1. WHAT IS YOUR
RECRUITMENT BUSINESS
WORTH?

2. WHAT IS YOUR BUSINESS WORTH?
Some terminology
and definitions
Characteristics of a
recruitment business
that can increase or
decrease equity
value
Strategy discussion
for business owners
Current business
values and models in
the recruitment
industry
Some considerations
for your business

3. SOME TERMINOLOGY AND
DEFINITIONS

4. For consistency, we define business value as:
 Normalised Profit: adjusting the revenue and expenses
to reflect the business as if someone else was running it.
 Net Working Capital: is most easily described as cash
plus debtors less creditors less staff entitlements.
 Takes into consideration shareholder loans and bank debt
 Staff entitlements include annual leave and other obligations
 Note EBIT, not EBITDA
SOME DEFINITIONS
“a multiple of normalised profit before
interest and tax excluding working capital”

5. LIFESTYLE COMPANY
OWNER-DOMINANT
CORPORATE
TYPE OF COMPANY

6. Lifestyle
Company
Lifestyle Company
Owner has characteristics that show the
business is not growing or changing to market
conditions.
These might be:
 Small
 No growth for years
 Withdraws significant profits (does not reinvest)
 Works mostly the same clients year on year
 Has another “job” e.g. property investment
 Does not change or improve processes to meet
circumstances.

7. Owner-
Dominant
Owner-Dominant Company
Owner has strategic intent, investment
strategies, and a continuous improvement
attitude
These might be:
 Sustainable size
 Strategic planning
 Investment in management level staff
 Investment in marketing & sales
 Investment in new business models
 Strong analytical focus
 Seeks external input

8. Corporate
Corporate Company
The business could, if it so desired, undertake
an IPO – they are “pre-IPO” status.
These might be:
 Predictable revenue and profits
 Less reliance on the owner
 Multiple shareholders
 External board
 Strong management team
 Auditable financials
 Strong corporate governance
 A great understanding of risk

9. SOME FEATURES OF VALUE

10. I. Office
II. Brand
III. Duration of business
IV. Location
V. Website & Social Media presence
VI. Candidate database **
VII. Technology **
These are features that may attract more buyers …
but they don’t add “value” as the business valuation is ultimately
based on a profit multiple.
A lack of these features may make a buyer decline to offer.
** Today, some of these aspects are very positive, not just desirable
## Investments need to be profit oriented
DESIRABLE FEATURES

11. The value of a services business can be defined as
“The risk associated with
earning future profits”
 Past performance is interesting but is not what is being sold
 Risk analysis on future profit is critical
 Sustainability, in all its forms, is the biggest part of risk
assessment.
## Average of last three years profit is not a valuation method
FUTURE PERFORMANCE

12.  Company age does not add value
 but a young company has unanswered questions
 Plenty of shooting stars in the industry
 Need to consider the cycles of staff, clients,
economic conditions, business models
LONGEVITY

13.  Size
 Can a team or sector specialisation of less than, say, four
consultants be sustainable?
 Single points of failure
 Staff
 Clients
 Working capital
SUSTAINABILITY

14.  Plenty of discussion on the need for sustainable
revenue.
 Perm-dominant recruiters are valued lower (and may
be unsaleable)
 Temp/Contract needs to be a significant contributor
in most sectors and most geographic locations
 We recommend 50% contribution at the Gross Profit (NDR)
level.
 Some sectors (eg IT) should aim for 70%.
 Some sectors have little Temp/Contract
## This is one of the major “desirability” factors and one of the major
determinants of value.
PERM V TEMP/CONTRACT

15.  Today’s recruitment industry is so much more
than perm recruitment and temp/contract
recruitment:
 SOW
 Online Staffing (think freelancer.com)
 RPO
 Provider to MSP/VMS
 Consulting eg HR Consulting
## The Recruitment Industry has skills and experience that
Corporations need
## Smart buyers are seeking value-added capabilities
THERE IS SO MUCH MORE!

16.  Not all about size
 Build a future: stand for something in the
market
Why would a client return your call when they
have been approached by many of your
peers?
STRATEGY

17. CURRENT RECRUITMENT BUSINESS
VALUATIONS VALUES AND
STRUCTURES

18.  Deal structure impacts price
 Structure is the result of a risk & reward
negotiation
 Buyer wants cash upfront
 All the risk is with the buyer
 Seller wants to pay in the future, based on performance
 All the risk is with the seller
 There are many aspects that change the risk
profile:
 Shares in the transaction
 Partial sale
 Major business risks such as contract renewals
CANNOT DISCUSS VALUE WITHOUT
CONSIDERING STRUCTURE

19.  Owner-Dominant Business
 Value: multiple of 2.5 to 4.0
 Structure: about 50% upfront and then 6-24 month earn-
out
 Most deals are in the 2.5-3.0 range
 Some are less than 2.5
 You’ve got to be good to get over, say, 3.5
 The purchase of business assets for cash is still the most
common mechanism
## Multiples have barely changed for over a decade but profits have
fluctuated wildly.
BRINGING IT ALL TOGETHER

20.  Lifestyle Business
 Value: multiple less than 2.5
 Structure: more variation. Can be, for example:
 50% upfront and then 6-24 month earn-out
 non-financial earn-out
 Totally based on future performance – eg perm pipeline or
contractor book.
 Without a contractor book value is difficult to justify
 Sustainability is a major issue – “what am I buying”
BRINGING IT ALL TOGETHER

21.  Corporate Business
 Value: higher multiples
 Structure: usually an upfront purchase of shares
 The purchasers of these businesses may include larger
overseas companies or Private Equity investors.
 There are some examples in Australia and New Zealand; there
are many examples in other countries.
BRINGING IT ALL TOGETHER

22. STRATEGY CONSIDERATIONS

23.  HHMC has conversations with business owners
about:
 Wealth creation
 Strategy
 We want business owners to
 Educate themselves
 Don’t be insular
 Read, attend conferences
 Seek external input and openly discuss the business
 Never stop
 We don’t like delivering bad news about business
valuation
 We want business owners to understand their business and get
reward for their risk and effort
STRATEGY

24.  Make conscious decisions, don’t drift to an
outcome
 Know the implications of your decisions
 Equity value
 Risk
 There is no right decision or wrong decision
 Many inputs such as appetite for risk, access to capital,
owner skills, and even geographic location
STRATEGY

25.  Wealth Creation
 A balance between:
 Reward for the owners
 Investment in the business
 Building the balance sheet by retaining cash in the business
## The most successful people in the recruitment industry
build a little wealth each year
STRATEGY

26.  The future of the recruitment industry is exciting
 There is room for all types of business models
within the industry
 But there are implications in the business model
you choose
A FINAL POINT

27. HHMC AUSTRALIA PTY LTD