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Factors to consider when valuing a recruitment agency

Here are a list of factors that are taken into account when valuing an employment agency in the UK:

Financial Performance: Evaluate the agency’s revenue, profit margins, EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization), and cash flow. Historical financial performance and future forecasts are crucial in establishing a baseline value​.

Client Base and Contracts: Assess the diversity and quality of the client base. Long-term contracts with reliable clients can significantly enhance the value of the agency. The loss of any major client could potentially affect the valuation so we often look for agencies that have high dependency on one or two clients.

Industry and Market Position: The agency’s position in the industry and its market share are important. Agencies specializing in high-growth sectors or those with a strong brand and reputation can command a higher valuation.

Staff and Intellectual Capital: The quality of the recruitment team and the agency’s networks can be valuable assets – we look for evidence of this. Key personnel, particularly those with strong client relationships, are critical to the agency’s value​.

Assets and Liabilities: Tangible assets (office space, IT infrastructure) and intangible assets (brand, proprietary software) are considered alongside liabilities (debt, outstanding payments).

Regulatory Compliance and Legal Factors: Ensuring compliance with employment laws and regulations can affect the agency’s value. Potential legal liabilities or ongoing disputes need to be factored into the valuation.

Valuation Multiples and Comparables: These tend to have much less significance than certain M&A consultants and accountants will let on to (its their business after all!). We don’t tend to use them. However you can look at comparable sales within the industry to identify valuation multiples applied to recruitment agencies. Common multiples include a multiplier of annual revenue or EBITDA. However, the specific multiplier can vary significantly based on the factors mentioned above and current market conditions​

Market Conditions and Trends: External factors, such as economic conditions, industry trends, and changes in employment law, can influence the agency’s valuation.

Profitability – it’s not only the amount of net profit which is important, but we are looking specifically for the percentage of profit compared with turnover.

Niche focus – very good for adding value to a recruitment agency. Strong levels of expertise and a well regarded brand in a specialist sector can add significant value in the eyes of a buyer.

Contractor base – recurring revenues from ongoing contract placements really boost saleability – mainly because they mitigate cashflow risk and justify sales forecasts (lets face it, most of these are usually plucked from the air by the FD!).

Geography – offices in key cities with strong pools of talent can play an important factor in any decision making.

Founder and Senior Staff Departure – this plays a key role in every sale. By far one of the biggest risks to the buyer is how an agency will perform without the founder involved day to day, or how losing one or two ‘big billers’ will affect sales. Evidence of a self-sufficient staff team can be attractive to investors.

Personnel – this is what you are selling really in most cases! Quality, tenure, training, expertise and long-term commitment of key staff members all go towards the value of any business. High staff turnover = low offers.

Technology & processes – good CRM systems, automated processes and fully functioning IT systems improve saleability.

Clients – buyers will be very interested in understanding size and diversity of customer base, strength of relationship with key clients as well as ensuring that the agency isn’t overly-dependent on a few vital clients. How much info is handed over by parties is very often a key consideration.

Customer contracts – any retained consultancy work is always good, RPO, exclusive contracts all work well to increase buyer confidence in future profit generation.

Compliance – any legal certification or accreditation (eg membership of the REC, Cyber Essentials, ISO 9001 etc) which often provide access to specialist markets can be viewed as an extremely valuable addition.

If you would like a valuation of your recruitment agency, please get in touch.