Business angels can be an attractive option for recruiters looking to fund growth - City comment
23 January 2014
As I write my first article of 2014 for Recruiter’s City page, I look forward with a sense of optimism to a year in which transactions will be a more regular feature and confidence will continue to grow. Recent plc results point towards a firming in the UK market, which echoes the general sentiment of businesses I talk to.
Thu, 23 Jan 2014 | By Philip Ellis, Optima Corporate FinanceAs I write my first article of 2014 for Recruiter’s City page, I look forward with a sense of optimism to a year in which transactions will be a more regular feature and confidence will continue to grow. Recent plc results point towards a firming in the UK market, which echoes the general sentiment of businesses I talk to.
So with confidence and performance seemingly strengthening, now would seem a sensible time to consider expansion to capitalise on improving market conditions and to build value into ones recruitment business. Some businesses may have built up cash reserves which can now be deployed to fund expansion, but this will generally be the exception rather than the rule as we come out of an extended tough period. So for the majority, how can such expansion be financed?
While private equity (PE) has undoubtedly been active in the recruitment market, this has been focused on large deals and acquiring assets from other PE houses. I have neither seen nor heard of much activity in relation to smaller PE investments, where previously there have been Venture Capital Trusts (VCTs) and other funds investing in smaller deals. This does not seem to be a realistic option at present, although that could change in the course of this year.
There was a time when business owners would regularly trot out the phrase “I want to sell or float” as if the float option on AIM would be a straightforward option. There are few recruitment businesses that are suited to being public companies and some of those who have taken the plc route would have to question the validity of that strategy with the benefit of hindsight. Today, AIM remains virtually closed to new entrants and even those businesses which might make suitable candidates in more normal market conditions would, in my opinion, struggle to enjoy a successful float after market. I expect that will remain the case for the foreseeable future and the days of small recruitment businesses floating may never return.
Businesses with good relationships with their banks could traditionally expect some support in the form of unsecured lending known as cashflow loans, which represented a multiple of EBITDA (not to be confused with factoring or invoice discounting which is lending against a sales ledger). The logic for this was that a business with a respectable profits record and strong management ought to be able to fund debt repayments out of future profits, so banks were happy to lend. Despite the propaganda, everything I see and hear leads me to believe that banks generally remain very cautious and only want to lend where they have security. Cashflow loans should therefore be regarded as inaccessible for the vast majority of small and medium-sized (SME) recruiters.
So having determined that three of the traditional routes for funding expansion are largely in active at present, what options do SME recruiters have? I believe there are two particular options worth considering.
1. There are a number of private investors often known as ‘business angels’ who have enjoyed success from recruitment and will consider investing in other recruitment businesses. It would be impossible to list the criteria that would make a business attractive to an investor and different investors have different preferences, but the crucial issues that any investor will consider include:
Private investors will want to buy some of the equity in the business and in addition to the cash, some may also bring experience and skills which can help to develop and grow the business. Selling part of the business to an investor is a complex, technical and regulated activity and owners should seek expert professional advice before even commencing the process to avoid the commercial and legal pitfalls. Two main considerations for an owner in assessing a deal are whether they feel comfortable with their investor, and so they feel that their reduced share of the larger business will ultimately have greater value than retaining full ownership of the business as it stands? If the answers to these questions are both ‘yes’, a deal would be worth exploring in more detail.
To summarise, SME recruitment businesses have options to fund expansion and although these may not be the traditional pre-recession routes, there is money in the market to fund good businesses.
So with confidence and performance seemingly strengthening, now would seem a sensible time to consider expansion to capitalise on improving market conditions and to build value into ones recruitment business. Some businesses may have built up cash reserves which can now be deployed to fund expansion, but this will generally be the exception rather than the rule as we come out of an extended tough period. So for the majority, how can such expansion be financed?
While private equity (PE) has undoubtedly been active in the recruitment market, this has been focused on large deals and acquiring assets from other PE houses. I have neither seen nor heard of much activity in relation to smaller PE investments, where previously there have been Venture Capital Trusts (VCTs) and other funds investing in smaller deals. This does not seem to be a realistic option at present, although that could change in the course of this year.
There was a time when business owners would regularly trot out the phrase “I want to sell or float” as if the float option on AIM would be a straightforward option. There are few recruitment businesses that are suited to being public companies and some of those who have taken the plc route would have to question the validity of that strategy with the benefit of hindsight. Today, AIM remains virtually closed to new entrants and even those businesses which might make suitable candidates in more normal market conditions would, in my opinion, struggle to enjoy a successful float after market. I expect that will remain the case for the foreseeable future and the days of small recruitment businesses floating may never return.
Businesses with good relationships with their banks could traditionally expect some support in the form of unsecured lending known as cashflow loans, which represented a multiple of EBITDA (not to be confused with factoring or invoice discounting which is lending against a sales ledger). The logic for this was that a business with a respectable profits record and strong management ought to be able to fund debt repayments out of future profits, so banks were happy to lend. Despite the propaganda, everything I see and hear leads me to believe that banks generally remain very cautious and only want to lend where they have security. Cashflow loans should therefore be regarded as inaccessible for the vast majority of small and medium-sized (SME) recruiters.
So having determined that three of the traditional routes for funding expansion are largely in active at present, what options do SME recruiters have? I believe there are two particular options worth considering.
1. There are a number of private investors often known as ‘business angels’ who have enjoyed success from recruitment and will consider investing in other recruitment businesses. It would be impossible to list the criteria that would make a business attractive to an investor and different investors have different preferences, but the crucial issues that any investor will consider include:
- Can management demonstrate that they have the ability to make the business successful?
- Are management committed to making the business successful?
- What is the timeframe for selling the business and are there likely buyers? And finally, will the investor be able to make a healthy return on the investment?
Private investors will want to buy some of the equity in the business and in addition to the cash, some may also bring experience and skills which can help to develop and grow the business. Selling part of the business to an investor is a complex, technical and regulated activity and owners should seek expert professional advice before even commencing the process to avoid the commercial and legal pitfalls. Two main considerations for an owner in assessing a deal are whether they feel comfortable with their investor, and so they feel that their reduced share of the larger business will ultimately have greater value than retaining full ownership of the business as it stands? If the answers to these questions are both ‘yes’, a deal would be worth exploring in more detail.
To summarise, SME recruitment businesses have options to fund expansion and although these may not be the traditional pre-recession routes, there is money in the market to fund good businesses.
