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Recruiter's Review

Selling your business

The recruiter’s guide to selling your business

What should I do if I am approached by a competitor, who would like to acquire my business? What taxation and commercial issues should I be aware of?

Selling a business can be a minefield. The most important aspect is not to be unnecessarily distracted from your business whilst offers are presented. Protecting the value of your business including the underlying relationships with clients and looking after your staff are essential when planning and negotiating the sale.

Firstly, consider appointing a business advisor – such as Deloitte - who is experienced in advising vendors of a similar size to yours and has an understanding of the recruitment sector. Be aware of business brokers out for a “quick buck” as they may value their commission over your post sale obligations. 

You will want to understand if things such as multiple paid, earn-outs, warranties/indemnities and restrictive covenants are consistent with other business sales in the industry.

How will the business fit into the purchaser’s business?

Clarify the buyer’s intention as generally there are two ways acquisitions are made in the recruitment industry. The first method is for the purchaser to consolidate your business into their business. In this case, the name of the business is usually changed to the purchaser’s and the business is physically moved into the purchaser’s premises. 

The second method is for your business to be retained and run as it has previously been. In this case, basically none of the operations change except possibly the centralisation of some of the back office services. This method will almost certainly require you to stay with the business for a period of time and some of the purchase price will usually be held back in the form of an earn-out. An earn-out is part of the purchase price that is held back pending you meeting forecasts.

What are Earn-Outs?

Where an earn-out is included as part of the purchase price, ensure you understand the future expected financial performance the purchaser requires for you to obtain the earn-out. In services oriented industries, it is not uncommon to see an exodus of professional staff who may not wish to be part of a bigger organisation. 

This may lead to a potential loss of clients affecting future profits. In addition, the taxation consequences to vendors of earn-outs need be understood in order to predict future cash flows required to fund taxation payments. For example, a tax payment may arise even though an earn-out has not been received.

Where earn-outs are negotiated, a large component of your consideration on the sale of the business can be reliant on the future performance of the business. As such, it is critical you feel comfortable with the purchaser and you understand their vision for the business over the period of the earn-out. The purchaser’s vision could be to leave the agency as it has been previously operating. Alternatively, the purchaser may consolidate the operations making it difficult to manage and equally difficult to measure performance.

Pricing

There is a lot of noise in the market in respect of who got what for their business. Do not believe everything you hear. Realistic multiples being paid for recruitment companies are between three and five. Of course, there are exceptions. Your multiple may be lower if you have a few clients that represent the majority of your fees. Alternatively, the multiple may be higher if a purchaser sees your business as having certain unique strategic synergies with their existing business.

The Enterprise Value of your business will be calculated as follows:

Multiple x EBITDA (earnings before interest, tax, depreciation and amortisation)
Generally, to establish the market value of your business you will add cash and subtract debt from the Enterprise Value.

Intangible Off-Balance Sheet Assets

The Market Value of your business will in most cases be more than the net assets on the balance sheet. The difference between the two is normally thought to be goodwill, however the valuations of recruitment businesses has become more sophisticated in the past few years. Other valuable identifiable intangible assets existing within your business may include:

  • Candidate Database – This could be one of the most valuable assets your business owns. Amongst other things, its value will depend on the quality of the information stored, how current it and how easy it is to access. Notes in an employee’s notepad will be useless if that employee leaves, so make sure you have strict policies to ensure a digital database is used, updated and cleansed. Remember that when a purchaser does their commercial due diligence they will focus on the candidate database. A well structured digital database with details of interviews, reference checks, salary expectations, likes, dislikes, etc will be more valuable then a database with just PDF copies of CVs. I have seen situations where multiples have been reduced post commercial due diligence due to poorly managed databases. Remind your employees who they work for and candidate information belongs to your agency.
  • PSA client relationships – Preferred supplier agreements are considered to be valuable. Although the existence of a PSA does not provide the agency with a guaranteed stream of income, it does increase the probability of income being generated from a potential client during the term of the agreement. A PSA exists between an agency and its clients where the agency has information about the clients, has regular contact with the clients and the clients have the ability to make direct contact with the entity as one of a limited number of agencies used for the supply of temporary and/or permanent staff.
  • Brands/Trade names – Although you may consider your brand name valuable, an acquirer may look to cease using the name either immediately or over a short period.
  • Software – Database management systems are used to structure and manipulate data whilst ensuring data security, recovery and integrity. In some cases, these will be “off-the-shelf” such as Cris or Turbo Recruit. In other cases, these will be sophisticated customised versions.

Structure

Many recruitment businesses start their life being run out of a discretionary trust however most transition their business to a company. If your business is run out of a discretionary trust, the vendor will have no option but to purchase the assets. In many states of Australia, the purchaser will incur a significant stamp duty impost as a result of an assets purchase. In addition, the transfer of the employees, PSAs, software licenses, leases, etc creates a legal headache.

On the other hand, share sales incur either no or reduced stamp duty imposts.

If your business is run out of a company, it is likely there will be taxation benefits associated with selling the shares. However, your business will be required to withstand the scrutiny of the purchasers legal and taxation due diligence process. A corporate structure with too many skeletons in the closet will be unattractive to a purchaser or may potentially bind you with heavy warranties and indemnities. Adequate and comprehensive preparation for the due diligence process is likely to increase the level of comfort of the purchaser. However, it may be necessary to “clean up” the structure prior to a sale.

A common issue that can arise is the ownership of property within the company that operates the business. This scenario causes problems on the sale of the company as it is unlikely a purchaser will want the property. Stamp duty and capital gains tax make it expensive to move property. So, this is best prevented by good planning.

Small Business Tax Concession

It is also important your advisor understands the small business tax concessions. These may allow you to reduce capital gains tax significantly.

Broadly, these concessions are available to business owners who own assets, including their business, but excluding their main residence and superannuation, with a value not exceeding $6 million.

These rules are complex and require careful analysis. There may be significant potential planning opportunities that must be acted on prior to the business sale.

Get the right assistance

You are successful at running a recruitment agency. Nobody expects you to be an expert in selling a business. Get help.

This article is provided as general information only and does not consider your specific objectives, situation of needs. You should not rely on the information in this article or disclose it or refer to it in any document. We accept no duty of care or liability to you or anyone else regarding this article and we are not responsible to you or anyone else for any loss suffered in connection with the use of this article or any of its content.

Selling a business can be a minefield. The most important aspect is not to be unnecessarily distracted from your business whilst offers are presented. Protecting the value of your business including the underlying relationships with clients and looking after your staff are essential when planning and negotiating the sale.

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