M&A is always a keen topic of conversation and opinions across the Recruitment sector. Here are some of the most frequent myths and misconceptions about selling a business in the sector.
1. There will always be a buyer for my business
Not so. Across the sector, a high number of attempted deals fail to find a buyer (often due to insufficient coverage of the buyer market from advisors). And finding a buyer is increasingly a challenge for owners due to the numbers of unsold businesses that have been building up since the start of the economic downturn in 2008 and which are now competing for the attentions of buyers.
2. I should sit and wait for a buyer to approach me
This exit strategy can be a long and unfulfilled wait, and often means that the necessary sale preparations are not ready. It can also involve a lack of competitive bidding tension as the buyer knows it the only interested party at that time. A better outcome for owners usually comes from a proactive, multi-bidder, and process-based approach to finding a buyer.
3. My business is worth at least a 10x multiple
Unrealistic price expectations often prevent owners of recruitment businesses from accepting offers that with hindsight they realise represented a good valuation and exit. A sensible M&A advisor should be able to set out a fair market valuation for an individual business as well as explain how this valuation might be exceeded through good preparation and through the sale process itself.
4. Deals are all about price (what else would they involve?)
Deliverability of a completion, timing and risk of consideration payments (including earn-out), buyer funding reliability, post deal cooperation and cultural fit (underpinning the value of any earn-out), and the level of legal exposure through warranties also determine the attractiveness of an overall deal as well as price. In our experience, a focus on price alone often makes for a bad deal.
5. My business is well-run and therefore already ready for sale
Possibly but we have yet to come across a business that is already optimally prepared for sale. Foregoing the necessary sale preparations (which will be a mixture of the strategic, operational or cosmetic changes to make the business more attractive to its potential buyers) often means that valuation is not maximised or worse that a deal never happens. The earlier the necessary preparations are identified and implemented, the more valuable the pay-off for vendors.
6. If I diversify by sector or by country, I reduce business risk and become more attractive to buyers
Often the opposite is true. Many recruitment buyers nowadays look for sector specialist acquisitions with concentrated country operations of critical mass. With some exceptions, diversification often makes it harder for a buyer to get comfortable with a potential acquisition strategically and with the task of its integration.
7. Earnouts are worthless
Some earnouts do indeed fail due to reasons such as intervening events (e.g. market downturns), personality clashes, or poor deal structuring that prevents earnout value translating into cash consideration. However, if structured well, earnouts can represent significant additional value for vendors and therefore should never be ignored during negotiations or following deal completion.
8. If Private Equity is the buyer, they will load my business up with debt and sack me and the team if something goes wrong
Often the answer here may be yes. The key to preventing this is to structure the deal with no more than a comfortable level of debt and to negotiate only with Private Equity houses with a good track record of supporting management teams through thick and thin (in our experience some do, some don’t).
9. M&A advisors are all the same (so I should just go for the cheapest)
The M&A advisors who will lead the sale process (preparations, buyer identification and approaches, negotiations, deal structuring, and project management of due diligence to completion) is often the most important external appointment in the commercial life of the business owner. Whilst advisors can initially appear somewhat similar, beneath the surface there is often great variance between their levels of sector specialism, independence, discretion and energy. In fact, the cheapest advisor is very rarely the best advisor.
10. The buyer is obvious (and is probably a buyer I already know)
The recruitment buyer landscape is internationalising, with many new buyers emerging in the Far East and other territories. There is also interest emerging from service players outside the recruitment sector who want to secure control of scarce human capital contractor talent to fulfil their own service delivery to clients. Both these buyer types will tend to be ‘strategic buyers’ offering higher valuations on account of them gaining an attractive new territory or service. These new entrants to the buyer landscape are increasingly unknown to vendors and need to be carefully identified and understood.
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