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How to manage a successful exit of your contract recruitment business

How to manage a successful exit of your contract recruitment business

Written by James Osborne

Last edited May 2, 2023

How to manage a successful exit of your contract recruitment business

This article originally appeared in The Global Recruiter Magazine – Written by The Recruitment Network Board member Graham Palfery-Smith. 

It is an amazing feeling, the realisation that you are in a position where you can sell your business and exit; all that time that you are going to have back, you can travel, enjoy the good things in life, spend more time with your family, buy a yacht/Lambo/chopper or invest in the next big thing. But BEFORE you start spending the money you’re anticipating making, there are a few things you should be aware of that you might need to sort out. There is not space enough here to outline all of these, certainly not in detail, but they might include:

  • Management – more on this below;
  • Spread of clients – Check that there is not too much of your business with too few clients, ideally no one client responsible for more than 10 per cent of your contract book;
  • Sustainability and efficiency of process – Can your process be replicated and scaled? Is it efficient, timely and cost effective?
  • Key markets – Are you in markets which offer opportunities you have yet to exploit?
  • Are you a significant player in any markets? Are you too thinly spread to allow you to scale?
  • Compliance – more on this below.

Invest in a Lambo?

So far so obvious but achieving a successful exit requires a different mindset from that you use to operate and grow your business. To paraphrase, you need to accept what you need to change, have the courage to change what needs changing and the wisdom to know the difference.

Start planning before you intend to sell, line up advisers and make sure you are not going to fall into the ‘bear traps’ outlined below. Include all aspects of your business in your planning and be realistic (not idealistic) about your objectives.

Start with where you are now, imagine where you want to be, then work on the detail of how to get there. Check everything at least twice so you don’t get caught out in the due diligence process (DD). If you can view your own business through the eyes of a potential buyer, identify the weak areas, as well as the strong, and develop answers to questions you expect.

A factor that is always high on the list of questions when considering an exit is how much is your business worth? Naturally you want to know if it is going to be worth working so hard to build a business.

Reasonable assumptive multiples would be four to eight times EBITDA, but this is only illustrative. There are many factors that will influence value and this article can only skim the surface of all you need to be aware of.

Key factors that could help increase the value of your business, allowing that successful exit, include:

  • Consistent recurring and visible profitability;
  • Consistent positive cash generation;
  • Quality residual management and succession planning;
  • Predictable revenues, the assumption is you are temp/contract weighted;
  • Leading position in key verticals/markets/geographies;
  • Compliant contractors in every jurisdiction;
  • Opportunities for growth, there should be potential for any purchaser;
  • Sensible/appropriate geographical coverage;
  • Logical spread of product offerings;
  • Get the right team, advisers personal and corporate, possibly a NXD?
  • Having all due diligence material ready for any potential purchaser to see;
  • Quality MI (including internal systems and controls) and analytics;
  • Functional and efficient back office infrastructure/outsourcing arrangements;
  • Below industry average fixed costs.

I want to pick a couple of these to focus on specifically as they seem to be ‘bear traps’ that could be, but often are not, avoided.


Quality residual management

Most of those I meet, who want to sell, do not want to wait around for an earn out, working for a new boss and not being in full control anymore. Instead they would like to hand over the keys and head for the beach to plan how to spend their millions. This is perfectly normal and understandable, but only achievable in certain circumstances.

Generally, there are two ways, individually or in combination, of achieving this. First, in the imaginary ideal world, your putative buyer has a readymade management team that has excess capacity just ready to step into your business and take over the reins. These super heroes are intensely capable, will instantly meld with the culture of your team and be able to extract at least an equivalent performance to that you could have got out of them, in no time at all!

Alternatively, and more realistically, you could have made provision for your residual management (those who will be left after you’ve exited) to be able to step up into bigger jobs or, even better, they could already be doing them and understand why they are doing them. This of course has the added and distinct advantage of allowing you, the owner, to concentrate on getting the deal done. Selling a business is easily as stressful as buying a house or going through a divorce, believe me, so the more support you have the better.

Having a succession plan is one thing that most agency owners can manage and it is obvious how important it is, not solely in the context of exiting, but in terms of business best practice; you could even call it management 101….if you were American!

Thankfully most business owners are aware of this and have made some steps to cover themselves but it never ceases to amaze me where there is a total lack of communication between owners and management. This lack

of alignment in goals makes no sense and makes a successful exit much less likely.

Having a succession plan is vital.


Compliant contractors

The second area I want to focus on is equally important but a lot less obvious. Rarely do I meet the owner of any recruitment agency who places contractors overseas who will not immediately pronounce that all their contractors are compliant.

My usual reaction is best summed up in one sentence, “no, you think they are, and might even sincerely believe it, but I’m almost certain not all of them will be.” This, following, is an amalgam of genuine quotes from

business owners…. “Why should it even matter anyway; surely this game is about making as much dough as possible…the contractors don’t care, the clients don’t care so why should I? Anyway, everyone is at it.”

So why does it matter?

The attitude towards tax evasion (including social security) and ‘aggressive’ avoidance has hardened right across the globe, there is virtually no government or tax authority in the world that is not trying to clamp down on those who are not paying their dues.

Penalties range from fines, sometimes punitive, through deportation, country bans and extend as far as incarceration. Agency owners are now liable for criminal charges in several countries (including, since last month, Germany) if they allow contractors to operate non-compliantly; ignorance, though apparently prevalent, is not an excuse!

All this is often viewed as a calculated risk, by consultants, after all it is not them but the owners of the business who’ll get the criminal record. But in the context of wanting to exit your business, non-compliant contractors have a level of far greater importance, simply because buyers are a lot more aware and will discount any GP and EBIT resulting from such contractors. They can pick anomalies up in due diligence quite easily which in turn can have a massive negative impact on your profit and thus your price.

Sad to say there are several unscrupulous international management companies that will say, if you allow it, whatever they can to make your contractors sign up with them; this can be mis-selling retention rates or offering ‘grey’ solutions where contractors don’t pay any local social security or work through an offshore limited company.

Fortunately, international contracting is not quite like the Wild West the UK used to be where umbrellas would compete to see who could ‘incentivise’ the most to win the business. I’m never comfortable where ‘kickbacks’ are involved, you should be able to make enough money in contract recruitment without needing other revenue streams, in my view.

International contracting is not quite like the Wild West the UK used to be.

What I struggle to understand is that most contract recruitment businesses made radical changes to their business model to accommodate the compliance legislation changes in the UK over the past few years: reviewing their PSL; not working with off-shore providers; ensuring the contractor is compliant and not a risk to the recruitment business. All this makes perfect sense, so why do some companies ignore this in Europe when most of the rules the UK has adopted are European principles?

An international contact book can often be much more lucrative than a UK contract book so why ignore the risks?

My advice therefore is, don’t take your consultants’ word for it, check for yourself if your contractors are compliant and make your management company provide documentary proof that they are.

The penalties of not doing so could be very painful, prices can drop or worse your buyer could decide, since you operate non-compliantly, that you are not to be trusted

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