The importance of a diversified revenue stream, profit sustainability and gross to EBIT conversion(Part 3 of a 3 part series)

Want to grow and then successfully exit your recruitment business? The importance of a diversified revenue stream, profit sustainability and gross to EBIT conversion? (Part 3 of a 3 part series)

Finances play an essential role in any business. If you are looking to exit your recruitment business, financial stability, reliability, and profitability are a must. When Recruitment Entrepreneur invests in a business,? it provides the expertise and experts to provide all these components.

In part one of our 3-part series we examined the strategic elements of scaling a successful recruitment agency. In part two, we looked at the operational requirements of growing and successfully exiting a recruitment business.

In the third and final part of our 3-part series, we discuss the financial requirements of growing and successfully exiting a recruitment business from the experience of Recruitment Entrepreneur, the number one global investor in recruitment businesses (we’ve invested in 45 recruitment businesses worldwide and counting). Here are the financial requirements an investor will look at when considering buying your recruitment agency:

?1. Diversified revenue stream

Being able to effectively manage costs, including consultant fees, operational expenses, and other business expenses, is crucial for establishing a cost-effective infrastructure that can support scalable growth. This is what is called gross profit to profit (EBIT) conversion.

As businesses expand, many are leveraging low-cost centers in various parts of the world to improve their profit margins. Demonstrating that the business has already successfully integrated an outsourced function from overseas can significantly enhance its value and growth potential. Additionally, the use of technology can have a significant impact on a business's value proposition. When technology is utilized to streamline processes, automate tasks, and reduce reliance on costly and inefficient procedures, it can serve as a key differentiator.

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2. Profit growth and sustainability

It is important to show a consistent and positive trend in sustainable profits over the last three years to provide confidence in the current and future financial performance for the next two years. This sustainability indicates that the business is not relying on one-time positive events that may have influenced recent trading performance, and proves the ability to acquire and retain clients and maintain performance in the long term. Adding credibility to the forecasts and demonstrating future growth potential is a critical aspect of enhancing the business's overall value.

3. Cost control

A final financial consideration is being on top of costs by showing a strong gross profit to real profit (EBIT) conversion.

“We have a plan A and the plan is that it is exit. You have to be able to create a business that's exit-able. So, we're not interested in boutique businesses, and we don't have a Plan B. Plan A only.? If you look at the exit-able value of a business, the formula that's used is, is your EBIT minus debt times a multiple. Those businesses will carry a huge amount of debt unless you make them very big, I mean really big. it's probably not exit-able within our models” Abid Hamid the Group CEO of Recruitment Entrepreneur, in an interview about how to start up and scale a recruitment business.

There are two ways to look at this - income concentration by (i) client and (ii) consultant

(i) Client – It's important to have knowledge of how revenue is distributed across the customer base, by examining the percentage of revenue generated by the top 5 or top 10 customers. Demonstrating a low dependence on a small number of customers is essential to showcase a diversified revenue stream.

(ii) Consultant – It's crucial to comprehend the proportion of net fee income generated by the top three consultants to assess the potential risk to profits if any of them were to depart.

This concludes our 3-part series that took a look at key constituents of the value of existing recruitment businesses.?

You can read part 1 here, the strategic issues: the importance of a strong management team, robust talent attraction & diverse income.

Part 2 - 3 operational factors - corporate governance, staff tenure and reliable budget forecasting - can be found here.

Do you need help scaling your recruitment business? Seek funding, mentorship and support on all of the above from the experts. Reach out today for a discovery call with @RecruitmentEntrepreneurCanada.