Staffing M&A Series
The recruitment industry is fragmented, has low barriers to entry, and can elevate startups meteorically in a very short space to become sizable businesses with deep market footholds. It’s something that’s both hugely attractive and unattractive to investors for the same reason and that divides the crowd.
“If you’re driving into a niche where the market has unmined potential and enough opportunity to accommodate your growth plans, then there’s a lucrative investment opportunity to swim with the tide.”
That said, some businesses might intend to add 100 heads to a desk, but overlook the wider signs of saturation, sector slumps, and competitors. Good intentions aren’t convincing, but data-driven plans are.
“Recruitment businesses are asset-light and investors are cautious around how easily your management and talent can walk off the park, unless appropriately rewarded and tied into longer term incentive plans.”
“Culturally speaking, it’s an industry where people sprint to a big payout and you need to operationally secure your critical people for a longer exit downstream with things like EIS and growth incentives. People have to buy-in to a future exit over a short-term financial reward.”
When you take on capital, it’s to extend your market, headcount, offices, or purchase businesses. That involves fastening the rope on what’s working to allow you to move confidently into new territory because all expansion comes with risk.
You’re investing your trust in them
“Due diligence is a much used term in the investment process, but often on the side of the business being acquired or receiving investment. It’s your prerogative to go and investigate those you’re partnering with and do your own due diligence.”
Dig into their portfolio and find a good cross-section beyond what they present to find a genuine ground-level understanding of what working with them will be like.
- Do the investors have a rapid timeline to an exit event and what do those milestones look like?
- How will your culture, composition, and company change?
- Some PE firms are family-run, some have thousands in manpower. Who are the key figures you’ll be working with and what does that chemistry look like?
Your business is only worth as much as someone’s willing to pay for it, thus having a considered view of valuation will help to oil the wheels of a successful exit or investment process.”
Investors want to deep dive into your underlying profitability (typically EBITDA) and how much of that converts to cash. They want to know the historic, current, and future condition of revenue.
“They’re not buying a business to stand still so they will want to know your three to five-year projections and know which indicators you’re using to support every assumption over:
- Territory mapping
- Historic benchmarks against future projections
- Additional investment needed into systems and infrastructure
- Necessary office and resource expansion
- Compliance and legal contracts
Landing in a business tomorrow I’d make sure that when an investor lifts the bonnet they’re going to like what they see and that’s not XL spreadsheets, missing contracts, and poorly maintained CRMs.”
“It’s a polished finance function, reliable data, automated reporting and a handle on how KPIs perform that’s water tight. You can only identify if you’re spending money in the wrong places if the data is showing you.”
About James Fieldhouse:
James is a Managing Director in M&A for BDO UK, the fifth largest accountancy firm in the world. His experience charts over two decades in advising on a variety of deals, including MBOs, fundraisings, private equity investments, trade disposals, trade acquisitions, and shareholder re-organisations. He specialises in advising mid-market recruitment businesses and payroll companies – typically between £10m and £50m – on their journey with private equity and acquisitions.