In an economic downturn, it is unfortunate but inevitable that some recruitment companies will experience financial difficulties.

There are signs of reduced demand for temps and permanent staff in some areas, reduced margins as clients appoint managed service
providers or RPO partners, and some major clients becoming insolvent or paying slowly. These factors could lead to banks and invoice discounters withdrawing funding arrangements.

If a recruitment company finds itself in serious financial difficulties, and new funding does not seem to be available, it is vital to move fast to preserve the remaining value of the business.

The lessons of the downturns of the early 1990s and early 2000s are that if prompt action is not taken, key assets will walk out of the door — leaving stakeholders with no value, and employees with no jobs, in no time.

The key assets of a recruiter usually consist of:
1 debts owed by clients in respect of workers supplied
2 future hoped-for income from the existing contract book of temps and contractors
3 key recruitment consultants
4 candidate and customer goodwill.

Problem areas
What are the problem areas with these assets when a company gets into financial difficulty?

Collecting existing debts can be problematic if a decision is made to appoint an administrator and/or sell the business. A new owner or lender can only collect recruitment debt if the relevant unpaid invoices have been issued in accordance with the Conduct of Employment Agencies and
Employment Businesses Regulations 2003.

A buyer or lender may commit a criminal offence if it tries to collect out debt to which it is not strictly entitled.

Usually it is safest to agree to collect it out as agent for the administrator in return for a reasonable collection fee.

If financial difficulties mean that temps are not paid promptly, income will quickly disappear because they will get itchy feet and their contracts may become unenforcable (meaning they can contract via any of the other recruiters who will soon be on the phone to them). Anxious clients
will be glad to engage them via recruitment companies which can pay.

If key recruitment consultants have not been paid, or merely get wind of financial difficulties, they could also decide to jump ship or easily be recruited by rivals, taking their ‘favourite’ clients and contractors and confidential information with them.

Restrictive covenants may not be enforceable if these employees have not been paid. And even if they are enforceable, will the employer, or an administrator, have the funds to pay for an expensive injunction?

If there is a sale then, under the law known as TUPE [Transfer of Undertakings (Protection of Employment)], the staff of the recruitment company can transfer over to the new owner of the business. Terminating these staff without getting the process right could lead to an
expensive class action for unfair dismissal against the buyer.

If a decision is made to sell, our experience in previous downturns is that there is really only one way for the management and lenders to get a decent deal; before any candidates, sales staff or rivals hear of a problem.

Reasonable terms
You need to move fast to find a credible buyer prepared to buy on reasonable terms in as little as 24 to 48 hours, be it by way of a
solvent sale or pre-packaged administration sale in an insolvency situation. If there is delay value could walk out of the door. Getting regulatory
compliance wrong could be an expensive mistake.

Many of the well-established recruitment companies will see this period as a time of opportunity, aiming to increase market share by picking up the insolvent rival businesses.

Those who have done these deals before will have the necessary systems and contacts in place to move quickly — even overnight — and in a way that preserves value and avoids regulatory traps.


Kevin Barrow head of Recruitment Group and partner, Blake Lapthorn