Welcome back to our blog series on exit options for ambitious recruitment business owners. In part 2 of our exit options series, we will delve into the world of third-party sales as a viable pathway to exit your business. We’ll discuss essential considerations such as business valuation, the importance of your management team, incentivising them through an EMI scheme, finding a third-party buyer, and key factors to ponder before sealing the deal. Additionally, we will explore the concept of earn-outs and their benefits and drawbacks. Let’s dive in!
Third-Party Sale Defined:
A third-party sale involves selling your recruitment business to an external buyer. This buyer can be an individual, another company, or a strategic investor. Third-party sales may offer the advantage of higher valuations and a quicker exit. However, it’s essential to consider potential challenges, such as finding the right buyer and ensuring you maximise enterprise valuation.
Valuing Your Business:
Determining the enterprise value of your recruitment business is a crucial step in any third-party sale. A common approach leans on the “EBITDA x Multiple” formula, but it’s important to note that valuing a recruitment business is more nuanced. Multiple variables need to be taken into consideration, including the type of recruitment, sector focus, international presence, customer base, culture, and management structure.
While EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortisation) can serve as a starting point, it’s crucial to make normalisation adjustments to adequately assess a business’s valuation. At the most basic level, these adjustments include market-rate salaries for business owners and accounting for one-off costs.
To assist you in the valuation process, we recommend you take a look at our valuation calculator, which will provide you with a good starting point. Additionally, be sure to check out our blog on increasing business valuation, which offers valuable tips on enhancing the worth of your business before entering the sales process.
Ultimately, it’s important to remember that a business is valued based on what someone is willing to pay and what you are willing to accept. While financial metrics and ‘done deals’ provide a framework, the final value of your business is determined through negotiation and finding a buyer who sees the true potential and value of your recruitment business.
The Importance of Your Management Team:
Your management team play a pivotal role in a third-party sale, as prospective buyers assess their competence and stability, which are vital to ongoing success. Nurturing and retaining a strong management team is crucial, as they positively influence the perception of your company’s value. To motivate and align your team with the sale process, implementing an Enterprise Management Incentive (EMI) scheme can be an effective strategy. EMI schemes grant eligible employees the opportunity to acquire shares in the company at a pre-determined price at a future date. The opportunity to exercise the share options is usually based on an event such as a sale, therefore aligning the employees’ interests with the company’s and enhancing their commitment to achieving a successful sale. You can find out more about an EMI scheme in our Long Term Incentives Guide.
It is important for any business owner not to be solely integral to the business’s success, such as being the top biller, as this does diminish the value of your company. If you were to exit the business on sale, a significant amount of value goes with you. Building a capable management team, ensures the business is more attractive to potential buyers, as they will expect that team to continue generating value after any exit event. That increases your value and allows you to exit your business on your own terms.
Key Factors to Consider Before Finding a Buyer:
Before embarking on the search for a buyer, it’s crucial to ensure that your business is well-prepared and your “house is in order”. Ensure you assess your readiness and reflect on your personal goals, the desired timing of the sale, and any contingencies that need to be considered.
If you are able to, I recommend you conduct an internal due diligence exercise before inviting potential buyers to carry out their due diligence. This exercise will help uncover any areas that need to be reviewed or improved before presenting your business to potential buyers. That my include a review of your financial records, compliance processes, employment contracts and client agreements amongst many others. Ensure your financial records are up to date, accurate, and readily accessible. Buyers will scrutinise financial and legal documentation, processes, and systems, so having everything prepared in advance saves time and instils confidence in potential buyers.
Finding a Third-Party Buyer:
Finding the ideal third-party buyer for your recruitment business can be a complex endeavour. You can proactively position yourself for a successful sale by building alliances and nurturing relationships with potential buyers well in advance. Consider the following strategies to connect with potential buyers and establish fruitful partnerships:
1. Engage with Your Accountants or a Business Brokers: To navigate the intricate process of finding a buyer, it is beneficial to engage the experts who specialise in the recruitment industry. These professionals possess extensive networks and can leverage their industry knowledge to connect you with potential buyers who align with you and your business.
2. Attend Industry Conferences and Networking Events: Industry conferences and networking events offer valuable opportunities to meet potential buyers and establish meaningful connections. Actively participate in these events, engage in conversations, and share insights within the recruitment community. By cultivating relationships and showcasing your expertise, you can build a network of contacts that may lead to future buyer prospects.
3. Foster Long-Term Relationships: Consider collaborating with potential buyers before the actual sale process. By working together on projects, forming strategic alliances, or engaging in joint ventures, you can develop long-term relationships that can potentially lead to future acquisition discussions. Maintain open lines of communication and nurture these relationships over time, ensuring that when the time comes to sell, you have established a solid foundation for a successful transaction.
By taking a proactive approach to building alliances and cultivating relationships with potential buyers, you can increase your chances of finding the right third-party buyer when you are ready to sell. Remember that the process of finding the perfect buyer often takes time and investing in these relationships early on can pay significant dividends in the future.
Earn-outs can be structured in various ways, but the general concept is relatively simple. In an earn-out agreement, a portion of the sale price is set aside and is contingent upon the business meeting specific performance targets after the sale is completed. These targets may include financial metrics such as revenue or profitability, or they can be based on other agreed-upon performance indicators.
The duration of an earn-out period can vary depending on circumstances and an advisor will help negotiate the earn-out period the qualifying criteria and the split of consideration. Your advisor will almost always default to a position of trying to obtain as much upfront consideration (immediate payment) as possible, with the earn-out period spanning a relatively short timeframe. This structure helps mitigate risks associated with future performance and provides you with a more immediate return on your investment.
While there are potential benefits to including an earn-out in the deal structure, such as a higher overall sale price or the opportunity to share in the business’s future success, it is crucial to approach the terms of the earn-out with careful consideration and negotiation. Key factors to address include specific performance targets, the level of influence you have over these targets, the duration of the earn-out period, and any provisions that protect your interests.
Third-party sales offer a compelling opportunity for ambitious recruitment business owners seeking to exit their companies. By valuing your business accurately, recognising the importance of your management team, incentivising them through an EMI scheme, finding the right buyer, and carefully considering factors before sealing the deal, you can set the stage for a successful transaction. In our next blog, we explore private equity sales in greater detail.
If you own a recruitment business and would like to discuss exit options, call our friendly team of business experts on 0845 606 9632 or email firstname.lastname@example.org.