Tue, 14 Aug 2012 | Tim Evans, managing director, Boxington Corporate Finance

The continuing economic recession means that the buying and selling of businesses that make up the M&A market is set to remain restricted for even longer.
It follows that the number of recruitment owners who want to sell their businesses but cannot do so continues to build up.

This has been the case since 2008 and gives rise to a significant over-hang of businesses ready for exit. In turn, this means that when the M&A market comes back to life, there will be an over-supply of businesses seeking an exit. And it is classic supply and demand that where there is an over-supply, valuations begin to fall. And the longer the recession goes on the worse the problem becomes.

So how do owners seeking a sale of their recruitment business mitigate this threat?

Firstly by creating competitive advantage over others through preparation for sale.
But this preparation cannot be piecemeal or half-hearted as is perhaps sufficient when M&A markets are in better health. Rather, it must comprehensively address three distinct dimensions of business value:- Strategy, Operations and Cosmetics.

1.    Strategy – ensuring that the business is executing a strategy that will attract buyers (noting there are many strategies that will not do so).

Single sector specialisation and building overseas operations of genuine critical mass are two strategies that are often attractive to the buyers who pay the highest prices for businesses.

Other attractive strategies may include improving NFI quality by increasing the volume and margin of contract earnings, and enhancing the nature, size and concentration of client companies (and in doing so creating a more natural fit with larger potential buyers).

2.    Operations – preparations in this area may include embedding good management methodologies, implementing new financial reporting systems, and developing a credible succession plan that will convince buyers that they are buying more than a short-term asset.

Minimising fixed costs by centralising support functions whilst rationalising office networks is another operational approach that increases earnings and therefore valuation.

3.    Cosmetics – ensuring the external and internal facing marketing messages are aligned both to strategy and to each other, as well as being focused on the most valuable characteristics of a business. Same too for maintaining a website which is vibrant and conveys the forward-looking of the business, its values and people.

No two businesses are the same and so credible preparation for sale across the three dimensions described should always be undertaken as a bespoke, “one size does not fit all” exercise. It goes without saying then that the blunt tool of standard grooming checklists should be avoided by owners who are serious about exit.

Also important is having an integrated approach across the three areas of preparation as of course the operations of any good recruitment business will be closely aligned to its strategy, which itself will be clearly expressed in its marketing messages and other cosmetics.

The second way for owners to mitigate the problem of “over-supply” is through intelligent deal timing – specifically completing a sale before others seek to do the same
This requires visibility over the intentions of competitors as well as over the acquisitiveness of the likely buyers for a business.

How do owners achieve this visibility?
- Building up networks of senior figures and advisors in the market is a good starting point as is keeping an ear to the ground for tangible evidence of deals being planned (distinct from chatter about M&A which is a feature of the recruitment market), and of news of buyers being active in the market for deals.

- Visibility over competitors and buyers will always help to optimise the decision of when to undertake an exit.