Estimated reading time: 10 minutes

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Successfully building a recruitment business is an incredible achievement. For many founders and business owners, they have no intention of ever selling — the business is their life’s work. They’re constantly looking to take the business to the next stage, with plans to stay working within their organisation for years as they guide it through further growth.

For others, the ultimate goal is an exit — whether that’s once you’ve hit a major milestone, once the time is right in your life, or once you think you can achieve your value aspirations. If you’re one these people and you’re starting to think about selling your recruitment firm, this guide will help you with some of the first things a buyer or investor will want to understand so that you can create the most appealing sales package possible.

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What does your business do, how does it operate, and what makes it unique?

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What you do, how you operate, and what makes your business unique should be clearly explained, either through an information memorandum (the sale document prepared by an advisor) or through conversations with the buyer. This is even more important if the buyer isn’t from your sector.

It might be surprising, but it isn’t always immediately clear. It is important to make things easy for the buyer. The quicker a buyer can understand your business and what makes it tick, the quicker they can decide whether it is a business for them and whether it is a strategic priority.

Buyers will want to understand a range of things, including:

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• What types of recruitment services do you provide?
• What is the split of your revenue / NFI?
• Who are your typical customers?
• How do you contract with these customers?
• Who is responsible for key customer relationships?
• What is your business’s niche?

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They will also want to understand what makes your business unique. Is it your network of contacts, your leading sector brand, or do you place candidates using a slightly different model? Anything that differentiates your business and provides it with a competitive advantage can help drive value. Get the answers to these questions ready in advance.

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Why do you want to sell?

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Any buyer will want to understand why you’re looking to exit, So, be clear on your rationale. Most commonly, owners are simply looking to retire, but when a younger, ambitious founder is looking to exit, you need to be prepared to be quizzed on why.

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They will want to understand your plans post-sale. In recruitment, especially, with its relatively low start-up costs, there will always be a concern that once you’ve sold your business, you may look to go again, setting up in competition. Make sure you address this upfront in conversations and any sales document. If you don’t convince them, buyers will want to mitigate this risk somehow — likely through the structure and terms of their offer, potentially tying you in for longer or reducing upfront cash value as a proportion of total value.

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Buyers will also want to alleviate any concerns that you’re looking to sell because you think the business has topped out. For an acquisition or investment to be worthwhile, they need to be confident they can grow it, and you know the business better than anyone — a buyer will look for subtle (and not so subtle) signs that you believe the business and market are in a good place going forward.

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What do you want out of a deal?

As with everything, there are trade-offs when selling your business. Primarily, these are trade-offs are between a simple structure for your deal and the ultimate value that you will achieve. Therefore, as a business owner, you need to consider what you ultimately want to get out of a deal.

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What buyers are willing to pay for your business depends on how risky they think buying it is. If you are driven by the total value of your deal and push for a higher value from your buyer, they may look to mitigate their risk by pushing some of it back onto you as the seller. This can happen in many forms, but the key levers available to them involve:

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1. Form of consideration – cash at closing, equity rollover, earn-outs
2. Timing of payments – deferring parts of the consideration
3. Introducing conditions – most often, profit targets

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The key thing to consider is where you want to sit on this scale.

It is also worth considering whether you want to exit the business on day one (or after a small handover period) or remain for the next phase. Wanting to leave at close or quickly may reduce the total amount you receive for your business, but in our experience, most business owners cannot imagine working for anyone else. If you do want to exit quickly, then you need to make sure you have a strong second-tier management team that has proven they are able to run the business without you, especially if selling to private equity.

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Who is the future of the business?

Having a strong second-tier management team in place before a deal is hugely attractive for buyers. If you’re considering selling to private equity and don’t want to remain involved, it is a must.

For private equity, the ideal and most common transaction involves a partnership with the management team that will run the business going forward. Private equity will buy the business alongside that team, providing a higher-than-proportionate amount of capital relative to the equity they receive. The management team also gets a slice of the action, receiving equity relatively cheaper than if they had funded the deal all themselves (but often with conditions attached) and are operationally responsible for driving the business forward post-deal.

The investor wants to know that the remaining team can run the business well and deliver the growth they are looking for. The easiest way to demonstrate this is to step away from the day-to-day before any sale process. Often, this is done by the founder and business owner transferring into a less operationally intensive Chair role. If they have a track record of running the business well before any deal, and have demonstrated an ability to run the business, a buyer will be much more comfortable with them running the business under their new ownership.

If selling to a trade buyer (often competitors within the same industry), having a concrete second-tier management team is less important as they will have their own team and resources they can depend upon. However, it still makes any acquisition less risky.

Either way, having a capable, trusted, and experienced team ready to take the reins means that there is less business disruption when you leave and provides a buyer with more comfort. This will be reflected in the terms and structure offered.

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What would your profit look like if you weren't owner-managed?

Normally, the most tax-efficient way to pay yourself in an owner-managed business is to take a nominal salary — usually around £12,000 — and then take the rest of your income via dividends. This enables you to maintain your state pension and benefits without incurring significant NICs and it allows you to benefit from a lower dividend rate rather than income tax.^* However, when considering a sales process, it also means there might only be a nominal salary taken into account in the profit number.

It’s rarely the case that a founder doesn’t require replacing, so your profit number will need to be adjusted or allow for market-level salaries in equivalent roles to those exiting the business. Alternatively, if you are continuing with the business, then you will also need to allow for a market rate for your role going forward.

There are two things to consider here:

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1. The impact of taking remuneration partly via dividends rather than solely salary
2. What is deemed a market rate remuneration

Dividends aren’t taken into account when considering the net profitability of your business. So, even if you are taking a market-rate remuneration for your role within the business, it will not be included. Rather than being an expense against the P&L, dividends only impact the balance sheet (by reducing cash and retained earnings).

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Owner-managers often do not pay themselves what is considered a market rate for an equivalent role. Sometimes, it can be below this level (for example, if they haven’t taken an inflationary increase for a few years). It can also be much higher than what a director may make if they were not a shareholder. Either way, a buyer will make an adjustment to the profit number you present if there isn’t a market-rate remuneration going through the P&L.

Sometimes, to inflate the profit number, an SME business will not include any replacement remuneration for an owner-manager, choosing just to take out their salary and other costs. It is rare that there should be no replacement cost. Generally, it is better to be upfront about what the profitability would be if an independent third-party were to own the business going forward. This allows you to start conversations based on what you deem to be the market level, rather than what a buyer thinks it is, thereby getting on the front foot of any negotiations on this point.

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What does the debt look like in your business?

Businesses are normally valued on a cash-free, debt-free basis. This essentially means, “ignoring any cash or any debt the business currently holds, this is the value of your shareholding".

Firstly, a buyer will want to know the value of the cash and debt in the business to calculate the value attributable to the shares. They will also always want to understand the make-up of these balances.

With debt, whilst it is deducted from the value you will receive from a buyer, the types of debt in the business can impact the cost of financing for a buyer. With trade buyers, they can and often will finance the deal using their wider group balance sheet and, therefore, your own facilities have less of an impact. However, with private equity, buyers will normally seek to fund a proportion of the deal with third-party debt via the balance sheet of your business. This makes the make-up of the debt important.

Typically, the cheapest form of third-party debt you can raise to buy a recruitment business is via an invoice discounting facility, which is asset-backed. This means that the bank has a claim on future invoices, has a higher quality form of collateral, and, therefore, can lend more cheaply. Sometimes, recruitment businesses already have a facility and may have drawn close to the maximum. This makes it more difficult to use this form of financing.

The alternative is a term loan (also known as a cashflow loan). With this, the collateral is the business in general, rather than specific assets. This provides a lender with less protection, increases the risk, and, therefore, normally raises the cost of the loan.

If an invoice discounting facility cannot be used to at least part-fund the debt requirement, financing will be more expensive. This is something to bear in mind when considering your capital structure as you start thinking about a sale.

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At Jigsaw, we’re not like a typical investor. We’re always open to having an informal chat – without any hidden agenda. If you want to talk through something we’ve raised, please feel free to get in touch with any members of the team.

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^*The information provided on this website regarding tax efficient remuneration in an owner-managed business is for general informational purposes only. It is not intended to constitute tax, legal, or professional advice. The content is based on our understanding of current legislation and is correct to the best of our knowledge at the time of publication. However, tax laws and regulations are subject to change, and their application can vary widely based on specific circumstances.