successful track record, he concludes.

So while Bissell believes that valuations have fallen slightly from their peak last summer — particularly for "bolt-on businesses" that don't have anything special going for them — "there are still buyers out there", he says. Indeed, he argues, "because buyers tend to be quality and proven buyers, it's a good time to sell".

Bissell says that another reason is because of "a sea change" in the way that investors see the recruitment sector. "Investors now see recruitment as a good long-term bet, and are less concerned by short-term economic hiccups," says Bissell. The UK economy no longer suffers from 'boom and bust' to the same extent as in the past, he believes, and as a result, the better agencies continue to grow through any problems.

That said, he believes there are certain sectors, which are less susceptible to a downturn. "It's good to have a balance of clients in the profit sector, the not-for-profit sector and the charities," Bissell advises.

Simon MacGovern, a director of chartered accountants and business adviser Baker Tilly's corporate finance team, agrees that diversifying can help maintain the value of the business through a downturn, although he accepts that this cannot be achieved overnight.

However, he argues that this only reinforces the need for recruiters to plan ahead, particularly as the sales process usually takes at least six months. Recruiters need to pay particular attention to profitability, the balance sheet, the client base and management structure, MacGovern advises.

MacGovern believes that the credit crunch is having an impact on owner's exit strategies, by making a stockmarket flotation less attractive. He says this is particularly the case for deals above £50m. Trade sales and institutional transactions remain relatively attractive, he says.

Maria Smith, who sold South-West recruiter Concept Staffing to the Synergy Group in December 2007, after building it into a £17.3m turnover enterprise, says the process was "the toughest thing you can get into", even though "I thought I had seen some things in recruitment".

But while she acknowledges that the state of the economy creates uncertainty, she doesn't believe that a downturn need affect the decision to sell. "If the market is going through a recession, employers use more temporary staff because they have to keep their labour costs as competitive as possible. I don't believe that a recession has a major impact on recruitment." And when the market is in an upturn permanent staff attract a higher premium, says Smith. "There's never a bad time to sell," she adds.

In fact, Smith says that the timing of the sale of her own business had "nothing to do with the economy", and a lot to do with other factors such as the changes to Capital Gains Tax, and proposals to put temporary workers on a par with permanent staff. "These are the sort of things that are barriers to growth, that would push smaller agencies into selling because it makes it much more difficult by creating more bureaucracy and red tape, and by making it more difficult for small companies to survive in a recession."

Smith says that her choice of exit strategy came down to whether "to walk away a day after the sale, or leave part of it [the remainder of what she stood to gain] in the business".

Smith opted for a two year earn-out, based on the performance of the company, in which Synergy held back part of the sale proceeds. Not only does she believe that she will get a better return this way than by a "take the money and run" approach, she also believes that staying on board "gave confidence to the acquiring group that it was a solid acquisition".

Although Smith is optimistic about the impact of a recession on the recruitment sector, she says there are a number of things that a recruiter must do to remain healthy and retain the business's valuation. "The most important thing is to have a secure structure across the business. Is it spread across permanent, temporary and fixed-term contracts?" she asks.

"Provided you are always forward thinking, and looking at different markets, a recession might do a bit of damage, but is unlikely to have a large knock-on effect on stable recruitment companies," she adds.

Another necessity is to have a robust organisational structure in place that is not dependent on one person, usually the founder, or managing director. "As managing director, I could quite easily have removed myself from the business, and had confidence in it running without me. You cannot even think about selling your business unless you are confident about this."

BDO Stoy Hayward's Clark says that most recruiters don't decide to sell their businesses simply to get a certain value. "It's more likely to part of retirement planning, or tax planning, a life event, or when the business reaches a certain size," he suggests, though he adds "obviously they want to get the best price they can".

However, he suggests that where there is some flexibility on timing they might want to wait a few months or a year, depending on where the market is.

Ben Fawcett, an investor in several recruitment companies, and founder of The Hiring Solutions company — an international recruitment software company — says that even in a downturn, some recruiters can get a good offer. This is particularly the case where there is a strategic buyer who believes they can raise profits by cutting costs, he suggests.

Where this is not the case, rather than selling in falling market, Fawcett recommends that recruiters concentrate on getting through any slowdown. While he acknowledges this includes cutting costs, he also advises recruiters to work on becoming "a better target" for buyers by moving into emerging markets, particularly Brazil, Russia, India and China.

Beyond this, he believes that recruiters who wish to sell their business should spend more time focusing on creating value, for example by putting in place a better financial structure. However, as he points out this could be difficult. "The kind of people who are in recruitment are entrepreneurial. They don't really set up their business with the intention of selling it." Ultimately, it may be this rather than the state of the economy that determines how well recruiters do from selling their business.


If you only read one thing, read this:

• Plan ahead. Selling a business takes six to nine months.

• Don't keep all your eggs in one basket. To maintain your company's value think about diversifying into other sectors or markets less likely to be affected by a downturn.

• An earn-out is a vote of confidence in your 'old company' but there is always an element of uncertainty about the future so it may be better to take the money and run.

• If you retain a financial involvement after the sale, make sure the new management structure is sound without you.

• Getting the most money for your company isn't necessarily the be all and end all. Other factors such as ill health and family need to be considered.

• Get professional advice on the financial and legal aspects of the sale.