What is an Exit Event?

We speak a lot about an exit at Recruitment Entrepreneur. But what does it actually mean and why is it so important? This blog is designed to help clarify what an exit is and what it entails.

What is an exit event?

An exit event is when the shareholders of a business sell their shares in the business.

?Why is an exit event important?

The shareholders get to realise the value in the business that they have created. It sounds simple, but nothing that is worth anything is ever easy! And that is why most businesses never exit. Because it is hard work to get there. But worth it.

?As a founder building a successful recruitment business, you will earn a salary and commission. Once the business becomes profitable and cash generative, the loans that were made to start the business will be paid back to the shareholders, and after that any future cash generated by the business beyond what is needed to keep the business running will be paid out to shareholders as dividends. At this stage a business founder will be earning a very comfortable living. However, selling the business is a chance to realise the value of the business that you have created with a significant capital sum.

?Recruitment Entrepreneur’s sole purpose is to build and exit recruitment businesses. We don’t invest in businesses unless the founder that we are investing with has the goal of exiting their business. But choosing to build a business for exit is a much tougher path. Everything is scrutinised and no corners can be cut. As an example, despite the huge cost, from year 1 our businesses are audited by a Top Tier audit firm, so that any prospective buyer will have comfort that the business’ financial accounts are accurate.

?Recruitment Entrepreneur has the people, systems and processes required to ensure that your business will be fully exit ready.

?Who would the buyer typically be?

?Recruitment Entrepreneur has an extensive network of potential buyers. The buyer would typically fall into one of two categories. The first is a private equity company; which is an investor in businesses with a view to growing them and then selling them over a period of around 5 years. The second is a large recruitment business - a ‘trade buyer’ who would want to buy your business as part of a growth strategy and subsume it into their larger business. Having a network of buyers alone isn’t however enough, as the buyers need change as economic trends shift, so keeping in touch with them and knowing what they are looking for is important.

?What is the process?

?A recruitment business is valued by its’ EBITDA (earnings before interest, tax, depreciation and amortisation) multiplied by a number (called the ‘multiple’) – Minus debt……. There are industry norms for the multiple, and it can be influenced by the size, scale and quality of the business. Once the business reaches a consistent EBITDA level which will be attractive to a buyer, as well as providing an attractive valuation for the shareholders, then we are ready to contemplate selling the business. Strategic buyers may pay more… e.g. market entry or geography or diversification

Once a buyer is identified and is interested in buying the business, Recruitment Entrepreneur will lead negotiations to secure the best price for the shareholders. Once the commercial terms of the deal are agreed, they are documented in a heads of terms between the buyer and the seller. The buyer will then instruct firms of specialists to carry out due diligence on the company - a bit like someone buying a house, paying for?a homebuyer’s survey. The buyer’s due diligence providers will request lots of information on the company, and again the Recruitment Entrepreneur team will lead this process. After the due diligence process is complete and assuming the buyer is still happy to go ahead with the sale, the legal teams will draft the legal documents.

The process is a long and complex one and takes a lot of effort - usually lasting 6-9 months from start to finish. Recruitment Entrepreneur has all of the required team in-house to lead a business through the exit process - we completed our first exit in 2021, selling Walter James to an American company called ZRG without using any external advisors. This was a trade buyer who purchased Walter James to bolt onto their existing business.

What will happen to the founder after the business exits?

?Recruitment businesses by nature are reliant on the people that run them day to day. You are therefore a significant part of the business that they buyer acquires, and they will therefore want to ensure that you are incentivised to continue to grow the business. Therefore, an exit deal may look like realising some of the value that you have created by selling some of your shares to the new buyer, however retaining a stake so that you continue to be incentivised to grow the business further under the new ownership and take the business towards its’ next exit where you will again be able to realise the value of what you have created.

?It might be that you don’t want to continue with the business after exit. If that is your plan, we would have discussed it a long time beforehand and created a succession plan with new management so that the buyer is fully confident that the business can continue without you as the founder. In that case you would leave the business at the exit point.

Want to grow your business and achieve an exit? Get in touch today ?[email protected]