Recruitment Agency Sales & M&A Glossary
Selling or buying a recruitment agency involves terminology that may be unfamiliar if you have not previously been involved in a business transaction.
This glossary explains common recruitment agency valuation, acquisition and M&A terms in straightforward language, with particular emphasis on how they apply to UK recruitment businesses.
Understanding Recruitment Agency M&A
Recruitment businesses have some characteristics that make valuation and sale terminology particularly important. Turnover, for example, may not always be a useful indication of the underlying economics of a temporary staffing business because a substantial proportion may relate to worker pay and associated costs.
Buyers may therefore pay close attention to net fee income, gross profit, adjusted EBITDA, contractor numbers, client concentration, management structure and the degree to which the agency depends on its owners.
Deal structure can be just as important as headline valuation. Two offers with the same stated purchase price can produce very different outcomes depending on how much is paid at completion, how much is deferred and whether part of the consideration depends on future performance.
Thinking about selling?
Understanding the terminology before negotiations begin can make it much easier to compare offers and identify where the commercial risks lie.
Read Our Exit Planning GuideAdjusted EBITDA
Adjusted EBITDA is EBITDA modified to remove or normalise income and expenditure that a buyer considers exceptional, personal, non-recurring or not representative of the future cost of operating the business.
In a recruitment agency this might include unusually high or low owner remuneration, personal motor costs, exceptional professional fees or genuinely one-off expenditure.
Adjustments should be capable of explanation and evidence. Buyers will not necessarily accept every adjustment proposed by a seller.
Read more about EBITDA →Asset Sale
An asset sale is a transaction in which a buyer purchases specified assets and, where agreed, liabilities of a business rather than acquiring the shares in the company.
Depending on the transaction, assets might include the trading name, website, contracts, intellectual property, databases and goodwill.
Employment, tax, contractual and data-protection consequences can differ substantially from a share sale, so professional legal and tax advice is important.
Business Broker
A business broker helps owners market businesses for sale and introduces potential buyers.
In recruitment M&A this may include preparing an anonymous sales profile, identifying potential purchasers, managing confidentiality, coordinating enquiries and assisting with negotiations.
How we sell recruitment agencies →Buyer
The buyer is the individual, company or investment vehicle acquiring the recruitment agency or its assets.
Recruitment agency buyers can include existing recruitment groups, competitors, management teams, individual recruiters, investors and companies seeking entry into a new sector or region.
Register as a recruitment agency buyer →Completion
Completion is the point at which the legal sale becomes effective and ownership transfers in accordance with the sale agreement.
The buyer will normally make any payment due at completion and the agreed legal documents are completed. Deferred consideration or earn-out payments may remain payable afterwards.
Completion Accounts
Completion accounts are accounts prepared following completion to establish the actual financial position of the company at the completion date.
They may be used to adjust the final purchase price for matters such as cash, debt and working capital.
Consideration
Consideration is the price or value given by the buyer in exchange for the business or shares.
It can include cash at completion, deferred payments, earn-out payments, shares in the buyer or a combination of these.
Client Concentration
Client concentration describes the extent to which a recruitment agency’s revenue or net fee income depends on a small number of customers.
A business generating a large percentage of its income from one client can present greater risk to a buyer if that relationship is lost after acquisition.
Client concentration can therefore affect valuation, buyer appetite and deal structure.
Deferred Consideration
Deferred consideration is part of the purchase price that is agreed at the time of sale but paid to the seller after completion.
For example, a buyer might pay 70% of the purchase price at completion and the remaining 30% in instalments over the following two years.
Unlike an earn-out, deferred consideration will generally not depend on the business achieving future performance targets, although payment may still be subject to contractual conditions.
Due Diligence
Due diligence is the investigation a buyer and its advisers undertake before completing an acquisition.
In a recruitment agency transaction this may involve examining financial records, clients, employee arrangements, consultants, contractor books, customer contracts, tax, funding, compliance, data protection, litigation and intellectual property.
Preparing for due diligence well in advance of a sale can help reduce delays and unexpected issues.
Preparing your recruitment agency for sale →EBITDA
EBITDA stands for Earnings Before Interest, Tax, Depreciation and Amortisation.
It is commonly used as one indicator of operating performance when valuing recruitment businesses, although EBITDA is not the same as cash flow and should not be considered in isolation.
Buyers may make further adjustments to arrive at adjusted or maintainable EBITDA.
Full guide to EBITDA →Earn-Out
An earn-out is part of the purchase price that becomes payable only if agreed future conditions or performance targets are achieved.
Targets may relate to revenue, net fee income, EBITDA, client retention or another agreed measure.
Earn-outs are common where the seller remains involved after completion or where the buyer wants protection against uncertainty about future trading.
Enterprise Value
Enterprise value is the value attributed to the underlying trading business before adjusting for matters such as cash and debt.
It should not automatically be confused with the amount that the shareholders will receive when a transaction completes.
Equity Value
Equity value is the value attributable to shareholders after relevant adjustments such as debt, cash and other agreed completion items.
A valuation expressed as enterprise value and an offer expressed as equity value are therefore not necessarily directly comparable.
Goodwill
Goodwill is the intangible value associated with a business beyond its separately identifiable assets and liabilities.
For a recruitment agency this can relate to reputation, customer relationships, workforce, brand, systems, databases and the ability of the business to generate future profits.
Gross Profit
Gross profit is revenue after deducting the direct costs associated with generating that revenue.
In recruitment, particularly temporary and contract staffing, gross profit is often closely related to the concept of net fee income and can be more informative than headline turnover.
Heads of Terms
Heads of terms are a document setting out the principal commercial terms agreed between buyer and seller before detailed legal documentation is prepared.
They may cover price, payment structure, exclusivity, seller involvement, timetable and important conditions.
Many provisions are commonly expressed as non-binding, although some clauses such as confidentiality or exclusivity may be intended to have legal effect. Legal advice should therefore be obtained before signing.
Indemnity
An indemnity is a contractual promise by one party to compensate the other for specified types of loss or liability.
In a business sale agreement, indemnities may be negotiated for particular identified risks discovered during due diligence.
Indicative Offer
An indicative offer is a preliminary expression of the price and structure a buyer may be prepared to offer before full due diligence has been completed.
It is normally subject to further investigation, agreement of terms and formal contracts.
Intellectual Property
Intellectual property includes legally protected or commercially valuable intangible assets such as trademarks, copyright, proprietary software, databases and other business materials.
Ownership and transferability of relevant intellectual property may be reviewed as part of recruitment agency due diligence.
Locked Box
A locked-box transaction is a pricing mechanism in which the equity price is calculated using an agreed historical balance sheet rather than completion accounts prepared after completion.
The seller will generally agree that value will not be extracted from the company between the locked-box date and completion other than as specifically permitted.
Letter of Intent
A letter of intent is a document recording the principal terms on which a buyer proposes to proceed with an acquisition.
In UK transactions, the expression is sometimes used similarly to heads of terms, although the exact legal effect depends on the document.
Management Buyout (MBO)
A management buyout occurs when members of the existing management team acquire the business from its current owners.
This can be an exit option where an established management team wishes to continue operating the recruitment agency independently.
Maintainable Earnings
Maintainable earnings are the level of earnings a buyer considers reasonably sustainable after the acquisition.
Historical profits may be adjusted where costs or revenues are exceptional, where the owner’s role must be replaced or where recent trading is considered more representative of the future.
Multiple
A valuation multiple is a ratio applied to a financial measure such as EBITDA or, in some situations, net fee income to help estimate business value.
A multiple should not be used without considering the individual characteristics of the recruitment agency. Growth, client concentration, management, profitability, recurring revenue and buyer demand can all influence the appropriate multiple.
How we value recruitment agencies →M&A
M&A stands for mergers and acquisitions.
It is the broad term used for transactions in which businesses combine, are bought, sold or reorganised through acquisitions or mergers.
Net Fee Income (NFI)
Net fee income is the income retained by a recruitment agency after deducting the direct costs associated with supplying temporary workers or contractors, where relevant.
It is often closely related to gross profit and is particularly useful in recruitment because turnover can include large amounts paid through to temporary workers or contractors.
For this reason, a recruitment agency with very high turnover does not necessarily have correspondingly high profitability or value.
NDA / Non-Disclosure Agreement
An NDA is a confidentiality agreement restricting how confidential information may be used or disclosed.
In recruitment agency sales, identifying and commercially sensitive information will often be disclosed only after a prospective buyer has agreed to confidentiality requirements.
Normalised Profit
Normalised profit is profit adjusted to remove exceptional or non-recurring items and reflect the likely ongoing cost structure of the business.
It is closely related to the concept of adjusted EBITDA and is intended to help buyers understand the earnings that might reasonably continue following acquisition.
Purchase Price
The purchase price is the total consideration agreed for the acquisition, subject to the precise terms and adjustments contained in the sale agreement.
Sellers should examine how and when the price is payable rather than focusing only on the headline figure.
Purchase Price Adjustment
A purchase price adjustment changes the amount ultimately payable by reference to an agreed financial mechanism.
Adjustments may relate to cash, debt, working capital or other agreed items at completion.
Recurring Revenue
Recurring revenue is income that is reasonably expected to repeat because of an ongoing customer relationship, contract or established pattern of work.
In recruitment this might include retained assignments, established contractor books, framework arrangements or regular temporary staffing requirements.
Greater visibility of future income can make a business more attractive to some buyers.
Restrictive Covenant
A restrictive covenant is a contractual restriction intended to limit specified activities after employment or the sale of a business.
Buyers may seek seller covenants restricting competition, solicitation of clients or recruitment of employees after completion.
Existing employee restrictive covenants can also be relevant to due diligence.
Retention
In an M&A context, retention often refers to arrangements intended to encourage key employees or managers to remain with the business during or after a transaction.
Retaining successful recruitment consultants can be particularly important where client relationships or revenue are closely connected with individual recruiters.
Share Sale
A share sale is a transaction in which the buyer acquires the shares in the company that operates the recruitment business.
The company itself continues to own its assets, employ its staff and remain party to its contracts, subject to any change-of-control provisions or other legal requirements.
Sellers should obtain legal and tax advice on the differences between a share sale and an asset sale.
SPA / Share Purchase Agreement
A Share Purchase Agreement is the principal legal contract governing the sale and purchase of shares in a company.
It normally deals with matters including purchase price, payment arrangements, warranties, indemnities, completion, restrictions on sellers and other negotiated terms.
Seller
The seller is the person or entity disposing of the business, assets or shares.
In a company share sale, the sellers will normally be the shareholders rather than the company itself.
List your recruitment agency for sale →Trade Buyer
A trade buyer is an existing business operating in the same or a related industry that acquires another company for strategic or commercial reasons.
A recruitment group may acquire another agency to enter a new sector, obtain clients, expand geographically, acquire a contractor book or strengthen an existing specialism.
Turnover
Turnover is the total revenue recognised by the business during an accounting period.
In temporary and contract recruitment, turnover can include substantial amounts relating to worker or contractor pay. It should therefore not automatically be treated as equivalent to net fee income or gross profit.
TUPE
TUPE refers to the Transfer of Undertakings (Protection of Employment) Regulations.
These rules can protect employees when a business or undertaking transfers to a new employer in circumstances covered by the legislation.
TUPE can be particularly relevant to some asset sales. Specialist employment-law advice should be taken rather than assuming whether TUPE does or does not apply.
Valuation
A business valuation is an assessment of what a recruitment agency may be worth at a particular point in time and for a particular purpose.
Recruitment agency valuations may consider adjusted EBITDA, maintainable earnings, net fee income, recurring revenue, management structure, owner dependence, customer concentration, sector, growth and current buyer demand.
A valuation is not a guarantee of the price a buyer will ultimately offer.
Recruitment Agency Valuation Services →Warranty
A warranty is a contractual statement about the business or company made by a party, commonly the seller, in a sale agreement.
Warranties can cover matters including accounts, contracts, employees, tax, disputes, intellectual property, regulatory compliance and other aspects of the business.
If a warranty is untrue and the contractual requirements are met, the buyer may have a claim for breach.
Working Capital
Working capital broadly refers to the short-term financial resources required to operate the business, commonly assessed by reference to current assets and current liabilities.
Recruitment agencies supplying temporary workers can have particularly significant working-capital requirements because workers may need to be paid before clients settle invoices.
Working-capital arrangements can therefore be an important part of recruitment agency acquisitions and completion-price negotiations.
Do Not Look at One M&A Term in Isolation
A recruitment agency cannot usually be valued properly by selecting one EBITDA multiple, looking only at turnover or applying a rule of thumb.
Buyers consider the business as a whole. A company with strong profits but significant client concentration or owner dependence may attract a different valuation from a business with the same profits but a broad client base, recurring revenue and an established management team.
This is why our recruitment agency valuations consider both financial performance and the commercial characteristics of the business.
What is your recruitment agency worth?
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Request a ValuationMore Advice on Buying and Selling Recruitment Agencies
Explore our guides to recruitment agency valuations, exit planning and the sale process.
Important
This glossary is intended as a general introduction to terminology commonly encountered in recruitment agency sales and acquisitions. It is not legal, tax, accounting or investment advice.
The precise meaning and effect of a term can depend on the wording of transaction documents and the circumstances of an individual sale. Buyers and sellers should obtain advice from suitably qualified solicitors, accountants, tax advisers and other professionals where appropriate.
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