Hi, I’m Rhys Jones. Welcome to my latest podcast, How to Value a Recruitment Business. The reason why I’m doing it today is I’ve done a few podcasts on how to grow a business to sell, how to sell a recruiting business. So, on that subject, I tend to get quite a few messages from people say I’ve got a recruiting business. I’d like to sell it. Can you help me please?

But unfortunately, I don’t do that. What I do is I build businesses so you can sell them. What I don’t do is sell them. The people who do that are corporate financiers. I’m not a corporate financier. However, what I can do is do a podcast to explain how you can value your recruiting business.

Now, it’s a bit more sophisticated for the sort of people likely to message me because the people that message me tend to be more SME business owners because if you are the owner of a large recruiting business that is turning over in excess of 1 million pound EBITDA profit. EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization, which basically to you and me is profit before corporation tax.

So, if it’s more than a million-pound profit, then you should be able to talk to corporate accounts. So, you probably know what you’re doing anyway. You might’ve had some solicited approaches, so, you know, you don’t necessarily need my help. So, the sort of people that contact me are SME business owners and micro business owners, and that is a little bit more difficult to value.

How DO you value a recruitment business?

So let me explain. So if you’re looking at selling your recruiting business, as I mentioned earlier, if you have a business that turns over 1 million pounds or more, you would probably appeal to either a trade sale, so another recruitment company or a group, or also a venture capitalist or a private equity buyer.

Now, those sorts of people, they are a lot more sophisticated. They know what they’re looking for and it’s going to be a lot easier to value, but also your market is a lot wider because rather than just trade sales, you also have the venture capitalist’s private equity, so that is a wider market, but also if your

business is turning over or rather is making more than a million pound a year profit, the chance are it’s built well, otherwise it won’t be a million pound profit.

So, if it’s built well, it’s easier to value because it hasn’t got the eccentricities you might have for the smaller business, but also if you get to a million-pound profit, by that point, really what you would expect is the owner of the business could be in a position where they can promote somebody to run it,

a managing director or CEO or something like that. Because the business will be worth considerably more if they’re not in it. Because a buyer, when they buy the business, what they’re looking for and the overriding thing that value your business is, ‘Is it secure?’. Because what people look into if they’re going to spend significant amount of money, so if it’s a million pound profit, you can be looking at it from four million pounds to 60 million pounds worth of business, if it’s a contract business, is they want something that they know is secure because recruitment business has a lot of aspects that value it, you know, there’s things like branding, database, marketing, all that kind of stuff.

People buy people

However, you’re buying people. Okay. The recruitment business is full of people. That’s what it is. It’s full of recruiting consultants. Now the thing is, recruiting consultants are transient by nature. So, they can go and join another recruiting company tomorrow. So, what you haven’t got within your business, you’re not like Apple, where you’ve got an iPhone and people work there because it’s got a specific thing.

It’s your recruiting business. You’ve got a phone, you’ve got your computer, you’ve got your chair, you know, there’s nothing magical about that. So, what they don’t want is a situation where, you know, people could move on mass. The bigger the business, the less chance people are going to move on mass.

The smaller, the riskier

Obviously, if you have a smaller business, then that is a bit more risky. So, what people value in buying a recruiting business is something that is secure. Now, I’ve covered this in some of my previous podcasts about how you value recruiting business and the things that make it secure. There are things like having low staff attrition.

If you have a good brand in the marketplace. If you have things like decent marketing, decent CRM. If you have your clients spread nicely rather than all your eggs in one basket; if you have a strong management team all these sort of things make the business more secure, and that’s what adds the value. So when you come into a value added business of say 1 million pound plus all that should hopefully be in place. Now the sort of people that contact me are the people that are further down there. So maybe people that have got half a million pound profit business. Now what I’d like to say at this point is if you have a business that is making a half million pound a year profit, you’ll be able to use a good Corporate Financier to market your business out there, try and find a suitable buyer.

Using a Corporate Financier

If it’s less than a half a million, then you’re probably going to struggle to get a good Corporate Financier to work on it. The reason being is they charge a fee based on the value of the sale. So, if the business is less than half a million, they’re probably not going to see the sufficient value in it for them to take on board this sale.

Now the thing is, the difference with the Corporate Financier is, it’s not, they just advertise, or they take it to market and sell it. They take you through the process. And trust me, I’ve been there. The process is fucking complicated and fucking hard work. And you want somebody who knows their shit to hold your hand and walk you through it.

Which is why you want a good Corporate Financier. If your business is making less than half a million pound profit, then there are businesses out there and I don’t want to slag them off, but they will take it on, but they’re more of a marketing business and they’re less likely to walk you through the process.

But also added to that, if your business is making less than half a million-pound profit, then it’s about finding the right buyer because if your business is making less than half a million-pound profit, it’s going to be a lot smaller, so therefore it’s less secure, isn’t it? So, there’s got to be a reason why somebody wants to buy it.

And it probably will be a strategic reason why they want to buy it. It might be they want to get into that market. It might be they want an international business, but it’s going to be harder to find because you’re looking for a specific type of buyer who wants your business. So, at that sort of level, the varies can value a lot more.

It’s all about ratios & security

Now, just to touch on the valuations. If you look at a perm business, you’re looking at say four times EBITDA, which is earnings before interest, tax and emoluments. Remembered it now. If you look at a contract business, it’s more sort of 8 to 12. Now, if it’s somewhere in between, obviously contract part perm, then it looks from between. Now, those sorts of ratios are seen as a good bar for what your business is worth.

Where that changes, if your business, is much, much bigger, you’re likely to get a better multiple than that. So, if it’s just a perm business, if it’s, let’s say, a half million, million-pound profit, make it four times, if it’s making 20-million-pound profit, you might get five, six or seven times. Again, cause it’s a lot more secure.

And this is where the private equity, so venture capitalists come in because what they’ll do is, because obviously their job as a private equity venture capitalist tends to buy business and try and sell them for more. Now, one of the strategies that quite often they will use is they’ll buy a business, and they’ll say, buy at four times and they’ll buy lots of other businesses at four times.

And they‘ll add them all together. When they buy them all together, rather than being lots of businesses, say make it five, 1 million pounds, that sort of bracket, add them all together, a hundred million pounds. It’s then worth six or seven times. So, all those businesses have gone up by about 50%. And that’s what they do. So, if you’re in that million pound plus bracket, then you could appeal as the venture capitalist.

Now, the thing that is also a critical thing, if it’s a venture capitalist or private equity, or even a trade buyer that’s looking to add that business to an existing business or a group that’s been undervalued is culture. It’s a culture fit because what they’ll need is they’ll need a business they’re buying that’s going to fit the group or the other business they’re going to join it to.

The culture matters

So, let’s say, for example, you’ve got one business is quite corporate, you know, they’re working eight till six, you know, they wear suits, they all work from the office, that kind of thing. And then you’ve got

another business. And it’s completely different. It’s all flexible work. People turn up in jeans and t shirts or shorts or whatever, and it’s a different culture altogether.

Now, how long do you think it’s going to last when you join these two businesses together before, let’s say, you know, the bigger businesses, the corporate, the smaller businesses, the more, you know, laid back, sort of flexible working one. Those sorts of people aren’t going to fit into that, are they? So, it’s not as secure then, is it?

So, a would-be buyer will look at it and go, okay, the culture fit isn’t right. That is going to make it insecure, so I’m not going to buy it. So, so the culture fit is very important when you look at a valuation. The other thing that matters about a valuation is rather than it just being about profit, it’s about what trajectory is the business on.

Is the business on a growth trajectory?

So, let’s say for example it’s been making a million-pound profit and gradually over five years it’s now half a million-pound profit. Do you think that’s going to be as desirable as a business that’s maybe making half a million-pound profit? But the previous three years it’s gone two hundred thousand, three hundred thousand, four hundred thousand, half a million-pound profit. So it’s going somewhere.

So, the trajectory – that makes a difference as well. Is it that kind of prospect where you think it’s going to carry on growing. The other thing that matters is when you when you’re doing your valuation, and again, it’s another thing that people forget. They go, all right, my business is turning over half a million-pound profit.

Okay, so when you leave, somebody’s going to have to do your job. How much do you have to pay them? Now, the thing is, if you’re going to pay somebody to run that kind of business, you might be, say, 100 grand, 150 grand to pay somebody to run that business. So that then takes the half a million pound down to, say, 400, 000 or 350.

The devil’s in the detail

So, if you’re looking at four times profit. That’s a massive difference, that really takes the valuation down.

And that’s one of the things that people tend to forget, is whether they need to get replaced. Now, if you’re smart, and you’ve got to the situation where you’ve virtually exited the business, and you’ve got somebody running it for you, then okay, that doesn’t really matter.

But it’s something that people do tend to forget; is you’ve got to take that salary off the valuation. So anyway, when you looking to sell a business, like I say, you need a corporate financer to come in and they look at the value of the business. Now, what they’ll do is when they market the business, they put something together called an information memorandum, which is quite difficult to say, but I managed to do it first time so I’m really pleased about that.

And what it is, it goes into great detail about the business in more of a data form. So, they can give a pack to a would-be buyer that explains in detail, you know, the staff attrition, the numbers, it goes back to the accounts last five years. I mean, I went through it, and I can’t tell you what’s in it, because I can’t remember.

But I know it took about three months to put together and it was bloody horrible. Because it honest to god the stuff they need to know. However, it was an education in itself. Because what it does, it obviously educated me at the time as to what a would–be corporate financier would want to see in that pack.

And also why they want it. Because the things that a buyer will want, and the corporate financier will want to see, are things that add value to the business. It’s things like low staff attrition, you know, how many, what’s your client spread like? You know, all the sort of data that they can look at and go, okay, these things tell us it’s a business that’s worth something.

Preparing Your Business for Sale

So then when I work with the business I work with now, I almost sort of retrofit that, and help put these things in place to make the business worth more. So, they’ll put together an information memorandum, and then when they go to market and approach the businesses, they have to sign a non-disclosure agreement to get this information memorandum to find out in more detail about the business from the data side of it.

And that’s the sort of document they have before you go to the buyer’s meetings. Now I’ve been to

buyer’s meetings, and I’ve got to be honest with you, I fucking hate them. Because you built this business and it’s your baby. And then you go up and you’re sat in front of usually a few people and they’re grilling you about your business and they’re pulling it apart.

And it just feels like, almost like you’ve gone back to school. But this is a business, it’s your baby, you built it. And, you know, it’s not fun in those sorts of meetings. Now, I’ve got to say, you know, my business wasn’t a 100 million profit business. So, I think further up the food chain, it’s slightly different.

But nevertheless, there’s still not a great deal of fun. And you do get some tyre kickers. You know, some chances that are, you know, wanted to meet you to find out about your business because they want to find out about the business. So, you know, those sorts of meetings can’t be a lot of fun, but then when it gets to the stage where they’ve made an offer, that’s when your corporate financier comes in and discusses the offer with them.

Because again, if you’re going back to the valuation, say somebody says, right, I’ll prepare to pay you three million. They’re not going to give you a cheque and then you’re gone. Nine times out of ten, they’ll have some sort of either earn–out, so you stay in the business while there’s a transition.

Or it’ll be linked to how much profit it’s going to make over the next three years. So, when you sell a business, you put together a projection, virtually all would-be buyers. They’ll say, I’ll give you, let’s say three million pounds on the basis that it hits those projections. If it doesn’t hit those projections, I’ll pay you half or less or whatever.

Why selling isn’t always the best option

So, there’ll be some sort of negotiation there. About what you’re actually going to get. So, when I get people that approach me and saying, okay, I built a business I want to sell it Rhys. Can you help me? I’d say well I can’t, but I can put you in touch with the corporate financier. What I tend to do is ask a few questions to find out if it’s actually worth passing on to a corporate financier because if the business, like I say, it’s got 10 staff, it’s making 350 grand profit, and I say to the person wants to sell it. Do you still bill? Oh yeah, I still bill. So how much do you bill? Oh yeah, I bill 150 grand. Okay, and you still run the business? Yeah. So, you take 150 grand off that, and then you’ve got to spend 100 grand to get somebody in to do your job.

So, they might be making 150 grand profit. Okay, well, who’s going to buy that? You know, it’s not as easy as people think. Valuing a business to sell it because it’s not quite often worth what you think it is. And this is why I wanted to do this podcast is to explain how you value a business. And more specifically, if you go further down towards the SMA style, because that’s when it is a bit more difficult to value the business. And it’s a bit more difficult to find somebody who wants to buy it. And also, if it’s at that level, it’s likely to be a trade sale. So, there’s a big culture match that goes with it.

So that’s when it becomes, again, you come into the the beauty parade, when you go to the buyer’s meetings and there’s all about a culture fit because I had a situation where, I went to a buyer’s meeting myself on my business part of the time, went to the buyer’s meeting and I had all not being flashed, but I was into looking the part because one of the businesses we had two businesses was an executive search business.

So, I had a Saville Row suit on, cost me three grand, really nice three-piece grey suit, but I didn’t have a tie on, my business partner, he had a suit on, but he had a V neck sweater underneath and a tie. Anyway, the people that came back said we don’t want to buy the business because it’s an executive search business.

But the two owners weren’t dressed for executive search because one of them didn’t have a tie on. One of them had a sweater on. Now what a pile of bollocks that was, and to be fair, because they had the suits on, they had the ties, they didn’t have the sweater, but it looks like they were Burton suits, and they slept in them.

And that’s the sort of thing that you’ve got to go through. Needless to say, we weren’t exactly disappointed that we didn’t get an offer from them. But, you know, so it’s not easy, it’s not easy. So, I hope this helps in, looking at how you value a business.

Oh, there’s one, there’s a few other things I actually wanted to mention.

Is if you are going to look at valuing your business, just because it’s valuable to you, you’ve got to think about, is it valuable to somebody else? Now, if you are looking at, let’s say a smaller business, that maybe it’s 10 or less staff, then, you know, is somebody going to want to buy that and how much they’re prepared to pay for it?

Now, the thing is, with that sort of size of business, you could probably go out and hire a team, which is

going to be considerably less, or build it yourself. So, your business isn’t quite as special as you might think it will be, because they’re going to attach it to another business anyway. So, if that’s the sort of level you’re looking at, and you’re looking to sell it, you probably need a bit of a wakeup call that that isn’t really going to happen.

So if you do have this idea, you want to grow a business to sell, you probably need to start talking to maybe a non-exec or someone who’s been through the process about what sort of level it needs to be before it’s even sellable. And I would say you really need to be looking at half a million to a million-pound profit for it to be sellable.

And that’s excluding what it’s going to take to replace your salary. Excluding any billings. And that’s the sort of level you need to be looking at. Now I have done another, video blog, podcast. That’s about how to sell a recruitment business. And also, is it a good idea? And in that, I question whether, do you really want to sell the business?

Because once it gets to the point where the business doesn’t need you there, and you’re going to get a four times profit, six times profit whatever it might be, and you can go on to, let’s say, live in the south of France and somebody else runs it for you. Do you really want to sell it? Because in the next four to six years, you’ll get that money back and you’ll still own it.

Whereas if you sell it to somebody else, well, there’s a stressor going through the sale. And also, you’re not guaranteed to get all the money. Because if they take over your business, they’re in charge of that business, aren’t they? So, things could go wrong. You run it, you run it well, and everybody’s happy.

Somebody else comes in, and if they start shaking a few trees and upsetting people for it, people could leave. So, you’re not going to get your money’s worth. So, in that video blog, it does go through, okay, what is the rationale to building a business to sell? And do you actually want to sell it? Now what we’re not going to do is go over that, because obviously you can watch that all this and start to find out.

Conclusion

But that might be something, if you have an aspiration to sell your business, it might make you second think, okay, is there a better way to extract value from a business? Could you do an MBO for example?

But is there a better way rather than going out to a sale? Anyway, I’ll keep this short.

I always do with my video blogs and podcasts. I hope that’s helped of how to value recruiting business and I will be doing more follow ups on the subject of selling a recruitment business. So, if you do like this, obviously like it, subscribe. You can also direct message me. We’ll put you on a mail list. I hope you enjoyed it.

I’ll see you soon.