Once a buyer has made an offer for a recruitment agency, the business will usually enter a due-diligence process. This allows the buyer and their professional advisers to test the information supplied, understand the risks and confirm whether they are willing to proceed on the proposed terms.
Preparing the information before a buyer requests it can save time and reduce the risk of avoidable delays.
This checklist provides a practical starting point for UK recruitment agency owners. The exact requirements will depend on the size and structure of the business, the type of recruitment undertaken and whether the transaction is a share sale or an asset sale.
1. Financial Information
A buyer will normally want to understand the historic and current financial performance of the agency.
Prepare:
- Filed and full statutory accounts
- Recent management accounts
- Monthly profit and loss reports
- Balance sheets
- Cash-flow information
- Aged debtor and creditor reports
- Tax returns and correspondence
- VAT and PAYE records where applicable
- Details of loans, invoice finance and other borrowing
- Forecasts and budgets
- Explanations for unusual or non-recurring income and expenditure
Make sure the figures used in the sale profile, valuation and buyer discussions can be reconciled with the underlying accounts.
2. Net Fee Income and Revenue Analysis
Headline turnover does not always provide a useful picture of a recruitment business, particularly where temporary workers or contractors are involved.
A buyer may request:
- Net fee income by month
- Income divided between permanent, temporary, contract and retained work
- Gross margin information
- Revenue by consultant
- Revenue by sector or desk
- Average placement values
- Contractor or temporary worker numbers
- Conversion and fill-rate information, where maintained
Present the figures consistently and explain how they have been calculated.
3. Client Information
The buyer will need to assess the quality, concentration and transferability of the client base.
Prepare:
- A list of active clients
- Revenue and net fee income by client
- Length of each material client relationship
- Copies of important client agreements
- Framework agreements and preferred supplier arrangements
- Rebate and replacement terms
- Notice and termination provisions
- Client concentration information
- Details of disputes, complaints or unpaid invoices
- Information about clients controlled personally by the owner
Client identities may initially be anonymised. Confidential information should only be released through an agreed process.
4. Candidates, Temporary Workers and Contractors
For temporary and contract recruitment businesses, the worker book can be a substantial part of the value.
Relevant information may include:
- Current temporary worker and contractor schedules
- Assignment start and end dates
- Pay and charge rates
- Gross margins
- Employment or engagement status
- Right-to-work records
- Screening and vetting procedures
- Timesheet and payroll processes
- Holiday-pay arrangements
- Pension arrangements where applicable
- Umbrella company relationships
- Existing worker or candidate disputes
Personal data should not be transferred simply because a buyer has requested it. Obtain appropriate legal and data-protection advice about what can be disclosed, when and on what basis.
ICO guidance on sharing personal data in mergers and acquisitions
5. Legal and Regulatory Compliance
Recruitment businesses must comply with rules that vary according to the services they provide.
A buyer may review:
- Standard client terms
- Candidate registration terms
- Temporary worker agreements
- Contractor agreements
- Privacy notices
- Data-retention arrangements
- Right-to-work procedures
- Agency Workers Regulations procedures
- Conduct Regulations compliance
- Equality and anti-discrimination policies
- Modern slavery statements where applicable
- Insurance policies
- Complaints and litigation
- Regulatory correspondence
6. Employees and Consultants
Prepare an accurate schedule covering:
- Employees and job titles
- Salaries, bonuses and commission
- Length of service
- Holiday entitlement
- Benefits
- Notice periods
- Restrictive covenants
- Consultant arrangements
- Outstanding grievances or disciplinary matters
- Planned departures
- Roles performed personally by the owner
A buyer will want to understand which people generate revenue, manage important relationships and keep the business operating.
7. Systems, Data and Intellectual Property
Recruitment agencies depend heavily on their databases, systems and brands.
Prepare details of:
- Recruitment CRM software
- Licence terms and renewal dates
- Candidate and client database ownership
- Data quality and retention
- Cybersecurity arrangements
- Website and domain ownership
- Trade marks and trading names
- Job-board contracts
- Telephone systems
- Payroll and timesheet platforms
- Software integrations
- Data backups and business-continuity arrangements
Check that important domains, licences and intellectual property are owned by the company being sold rather than personally by a director or outside supplier.
8. Property and Other Commitments
The buyer may also request:
- Office leases
- Equipment leases
- Vehicle agreements
- Supplier contracts
- Marketing commitments
- Job-board agreements
- Outsourcing contracts
- Guarantees
- Hire-purchase or finance agreements
- Details of any change-of-control provisions
Common Problems That Delay Due Diligence
Delays often arise where:
- Management figures do not match the accounts
- Client contracts cannot be found
- The agency relies heavily on one client
- Worker compliance records are incomplete
- Personal and company expenses are mixed
- Key software is held in the owner’s name
- Commission arrangements are undocumented
- Important staff have no effective contracts
- A claimed recurring income stream is not supported by written agreements
Finding these issues before the agency goes to market gives the seller time to address or explain them.
Start Preparing Before Accepting an Offer
Due diligence should not begin with a frantic search for documents after heads of terms have been agreed. A well-organised seller can respond more quickly, give buyers greater confidence and reduce the risk that preventable issues disrupt the transaction.
Recruitment Agency Sales assists owners with valuations, exit planning, confidential marketing and buyer introductions. We work alongside the seller’s solicitors, accountants and tax advisers rather than replacing them.