Businesses are valued based on a multiple times EBITDA or in layman’s terms a ratio times profit. The profit figure used is generally based on the last 3 years with a weighting added to each year to give you the amount used for valuation calculation purposes. As the profit amount given to the tax man is adjusted to reduce tax some of these adjustments are taken into account, plus additional considerations, for example large one off investments, debt that requires writing off. This does make it very hard to value a business quickly.
However rather than going into more depth on how your business is valued, this blog is written to help you to increase the ratio applied to the profit figure increasing the market value of your business. Doing this as you grow, even if you’re not sure you’ll ever want to sell your business it makes very good business sense.
If you do ever decide to sell or receive an unsolicited offer for your business, at that point you’ll clearly want to extract the most value possible, and for this reason alone should think about make a start adding the below now. For all would be buyers the less risk there is in their purchase the higher the value they will put on it, it’s for this reason you’ll see virtually all the suggestions add valuable resilience to your business. Who knows when another 9/11 or credit crunch will hit us again so it’s a no brainer to get your business in the best possible position to tough out any negative trading conditions.
There will be numerous potential influences that will decide if the potential acquirer actually makes an offer or what size it will be. For this reason I would advise on an individual business to business basis, so the additions in your strategy will vary, however the below is a good blog size start.
Specialist Recruitment Businesses Are Worth A Lot More Than Generalists:
Acquirers often want to buy their way into a new market, add weight to an existing business or just want “safer” businesses, and specialist firms are a far less risky purchase than generalists. If you want to expand your business into new markets it’ll add more value if you do so into allied markets so maintaining a broader market specialization. If your business has a wide variety of unconnected markets, the chances are you would be buyer will only value some of the markets and therefore discount the value of the others you trade in.
Good spread of clients:
Over reliance on a small number of businesses increases the risk factor in any business and will influence your buyers view on the risk in your business. In the early days of growing a recruitment business you definitely want to follow the rules of making more of existing clients, ring fencing them and building those strong relationships. However you do need to expand that client base as soon as your growth allows and be aware your buyers will want to see longevity of your client relationships to give the reassurance of sustainable business. Smashing the new business for the last couple of years won’t fool any buyer.
Have a very strong database:
If your business has a longstanding well maintained database this makes it much easier for new recruits to bill, and therefore easier to expand the team. A good database also makes it easier ramp up the digital marketing. Both these factors will make post purchase expansion easier so adding value. This will also add to much needed reassurance to those interested in purchasing the business that your business is not based largely on the existing staff.
A contract book:
As the biggest factor in making a business valuable is low risk, having a strong contract business (or division) will add value due to virtually guaranteed forward order revenue.
However a word of caution, I’ve seen businesses try and add contract divisions to a business to increase value for sale and it backfire badly. If building a contract business was easy everyone would do it, so be aware if it’s not an area you have strength in think carefully on how you can do it without risking what you have already. It is also worth considering would adding a contract arm devalue the brand you’ve worked so hard to build? Another consideration is that not all buyers would want both a contract and perm business, so your expansion may actually be better served building additional levels of offering in to your existing business e.g. Executive Search or adding more disciplines that your existing clients also recruit for.
Long Serving Key Employees and Low Staff Attrition:
Again looking at reducing the risk of purchase, an acquirer will want to see that key employees have longevity with the business therefore less likely to leave, staffing up heavily in the recent history will not work. Having a strong positive business culture with well thought through incentives and loyalty schemes will give your buyer confidence in employee loyalty. Also you could go a step further and make your key employees shareholders with long contracts.
Have a strong management team that knows how the business works:
As a big value-ad for your exit and the value of the business is your succession planning, you need to be able to demonstrate a strong management team that will be in place when you exit that not only run the business, but run it well. Also the strong client relationships can’t be with you, they must now be with the team you leave behind.
For you to be able to extract the most value from your business you need to have an effective management team in place. Interested buyers will consider the quality of the management team who will remain in place post sale. If you intend to leave the business immediately or soon after the sale, the business cannot be reliant on your continued involvement. Key client relationships should be with the remaining team and the business should by the point of the business going to market be run on a day to day basis by this management team, not you.
Branding is part of the value of being a market specialist so having a very strong name in your market is important. Cherish the market perception of your business so this strong name has value. The mission statement I encourage in my businesses is “To be seen as the recruitment business of choice in our market”. We then cascade that down to, “How this would be measured” and that takes you to “How do we make these measures happen”. An acquirer will want to see why paying to buy a business is far safer and better value than trying to do it themselves. So if your brand is high profile and well regarded there’s the low risk which increase value.
I touched on this earlier. Unless you want to only sell part of your business and remain in the business, it’s vital you plan for your exit as early as possible. If your business is still reliant on you in any way, your acquirer will be far more likely to insist on an earn out i.e. the sale agreement will include a requirement of you staying on in the business for a set amount of years post sale. Clearly this will mean you’ll go from running your own business to having a boss again, not an appealing situation! And don’t think you can coast those earn out years. The price will be heavily structured around maintaining profit or hitting the business plan, and if the market takes a hit your sale price will take the hit to if you can’t keep hitting the numbers.
So creating a succession plan should be a consideration way before you think about selling your business, and trust me it can take longer than you think. I won’t expand on how, that’s another blog on its own.
Written by Rhys Jones Managing Director – Davidson Gray.
Rhys sold out of his previous recruitment businesses in 2012 to focus solely on helping recruiters set up and build recruitment businesses. Follow Rhys on LinkedIn or contact him direct for help with your start-up recruitment business or for coaching to grow an existing one.