When is the ideal time to sell a recruitment business? – City Comment
19 September 2013
We are often asked when we would advise owners to sell: “Should we wait until the market improves a bit more?” or “Do you think multiples will be better in 12 months?”
Thu, 19 Sept 2013 | Philip Ellis, principal, Optima Corporate Finance
We are often asked when we would advise owners to sell: “Should we wait until the market improves a bit more?” or “Do you think multiples will be better in 12 months?”
It would be handy to have a crystal ball, but in the absence of a reliable one we tend to rely on more traditional corporate finance methods.
Macro factors
Macro factors are those that affect the market as a whole without reference to any specific business.
Recruitment used to follow cycles and one could predict with reasonable accuracy when the market would rise and fall. It is generally accepted that at present that pattern has ceased and we don’t know whether that reliable pattern will re-emerge.
So if we can’t rely on traditional cycles, what other macro factors can owners use to evaluate the timing of a sale?
Public companies
The sale of a privately-owned recruitment company is not insulated from the performance of listed recruitment plcs, even though the businesses may be poles apart in every respect. The plcs dictate market sentiment towards the sector and valuation multiples. Private companies must accept that other than in exceptional circumstances, they will be valued at a discount to their plc counterparts.
Private equity
Private equity likes the recruitment market, but is of course keen to ensure it invests at the right time so that returns can be achieved. The increasing level of private equity deals should be taken as an encouraging sign that the investing community sees long-term value in the sector at present.
Bank lending
New bank lending, other than against sales ledgers or other tangible security, has been a rarity for the sector in recent years. Previously banks would lend against profit records in the form of cash flow lending which helped fund acquisitions by both corporates and private equity. We have started to hear talk of modest cash flow lending creeping back into the market, which would certainly help to stimulate more M&A activity.
Micro factors
Equally if not more important are the micro factors – matters specific to the business itself. There are numerous micro factors to consider and some will vary from business to business, but I will highlight some crucial points that apply to every sale:
Non-reliance on vendors
In order to achieve a respectable value for a recruitment business, the vendors must ensure that their business no longer relies on them. It is an easy thing to say but harder to achieve. Acquirers will assess this rigorously during the transaction process as this is one of the key risks they face.
Reason for sale
Vendors will need to explain why they are selling now and what they plan to do after the sale. There are only so many days spent on a beach or the golf course before it becomes tedious (I am told). An energetic 30-year-old who has only ever worked in recruitment with no particular plans post sale will be regarded as potentially likely to set up again in competition with the acquirer (after restrictive covenants have expired of course), which nevertheless will be perceived as a risk.
Rising profits
A successful sale is most likely when profits are rising and crucially, when the acquirer can see a realistic prospect of a continued growth trend. Squeezing every last penny of profit out of a business, reaching a plateau and then trying to sell will be impact on valuation. The acquirer will want to see a return on their acquisition so leave something on the table for them.
Conclusion
As with most things in life, timing is crucial. Many owners we speak to are planning a sale in two to three years. If everyone looks to sell at the same time it will become a buyer’s market, which, despite all of the factors above, will impact on valuations.
All of the micro factors are controllable and a sale process should be planned if vendors wish to maximise their value when they sell. It might be wise to get ahead of the crowd.
We are often asked when we would advise owners to sell: “Should we wait until the market improves a bit more?” or “Do you think multiples will be better in 12 months?”
It would be handy to have a crystal ball, but in the absence of a reliable one we tend to rely on more traditional corporate finance methods.
Macro factors
Macro factors are those that affect the market as a whole without reference to any specific business.
Recruitment used to follow cycles and one could predict with reasonable accuracy when the market would rise and fall. It is generally accepted that at present that pattern has ceased and we don’t know whether that reliable pattern will re-emerge.
So if we can’t rely on traditional cycles, what other macro factors can owners use to evaluate the timing of a sale?
Public companies
The sale of a privately-owned recruitment company is not insulated from the performance of listed recruitment plcs, even though the businesses may be poles apart in every respect. The plcs dictate market sentiment towards the sector and valuation multiples. Private companies must accept that other than in exceptional circumstances, they will be valued at a discount to their plc counterparts.
Private equity
Private equity likes the recruitment market, but is of course keen to ensure it invests at the right time so that returns can be achieved. The increasing level of private equity deals should be taken as an encouraging sign that the investing community sees long-term value in the sector at present.
Bank lending
New bank lending, other than against sales ledgers or other tangible security, has been a rarity for the sector in recent years. Previously banks would lend against profit records in the form of cash flow lending which helped fund acquisitions by both corporates and private equity. We have started to hear talk of modest cash flow lending creeping back into the market, which would certainly help to stimulate more M&A activity.
Micro factors
Equally if not more important are the micro factors – matters specific to the business itself. There are numerous micro factors to consider and some will vary from business to business, but I will highlight some crucial points that apply to every sale:
Non-reliance on vendors
In order to achieve a respectable value for a recruitment business, the vendors must ensure that their business no longer relies on them. It is an easy thing to say but harder to achieve. Acquirers will assess this rigorously during the transaction process as this is one of the key risks they face.
Reason for sale
Vendors will need to explain why they are selling now and what they plan to do after the sale. There are only so many days spent on a beach or the golf course before it becomes tedious (I am told). An energetic 30-year-old who has only ever worked in recruitment with no particular plans post sale will be regarded as potentially likely to set up again in competition with the acquirer (after restrictive covenants have expired of course), which nevertheless will be perceived as a risk.
Rising profits
A successful sale is most likely when profits are rising and crucially, when the acquirer can see a realistic prospect of a continued growth trend. Squeezing every last penny of profit out of a business, reaching a plateau and then trying to sell will be impact on valuation. The acquirer will want to see a return on their acquisition so leave something on the table for them.
Conclusion
As with most things in life, timing is crucial. Many owners we speak to are planning a sale in two to three years. If everyone looks to sell at the same time it will become a buyer’s market, which, despite all of the factors above, will impact on valuations.
All of the micro factors are controllable and a sale process should be planned if vendors wish to maximise their value when they sell. It might be wise to get ahead of the crowd.
