The Cornerstones of Value Creation in Recruitment

What an insightful and power filled day at the TRN New Year Huddle. In some of the break-out sessions I fielded a number of questions about those areas that as owners you should concentrate on to build sustainable value in your business

The following short piece headlines some of those key areas that need to be at the top of the CEO/Owner’s agenda. I hope it is helpful, any questions please reach out through TRN and I will get back to you.

The recruitment and Human Capital sector is generally an attractive one to investors. Over the past 35 years the sector has grown in more years than it has retracted, and this has driven a consistent flow of investment and M&A transactions. 

Deal flow naturally peaks and troughs along with the economic cycle and investor sentiment but at times leaders of companies in the sector could be forgiven for thinking that every competitor they have has sold out or raised investment in transactions worth eye watering sums of money. 

The truth however is very different; when the size of the market is considered these transactions are for the select few. 

So, what are the cornerstones of the businesses that do achieve these sometimes life changing transactions.

Market
Investors back markets so the markets that you serve need to be seen as growth sectors, resilient to, or benefitting from technological and macro-economic change

Investors will expend due diligence dollars on your markets and customers as well as on you, so this is a critical cornerstone for investment worthy companies

Market Leading
You need to show that you are a market leader, notice I did not say THE market leader, that is subjective and usually impossible to verify.

You need to be able to justify through service and product mix, and in-depth sector knowledge, that you are forward thinking with a customer proposition that sets you apart or demonstrates your innovative nature and real time adaptability to change

Financial Performance
This area is complex but to simplify it look at your financial performance under two headings

Scale
A renowned colleague in the industry some time ago said for companies making less than £3m in profit (EBITDA) there are 15 companies chasing every investment cheque, but for companies making more than £3m in profit there are 15 investment cheques chasing every company. The maths are not necessarily accurate but you get the meaning

The scale argument can be looked at through two different lenses; if a core reason behind seeking an investment transaction is for shareholders to re-risk by taking money out in the transaction, then bigger is better. Investors will see scale, but not scale alone, as a de-risking element in such a transaction

If investment on the other hand is for the development of the business, then there are investors and of course strategic acquirer’s that will focus their intentions more on the strategic opportunity the company might offer meaning that scale may not be as critical

Financial Ratios 
The markets that you serve and the proposition that you take to those markets needs to show that you can convert sales revenue (or Gross Profit depending on your business model) in to profit (EBITDA) at premium levels

There are many factors that go into a ratio analysis; for example what is the on-going level of investment in new people or in change projects that might make current results diverge from business as usual, so the following guidelines must be seen only as a rule of thumb:

Sales/GP to EBITDA - less than 15% - Needs improvement
Sales/GP to EBITDA – 15% -20% - Satisfactory
Sales/GP to EBITDA – 20% - 28% - Premium
Sales/GP to EBITDA – 28% - 35% - Super Premium
Sales/GP to EBITDA – 35%+ - Needs investigation

Management
I have purposely left this to last, not because I think it is less important than the points before but because sometimes talented managers often ignore or fail to realise the significance of the earlier points, so I wanted to put them front and centre.  Without high calibre management attracting investment will not be possible.

Management teams need to demonstrate a multitude of skills and competences; I have listed below some of the more obvious ones:
- The talent to create followship for staff at all levels.
- Talent in depth so that succession and the capability to expand can be built into business planning.
- The ability to formulate winning strategies and execute on them.
- Consistency of leadership style.
- The recruitment and retention of high quality people.
- Sound financial judgement.
- An acute awareness of risk.
- Ability to use data in decision making.

I hope you find this of use.

Jonathan Wright