Anyone planning to make a profitable exit by selling a recruitment company is likely to get one common piece of advice at the moment: don’t. Companies and investors don’t have the cash to buy up opportunities, and they are struggling to get their hands on debt too. Prices are dropping at a staggering rate and doors are closing across the industry. However, this doesn’t mean owners are stymied if they need to sell right now, nor does it mean they should forget all about selling until the economy looks rosier.

Certainly now isn’t a great time to be selling. John Bissell, senior partner for recruitment business sales consultancy LBA, says: “Clearly the market for sales is significantly down. Very few buyers have cash or other reserves to do outright acquisitions at the moment.” Even if they have the cash, many don’t have a resilient enough business to handle the challenges any acquisition will bring. Tim Evans, a director of atalyst Corporate Finance, adds that even if they have these two things: “It also comes down to whether they have the confidence to buy.”

If you are lucky enough to find a buyer, sellers still won’t get the value from the business that was available a year ago. David Silver, managing director of investment bank Robert W Baird, points out: “Look at publiclyquoted staffing companies and how much valuations have come off in the past year, and you get an idea of how valuations have fallen.”

Given the difficulty of finding a trade buyer, owners may look internally for a management buyout (MBO), but these are fraught with difficulty in the current market too. They tend to be funded by raising debt in the business or by bringing in another investor.

Evans warns: “Raising debt is very expensive, so there needs to be an even higher level of growth from the business to make the returns work. In the current climate it’s notpossible to forecast or achieve that growth.” Bissell adds: “The banks won’t be sympathetic if they see your profits fall. One business, which was bought less than a year ago, had a lot of bank borrowing. It was still making reasonable profits, but they were lower than they had been, so the banks withdrew their support and the business went into receivership.”

Bringing in another investor brings other concerns. Bissell points out: “You are essentially swapping a founder for a venture capitalist — and one who may not be very good at running the business. Often these businesses fail because the management are not allowed to manage the business in the way they want to.” In addition, he warns: “They are also going to want a lot more for their investment than before, because they see the risks as higher.”

Aside from any kind of sale, the only real alternative is a stockmarket flotation. At the moment, this is out of the question. Bissell says: “I don’t think you could float a business in this market. Nobody would buy the shares. A finance house has to be the sponsor and they wouldn’t do it because they would be stuck with the shares.”

The options for making a successful and profitable exit, therefore, look thin on the ground right now. Yet it is possible: there are still some buyers. Jack Sheldon, managing director of Adison International, says: “Around 95% of the businesses we sell are sold to larger recruitment companies wishing to expand via acquisition. However, we are actively negotiating with several investors who are looking to buy and build a group of recruitment companies to float their assembled company on the stockmarket once share prices recover. Interestingly there is considerable activity from individuals with recruitment experience looking to purchase small recruitment businesses which will allow them to have employment and a business opportunity where they can bring to bear their previous experiences.”

To capture these buyers may mean having a strong business to offer. Sheldon says: “Good businesses continue to sell well even in this marketplace. This is particularly true of businesses that operate in the contract or temporary marketplaces, have not factored their invoices and retain reasonable assets in the business. These companies are easier to fund with the banks advancing monies against the sales ledgers and bridging loans for the assets.”

Part of the art is in finding a potential buyer for whom you are a good match. Silver says: “A lot of people are internally focused at the moment, so they are only going to make a move if there is sound strategic rationale. They are careful about preserving cash too, so they only spend money if it’s immediately additive and not a drain on their resources.” So it is worth dealing with advisers who are talking to potential buyers.

Finally, even if you are not a strong business and not a perfect match, there may be a buyer if the price is right. Sheldon says: “There are many recruitment organisations seeking to find distressed businesses to purchase at much lower prices than seen before the credit crunch.”

Even companies heading for disaster can find a buyer if they take the right approach. Bissell says: “If you are in dire straits you can go into administration and do a pre-pack. It’s an arrangement where you put the business in the hands of the administrator and you already have a buyer lined up. The seller gets nothing from the deal, because the business is in administration. It means you can walk away from it without debts if you can’t see any way forward or you may continue to work for the business and get some of the benefits of it remaining in existence.”

Although it is possible to sell, it is also clearly worth putting it off if you can and use this time as an opportunity to plan. There are the practicalities that can be sorted out in the interim. Evans says: “Tidy up all the legal documents, the database and information systems, because a buyer will want to look at those. Clean up the balance sheet, so any sale will be more streamlined.”

Sheldon adds: “In this current market it is important to ensure that your business … has its post completion management team in place, and that there are no lingering issues such as disputes with key customers or employee tribunals hanging over the company.”

There are also things you can be doing right now that will eventually maximise your sale price. Richard Bligh has successfully exited four businesses, including selling Ridgeway Employment Agency to Adia in 1987 and Euro Professionals to the Carlisle Group in 1994. He has experience of selling in good times and bad, and uses this to advise recruitment companies as an independent consultant. He says: “In a difficult market like this one it’s vital to maximise profitability, as the sale price will be a multiple of profits. This means cutting any unnecessary expenditure.”

A recruiter should therefore avoid spending on equipment or signing any long-term contracts with suppliers. In addition, Bligh says: “Staff are usually the highest costs a business is carrying, so unfortunately you need to look at this. I know of one business, which is getting rid of its administration staff. You may not want to go down this route, but anyone who can’t sell, who is genuinely deadwood, now is the time to give them their freedom.”

Bligh adds: “Try to cut your own salary to the bone and reward yourself with dividends. Check the tax situation, but if you can, you will show a higher profit.”

Aside from cost-cutting, recruiters need to look at cash flow. Bligh says: “You need to be on top of chasing creditors, because it’s only profit once the cash is in your hands. In tough times clients will ask for a discount. There’s no point giving one unless you ask for something in return. So, for example, if you cut your placement fee from 20% to 15%, at least ask for payment within 14 days and say if payment is not made by then you reserve the right to invoice the difference.”

Now is a good time to start planning and plenty of people are doing just that. Bligh, for example, has a client looking to retire, who is currently maximising the profit position, ready to take advantage when buyers return to the market.

And this may not take as long as you think. Evans says: “A lot of owners think they won’t be able to sell until the economy picks up, but what they need in place for a sale is certainty, which will come quicker than economic recovery. You can have certainty as long as things aren’t getting worse, which I believe will come by the second half of this year.” In any case, the experts say it’s worth talking to an adviser in advance of this, as they will be speaking to potential buyers and will be able to alert you whenever a suitable match comes along.

Exiting a business profitably is clearly not straightforward. However, as Bissell points out, it may not be necessary. He says: “The gain you make from the business is a combination of the profit as you go along and the sale price. You might build a saleable business that makes £100,000 profit a year and sell after 10 years for £1m. Alternatively, you might build a business that produces £200,000 a year for 10 years, but is unsaleable because you or a few consultants do too much of the work. Both will make the same amount of money for the owner, and both are legitimate business models.”