Avoiding the pitfalls when selling a recruitment business

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It is often overlooked fact that the majority of M&A deals that are attempted in the recruitment sector fail before they are ever completed. So why do so many deals in the recruitment sector, and how can owners avoid the pitfalls?

1. Failure to develop proper systems and methodologies

Many recruitment businesses can make good money for a time without having particularly good systems or clearly defined methodologies. However, without such structures it is almost impossible for a business to successfully continue to increase its scale and to ‘stand alone’ without its founders, which is exactly what buyers expect in their acquisitions.

As a result, there is sadly a long history in recruitment of buyers withdrawing their interest during a period of due diligence into a target business upon discovering that there is little substance “under the bonnet”.

Development and embedding of systems and methodologies is therefore critical to success when selling a recruitment business.

2. Lack of a management succession plan

Many recruitment business owners who believe they have a management succession plan in place in reality do not. The presence of a second tier of management who are good sales people and who can “just about hold the fort” while owners are away is not a credible succession plan. Instead, a more accurate measure of a succession plan is whether the nominated successors have the ability to lead the business and its people for long periods without regular guidance.

Many sophisticated buyers will tend to avoid deals where they have to solve a succession problem by bringing in their own people. As many buyers know from experience, imposing one of their own managers into a new acquisition can be destabilising and “value eroding”. Indeed many bidders will instead walk away when they find out that the “MDs in waiting” are no more than top billers who happen to get on well with the owner.

More often than not, good succession planning involves bringing in proven senior talent from outside and well before a deal happens.

3. Poor management information

Some owner-entrepreneurs regard the use of key performance indicators (KPIs) and management accounting as being unimportant to their businesses. Such owners will often say that knowing the daily cash balance and sales “wins” per day is all they need to manage their business as “the rest will take care of itself”. This may be true at a certain stage of a business’s development – however, as all businesses grow, accurate and timely management information is essential both for survival and
success as it helps management quickly to identify issues and opportunities.

Furthermore, when it comes to selling the Business, management information is even more critical to success as buyers will want to see many forms of segmental performance analysis in order to be reassured that they understand an acquisition and that it is well managed (and Private Equity investors require an even higher standard of information than trade buyers!).

4. Choosing the wrong time for a deal

Getting the timing right for doing an M&A deal is a complex judgement that should take into account economic, sector, company and personal “time cycles”. Waiting for a near perfect alignment of all the cycles is a common mistake which can result in owners waiting too long, by which time their business has stagnated and growth prospects reduced (and with its valuation and level of buyer interest). The maxim of “sell before you need to” continues to stands the test of time. As the famous banker Lord Rothschild said back in the 1800’s, “the greatest profits I ever made were by selling too soon”.

5. Reluctance to partner with the experts

Often by the time of attempting a sale, the only professional advisors with which many owners have previously had dealings are auditors and commercial lawyers. And often these relationships can be quite distant, with many owners not getting too closely involved.

However, completing a successful M&A deal requires a far deeper partnership with an expert M&A advisory team made up of lead M&A advisor, specialist lawyers and tax advisors. The ability of owners to partner with and trust a team of experts usually dictates whether they will achieve a successful deal or not.

6. Failure to identify the likely buyers in advance

It is surprising how often owners of recruitment business come to sell their business without much of an idea of who may be the interested bidders and why. When this happens, something frankly has gone wrong in the preparation.

At least a year in advance of beginning a sales process (and ideally even longer) sellers should be thinking about likely buyers so that, with the guidance of their M&A advisors, they can begin shaping their business to appear most valuable and to ensure that the identified buyers know about them as an attractive future acquisition target. In undertaking this preparation, the level of buyer interest and valuations are always enhanced.

Published in the Recruiter, 4th January 2011


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