Why should you entertain an M&A approach as a recruitment business owner?

When reaching a certain critical mass, it is common that many recruitment agency owners will experience M&A related approaches whether that be trade buyers, private equity or intermediaries, some are approached weekly or even daily. Whilst understanding business value from an investor perspective is crucial, the priority for any founder is managing and growing the business meaning entering into discussions can distract from this. Therefore, if selling isn’t on the agenda, why should an owner consider engaging with investors?

Market Validation

Discussing a sale with investors or potential buyers helps to validate an individual’s business model and current service offering. Speaking with a buyer can be beneficial in terms of revealing broader industry trends and helping owners to align their business strategy with new opportunities. Furthermore, businesses are frequently scrutinised in these discussions by investors who are knowledgeable in the sector. Buyers can provide operational insights, enabling owners to validate or critique the current business model while highlighting strengths and areas of improvement.

From a valuation perspective, ongoing discussions help owners understand typical valuation metrics and industry-standard EBITDA multipliers for their business. This preparation is useful for when owners are ready to exit as bridging the gap between buyer offers and seller expectations is a common issue in M&A transactions. Given that Recruitment transactions are not asset-based as a people-led industry, earn-outs are quite commonly integrated into deal structures to mitigate the disparity between what a buyer is willing to pay and what a seller feels their business is worth. By having a discussion, owners can benchmark their business against industry standards to gauge typical deal structures.

Understanding Key Value Drivers & Strategic Clarity

Having conversations can also be an educational piece, as buyers will highlight the aspects that drive value in each business, such as proprietary technology, customer base, brand strength, and market position. Understanding what the key value drivers are in any given sector, is imperative for owners planning any sort of future exit. For instance, in recruitment, contract focussed businesses are likely to attract a higher multiple than permanent agencies, given recurring revenue and visibility of earnings. In addition, specialising in consulting, SoW, MSP or RPO is expected to move the needle even more when it comes to valuations. Speaking with buyers allows owners to identify whether their organisation is structured in a way to achieve optimal value or if changes can be implemented which might increase the multiple.

In addition, investors often seek businesses with clear strategic direction. Engaging in sale discussions forces an owner to articulate their business strategy and growth plan. Feedback on this can allow owners to re-affirm if they are considering the right growth avenues or highlight new and more lucrative areas worth exploring.

Cultural Alignment

Engaging with investors allows for a better understanding of which buyer would be the best cultural fit for the company. Investors differ not only in financial terms but also in aspects such as sector knowledge, track record, approach to working with management teams, and the value they provide beyond capital. Additionally, personal rapport is crucial and as we have seen with many transactions, it can take 6-12 months for a deal to complete. If there is cultural alignment from the outset and the two parties are on the same page, it can certainly benefit momentum in the process of any transaction. Getting to know potential investors on a prolonged basis allows an individual to understand their options and any reputable buyer will be willing to build the relationship on a longer time frame to ensure it is the right deal.

Contingency Planning

Entertaining conversations forces owners to consider how reliant business trading is on their involvement and to implement contingency plans should anything happen. Most transactions are driven by personal factors rather than attempts to perfectly time the market. Personal life events, retirement, succession planning, or sudden opportunities for exponential growth can cause owners to consider an exit. Engaging with buyers well in advance allows owners to consider how they can step away from their involvement in day-to-day running and be best prepared when operations need to be fully passed over to management. For example, one of the first questions many buyers will ask is whether the owner is actively involved in billing. If a significant portion of revenue is generated by the owner, it poses a high risk if the owner is not involved post-transaction. Having the conversation will highlight this potential issue and allow the owner to make changes ahead of sale.

Trade versus Private Equity

After acknowledging that these conversations can be beneficial, it can be difficult to decipher the genuine approaches from the fishing expeditions and many owners are unsure whether trade or private equity is the best route to explore. Private equity is frequently met with misconceptions, with the assumption that some funds are only interested in short-term gain, with acquisitions involving aggressive cost-cutting and redundancies. The reality is that funds can offer businesses the firepower to make strategic investments which will help scale the business. It is a great option when owners have hit a glass ceiling with growth but still want to take the business to the next level, whilst providing options to take some chips off the table and de-risk. When considering PE approaches, it is useful to look at their portfolio and consider what investments they have made into the sector along with their exits.

Considering M&A discussions from trade buyers can also be met with wariness as these approaches are often made by competitors. An open discussion may include access to proprietary information which raises concerns about confidentiality and the potential for competitive disadvantage if a deal does not progress. Whilst these risks are legitimate, the exchange of information is mutual, allowing owners to also benefit from the buyer’s expertise as long as they are cautious in doing so. Ahead of engaging in detailed discussions it can help to vet the trade buyer’s financial stability, reputation and strategic goals to ascertain if there is genuine motive for making the approach. If conversations progress from there, signing a mutual non-disclosure agreement (NDA) can help mitigate concerns and safeguard proprietary information.? ?

In conclusion, engaging in sale conversations with credible buyers can provide significant strategic benefits for recruitment agency owners. Discussions will provide insight on key value drivers, suggestions to implement transformational change to optimise business value, and understanding the wider M&A market when timing is right to consider a sale.