Key players in all areas of the private equity market remain keenly interested in the recruitment market. Here are four key characteristics investors look for when deciding to invest in a recruitment business...
Private equity has always had a somewhat ‘marmite’ attitude to investing in recruitment businesses. With repeatable revenue streams operating at high profit margins and a focus on entrepreneurial leadership, there is a lot of characteristics that should draw in investors. However, well-publicised private equity horror stories (for example Sovereign Capital’s struggle with Education Placement Group) and a reliance on retaining key people has switched some investors off the sector.
Nevertheless, key players in all areas of the private equity market remain keenly interested in the recruitment market. Here are four key characteristics investors look for when deciding to invest in a recruitment business:
1) Focus on temp
A key characteristic that private equity firms look for across all industries is repeatable revenue streams, and it’s long-term temporary placements that hold the real value in recruitment. Private equity houses have been aiming for and finding industries where eight to nine month placement periods are not uncommon (for example the IT/tech industry). Better still are industries with skills shortages, such as life sciences, where candidates can be easily placed. This obviously gives greater certainty over repeat revenue once the placement finishes.
Nevertheless, placements on short term cycles still provide value as candidates tend to stick with the same agency in the long run. Key to ensuring this is to create brand loyalty in your organisation amongst your candidates as well as your clients. Driving your agency towards targeting temporary placements offers the investor confidence by providing security over the long term profitability of the organisation. Furthermore, this repeatability drives up multiples, meaning the private equity house will get a better return on its investment when it comes to exit.
2) Niche offering
Having a particular sector specialism has become increasingly important to private equity buyers. When a private equity house looks at an investment, they think to both the short and the long term. Their long term planning mostly involves thinking of who they will exit their investment to. Multiples on exit are higher for sector specialists as eventual buyers will see the target as strategic. There is also the age-old adage of find what you do best and stick to that. Diluting your sector specialisms to serve multiple markets can distract from your core business that private equity investors will value.
3) Succession planning
By nature, an agency is only as successful as the consultants it employs, meaning the risk for private equity is these consultants leaving during the course of their investment. To prevent this, it is essential to instil a culture and long term incentives which encourage consultants to stay. Making consultants feel embedded and part of the organisation will make them feel valued on both a personal and financial level. This could be achieved, for example, through the grant of share options, often through and Enterprise Management Incentive (EMI) scheme. By granting these options, you are ensuring consultants are incentivised to work towards the long term growth of the business and to stay to participate in the eventual exit.
4) Growing but stable markets
The market your agency operates in will be a key area of consideration. Private equity houses are attracted to growing markets so the business can expand in order to achieve an acceptable return on investment. However, it is important for that market to be stable, ie free from major peaks and troughs. An unstable growth market presents a risk to the investor that they invest just before a crash. A good example of a stable and growing recruitment market is the life sciences sector. High levels of government investment and general industry growth has seen demand for workers rise year on year but in sustained manner.
Attracting a private equity investor to your business, be it for growth funding or to take some cash out of your business, is a difficult task. Being aware of the key characteristics investors are looking for will help you to plan your business’s journey and give you the best possible chance of attracting private equity interest.
If you'd like to discuss how we can help you fund, sell or buy a business, please contact me or book an informal chat via our website
Oliver Roper is an Assistant Manager - M&A at Shaw & Co
When a specialist recruitment business grew to £103m turnover, its owners asked us to sell the business to a new owner.
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