How do you make a success of growing and selling your recruitment business?  Our recent panel event, "Growth, Profitability and Exit", held on Wednesday 8 November, helped staffing company owners identify the key steps towards achieving a successful sale.  These included:

  • how to create and achieve the most successful growth strategy to hit profit ambitions;
  • how to maximise value in line with exit and the different types of growth investment available;
  • how to position your company best when seeking investment or an exit; and
  • the key legal issues to watch out for along the way.

Jennifer Millins, Partner at Mishcon de Reya LLP, chaired a panel of leading industry figures:

  • Alex Arnot, founder of MyNonExec.com.;
  • Brendan Flood, Executive Chairman of Staffing 360 Solutions, Inc.;
  • Mark Farlow, Partner at Catalyst Corporate Finance; and
  • Nick Davis, Head of Corporate and Head of the Recruitment Services Group at Mishcon de Reya LLP.

Challenges and Tips for Growth

The panel members identified a number of challenges for growth, including:

  • finding talented, experienced recruiters;
  • the increasing sophistication of in-house recruitment teams; and
  • de-risking for Brexit.

Alex Arnot suggested that attracting and retaining good talent could be achieved by creating a strategy document listing all the places good recruiters can be found and learning what works from new joiners. Brendan Flood observed, "We need to be as sophisticated at finding people for ourselves as we are at finding people for our clients."

In relation to de-risking for Brexit, Alex Arnot pointed out that some UK based staffing companies are setting up mainland European operations, while others are setting up international offices in the US.  He recommended careful planning, adding that it is important to be aware of the bigger picture and de-risk for the longer term, but also to look at shorter term issues, including what can be done to resolve difficulties with staffing.  Brendan Flood commented, "Brexit is not really a problem for you, unless you are really deeply into financial services, then maybe it is."  He added, "I would keep it down to the nuts and bolts of how recruitment actually works and just make sure that we all hire the right people".  According to Mark Farlow, attractive targets for private equity investors are staffing companies that are not completely UK-centric; those with an overseas exposure, particularly candidate-scarce sectors serviced in a number of different jurisdictions across mainland Europe, and possibly the States.

When asked for his thoughts and tips on growing an established business through acquisition, Brendan Flood recommended sticking with sectors you know and keeping it simple: "pick the few things you are good at, the few things you understand and they are the only things that you should buy and buy good ones".

Nick Davis observed that acquirers want to be sure that the business's key people are tied in.  Acquirers also scrutinise client contracts to see whether key clients are contractually tied down, where the revenue is coming from and how certain that revenue is.

The panellists agreed that ways to incentivise and retain star performers include:

  • giving them a stake in their own subsidiary and letting them run it;
  • tight shareholder agreements with no good leavers;
  • retaining sufficient control to make decisions; and
  • putting in a profit share scheme or revenue share scheme alongside an EMI scheme.

Alex Arnot highlighted the fact that potential acquirers of staffing companies take for granted good staff retention and preferred supplier status.  Acquirers focus on the profits of the business.  They look for differentiators, for example, technology that drives efficiency.

The Current Market

When asked to talk about trends and activity levels in the market and whether these differ in different recruitment sectors, Nick Davis observed that technology, pharmaceutical and healthcare are currently hot sectors, as well as UK government spending.  Contract recruitment is much more attractive to an acquirer than permanent recruitment because of the greater certainty of a regular income stream.  In terms of multiples of EBITDA (earnings before interest, taxes, depreciation and amortization), a strategic purchaser might pay six times EBITDA for a good technology staffing company.  A private equity investor would probably pay eight times EBITDA.  Mark Farlow added that there is a broader range of potential purchasers of businesses with more than £4 million of EBITDA.  This drives up the price to seven or eight times EBITDA.  The stellar ones, say 2%, will achieve a price of nine or ten times EBITA.  Alex Arnot added that interest spikes once EBITDA goes over £1 million.

Nick Davis commented, "The smart thing is to have your succession management team in place running the business for at least eighteen months beforehand... and you can present it as an MBO, but you have to have a business of some scale before you can put that extra layer of cost in."  In Alex Arnot's experience, 60% to 70% is typically paid up front in a sale, with an eighteen month to two year earn out.  For investment deals, typically the tie in is for three or four years and the investors will buy 51% of the business.

Positioning for Exit

In relation to positioning for exit, Nick Davis warned that "buyers hate surprises", it undermines their confidence in the business.  Plan years and not months ahead and be organised.  Alex Arnot recommended identifying the company's core areas and assigning responsibility for each area to people within the business.  Buyers are likely to do less detailed due diligence if they see a smoothly run business. 

Nick Davis added that the sale process usually takes around six months.  The intensity increases as the deal progresses.  It is important to have a strong management team in place who can focus on the day-to-day running of the business and enable the owners to concentrate on the sale process.  Alex quipped, "you have to like your lawyer because, boy, do you see a lot of them!" 

From a buyer's perspective, Brendan Flood added that he preferred sellers with sophisticated advisors: "it is a hell of a lot easier for your side of the process if you engage somebody who knows what they are doing rather than engage the cheapest guy you can find in the market because you know you need to have somebody in the room with you".

Key Take-Aways for Success

To summarise the key take-aways from the event, staffing businesses most likely to achieve a successful sale will have:

  • star performers tied in;
  • key clients on strong contracts;
  • temporary contract business;
  • profit of over £1 million;
  • a strong management team; and
  • solid, experienced advisors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.