In short, if you manage to build a recruitment business turning over £10 million with an established team of staff, a niche area of work and public or private contracts in place then yes, absolutely.
Questions like these can be difficult to answer in a simple yes or no fashion as there are many different opinions and may different factors that will come into play. For example, if you have a substantial amount of cash and the goal is to grow an existing firm into something much larger and rapidly with a good business plan and the necessary expertise, this can be a very good idea if you can get to the sort of turnover given above.
However, most recruitment business owners are those who have just enough capital to pursue a more organic growth strategy, primarily funding expansion through profits. In my opinion, the answer is both yes and no and this article will explain both perspectives.
Why Do You Want to Sell?
In the conversation we have with recruitment agency owners who want to build to sell, the first question we ask is ‘why?’. It may seem like a simple question to some, “to become wealthy,” but not everyone’s ambition is driven by money. It could be that you want to retire, you have suffered ill health, a key member of staff has just left, your business is struggling, your clients are leaving you. Your reasons for selling also affect the sale price. A 75 year old seller looking to retire will usually find it harder to achieve top prices than a seller looking to sell a recruitment business to make a lot of money.
How Much Are Recruitment Businesses Worth?
It’s important to note that determining the value of a recruitment business can be quite challenging. A lot of valuers cite industry averages: 4 times EBITDA for permanent recruitment businesses and 8 times EBITDA for contract businesses. EBITDA, which stands for earnings before interest, taxes, depreciation, and amortisation, essentially reflects profit. It is important to note however that the majority of recruitment agencies do not sell for these amounts. A lot of publicity has gone into promoting these figures by brokers and there is often talk of 3.5 – 5.5 x multiples of EBITDA for all agencies.
However..
The sorts of figures you see above are applied because all the deals that get publicised in trade magazines etc and where figures are quoted, tend to be for listed companies and/or those with audited accounts. This means that the rules apply to turnover of above c£6 million. The valuation rules of thumb cause a huge amount of confusion and misinformation.
Think about it. If you are a small recruitment agency undertaking mainly permanent introduction work with say 2 other recruitment consultants, no support staff, no guaranteed fees and solely contingency based recruitment, then chances are your recruitment agency is going to be worth a hell of a lot less than the figures above. In fact in some cases your agency will have no value at all. If your turnover is £150k with £50k profit and you work 50 hours a week on personal contacts to achieve that, who on earth is going to pay you 5 times your profit (£250k) to buy your agency? What would you pay for such an agency – £75k possibly if you could see a strong link to certain clients?
Valuation is vanity, cash is sanity. Or something like that!
What Is the Reason Recruitment Businesses Aren’t Highly Sought After?
There are three main reasons for this.
Firstly, recruitment businesses are not particularly complex. If someone has enough money to buy one, they likely have the knowledge and skills to start their own from scratch.
Secondly, there’s a significant element of risk involved. Unlike businesses that rely on patents or products with tangible, hard-to-replicate value, recruitment firms don’t have those safeguards. A recruitment agency is providing a service that is in theory easy to replicate. What a buyer is really acquiring is the brand and the workforce, with the latter being the key risk. Employees can leave at any time, and this uncertainty is a major concern. There is a familiar saying in the recruitment industry, “You’re only as good as your last month” — and that same risk applies when purchasing a recruitment business. If key recruiters leave, particularly in large numbers, the business can quickly crumble. We’ve seen cases where, after a takeover, a few long-standing employees departed, unsettling the rest of the team and causing a chain reaction. Before long, the business was gone with the employees (be nice to your new employees post sale!).
Thirdly – and it relates to the second point above – one of the first sectors of any economy to be badly hit in a recession is recruitment. Business can virtually dry up overnight. In 2008 when banks were busy crashing all around the world, recruitment agencies were shutting up shop equally as quickly. A lot of agencies had no cash coming in for months at a time.
Why Building a Business to Sell Is a Bad Idea
When you sell a business, unless you’ve already stepped away from its daily operations, it’s almost inevitable that the new owner will require an earn-out as part of the deal. An earn-out means continuing to work and taking your payment for the sale from the future profits of the business. Very often this will involve a portion of the sale price upfront with the remainder paid over time based on the business meeting agreed performance targets. Furthermore, deals can also include clawback of any payments made already if business drops off.
Earn Out = Modern Slavery?
While you might think you’re selling for 4 times profit using the multiplier above, you could end up working for the company for another two years, effectively walking away with just 2 times profit upfront. Moreover, after years of being your own boss and building the business yourself, how would it feel to suddenly be working for someone else? Worse still, you may have to stand by as the new owner makes poor decisions, or see your valued staff leave because they don’t like the new management, who you will need to support in order to get your payout. Sellers can feel trapped in a business they built but no longer own. Depending on the conditions, earn out can feel a bit like slavery to some..
Consultancy Option
Instead of selling outright, another option buyers might suggest is including a consultancy role as part of the deal. On the surface, this sounds appealing—you get paid by the hour to offer advice and guidance to the new owners. This helps you keep an eye on the business whilst the earn out period is worked, but also this arrangement often keeps you tied to the business and can make you feel trapped, as you no longer have full control but are still involved in day-to-day operations and outcomes. Plus, if the new owners make decisions you disagree with, it could lead to frustration without any real authority to make changes which will also affect your earn out amounts.
Retaining Your Business Can Be More Profitable
So, why settle for two years’ profit and a consultancy role, when, if the business runs without you, holding onto it could yield profits for 6, 10, or even 20 years? If your team performs well, the annual profits could even increase. In fact, owner-managers can sometimes hold a business back. A smarter approach might be to incentivise key staff with shares, hire a strong Non-Executive Director to guide the new board, and enjoy the profits every year. That’s a far better return than a short-term payout. This is a difficult scenario for some to achieve – you have to have key staff you can trust, the finances to hire additional managers and again trust them not to run your business into the ground.
Why Building a Business to Sell Is a Good Idea
There are a number of key factors that can significantly increase the value and saleability of a recruitment business:
- Specialist businesses tend to be worth more than generalist ones
- Ongoing retainers are valuable
- A diverse client base is crucial (1 client providing 75% of the business is not good)
- Building a first-class database is essential (and making sure it is regularly maintained)
- Keeping staff attrition low adds value (your staff add a lot of value and they are not easy to replace)
- Developing a strong management team is incredibly important (try to let the business run itself)
- First-class branding enhances your business (recognised branding = higher value)
These elements help create a business that operates more like a well-oiled, money-making machine—less dependent on individual employees and you. This, in turn, makes the business more resilient, easier to grow, and better at retaining staff. It sets you up for a smoother exit or semi-exit when the time is right.
By focusing on these areas, you’re essentially following a blueprint for building a business on strong foundations. This will make it easier to scale, ensure longevity, and allow it to continue generating profits long-term. Plus, if an unsolicited offer comes your way, the business will be worth that much more.
Conclusion
Building a business with the mindset of a future sale often leads to a stronger, more resilient company. This approach is commonly used with businesses that attract investment and partnerships. However it doesn’t necessarily mean that your business should be sold one day – it can be more profitable to keep a business yourself, recruit staff and management to run it, and live off the profits. For a valuation of your business please get in touch or visit our valuation pages. To discuss listing your business with us please get in touch.