A review of 31 listed recruitment businesses by advisers to the recruitment sector BDO has revealed a 32% average write-down in the value of goodwill for acquisitions made during the boom times. of value eliminated from the recruiters’ balance sheets overall, according to BDO’s review. Tim Young, senior audit manager for BDO’s London audit group, told Recruiter that the range in the amount written off represented 7% to 100% of the goodwill value before the write-down.

“This indicates that the price paid for the business(es) now appears, with hindsight, to have been too high,” Young said.

The issue of determining what the carrying value of goodwill should be has raised a significant challenge for finance directors while preparing their financial statements during the economic downturn, Young added.

Goodwill represents a premium paid for acquisitions in excess of the fair values of the identifiable assets and liabilities of the company being acquired. For the recruitment industry, Young said “this can be 80% plus of the consideration paid given they have very few tangible assets”.

Looking forward, we are likely to see more creative earnout arrangements being introduced and tougher negotiations to bridge the expectations on value between buyers and sellers TIM YOUNG, BDO, LONDON AUDIT GROUP

International financial reporting standards require goodwill to be assessed for impairment annually with any write-down, or “impairment”, being booked if the future cash generating potential of the business does not equal or exceed its currently reported value.

Young said that write-downs suggest that the expectations of future earnings for the foreseeable future are lower than were envisaged at the time an acquisition was made. It is likely that this will affect the value of future sales and purchases of recruitment businesses, he predicted.
“Looking forward, where transactions are contemplated, we are likely to see more creative earnout arrangements being introduced and tougher negotiations to bridge the expectations on value between buyers and sellers,” Young said.

He recommended that buyers and sellers looking at future deals “should structure deals to include performance-based consideration, which will only be paid if certain post acquisition targets are met - although under new accounting standards this may be treated as an expense rather than being treated as part of the good will figure”. Young also urged buyers to “to be realistic about earning and earnings multiples when pricing acquisitions or disposals”.