There comes a time for every business owner when the question changes.
For many years the questions are about clients, staff, growth, profitability and the next opportunity. Eventually, particularly for an owner approaching retirement or wanting to move into a different phase of life, the question becomes “how do I get out of this business?”
For the owner of a small recruitment agency, that can be a more difficult question than expected.
There is plenty written about selling businesses. Much of it discusses valuations, multiples, buyers, sale preparation and transaction processes. Unfortunately, a lot of that material is of limited relevance to the owner of a smaller, owner-dependent recruitment agency.
The starting point is a realistic assessment of what has actually been built.
A small recruitment agency can have been an excellent business for its owner and still have little value to someone else.
A successful business does not necessarily mean a valuable business
Many small recruitment agencies have served their owners extremely well.
They have generated a strong income over many years, provided employment, created flexibility and independence, built enduring client relationships and allowed the owner to enjoy a career on their own terms. That is a successful business.
But equity value is a different question. When somebody buys a recruitment agency, they are not buying its history.
The buyer is interested in what happens next. What clients remain? Who holds those relationships? Who generates the revenue? Who manages the staff? What happens when the owner leaves? How forecastable are future earnings? Are there significant client, staff or revenue dependencies?
In a service business, value is closely connected to the risk associated with earning future profits. That is a challenge for most small agencies.
If the owner is the key biller, or holds the important client relationships, or makes most of the decisions and drives the culture and performance of the business, much of what has generated the historical profit may leave when the owner leaves.
There may be a good business, but there may not be much transferable value.
The valuation issue
There is no precise line at which a recruitment agency has meaningful transferable value.
However, maintainable profit of around AU$500,000 is a useful point of discussion. Below that level, there is usually an identifiable sustainability constraint. It may rely heavily on one owner, one significant biller, one or two major clients, a narrow revenue stream or a very small team.
This definitely applies to most recruitment agencies with fewer than about five staff.
There will always be exceptions. But as a general observation, very small businesses carry clear sustainability risks. And those risks affect transferable equity value.
This is sometimes difficult news for an owner to hear, particularly when the business is profitable and has operated successfully for many years. It is even harder for a younger owner who believes that current success will inevitably translate into a valuable business later.
But avoiding the discussion does not improve the eventual outcome.
There may be no pot of gold
One of the conversations I regularly have with owners of smaller agencies is quite direct: “There is no pot of gold from the sale of this business.”
That does not mean the business has zero value. It does not mean the business has failed. It means the owner should not base their personal wealth plans on receiving a large cheque when they eventually sell.
This changes the strategy. If the owner still needs to create personal wealth, then perhaps the right decision is not to sell now. It may be better, if possible, to work for another few years with a deliberate wealth-creation objective.
Make good profits. Manage working capital sensibly. Invest where investment is required. Take appropriate shareholder rewards. Reduce personal and business debt. Build personal assets outside the business.
At the same time, of course, work on the areas that make the business less dependent on the owner. Some of those changes may improve the eventual equity value. More importantly, they may make a transition possible.
The owner may also earn meaningful income during the transition period itself. An owner may stay for a few months or a few years. For a small agency, that future income can be more significant than the amount paid for the equity on day one.
That is why focusing only on the question “What is my business worth?” can be misleading. A better question is: “What is the best way for me to exit?”
Think transition, not transaction
The conventional picture of a business sale is simple. A buyer pays a price. Ownership changes. The seller leaves.
That is rarely how a people-business sale transaction works. And it is rarely how the exit from a small recruitment agency works.
The business and the owner are too closely connected. A better starting point is to think about transition.
A formal sale process can also be disproportionate to the likely transaction value. A conventional sell-side mandate may run for nine to twelve months and involve monthly advisory retainers, preparation and marketing costs, as well as more formal legal, accounting and due-diligence expenses. For a larger transaction those costs may be justified. For a small owner-dependent agency, they can consume too much of the likely outcome, or even more than the likely outcome.
That is another reason to think differently. The owner may be better placed to manage much of the process themselves, supported by experienced advisers at key points rather than committing to a full transaction mandate.
There may be another recruitment agency interested in absorbing the clients, staff or contractor book. An individual buyer may be willing to acquire the company. A larger agency may employ the owner for a period and provide a home for the business activity. There may be an internal successor allowing a gradual transfer of responsibilities and relationships.
It may not look like the transactions reported in the business press but that does not make it a poor outcome.
For a small owner-dependent agency, a carefully structured transition can be much better than chasing an unrealistic headline valuation.
Start early enough to have choices
A good transition takes time. It starts with understanding what the owner actually wants and what is possible.
Is retirement the objective? Is the owner willing to keep working for a period? Do they want to stop managing staff but continue working with clients? Is there a minimum financial outcome required? Does the owner need continuing income?
Then the business needs to be viewed realistically:
- What is transferable?
- Which staff are likely to remain?
- Is there recurring or forecastable revenue?
- Are the financial accounts clear enough for another party to understand?
Once those questions are understood, the owner can assess the genuine pathways available.
This does not require turning the business into a corporate organisation before retirement. It requires enough preparation to allow somebody else to understand what they are taking on and enough time to create an orderly transfer.
Closing the doors should not be the default strategy
There is another dimension to this discussion that becomes more important as an owner reaches the end of a career.
A recruitment agency is not just a company registration and a bank account. It contains relationships accumulated over many years. There are employees who have helped build the business. Contractors whose livelihoods may rely on the agency. Clients who have trusted the owner and the team. Candidates who have relied on the organisation during important periods of their careers.
An owner can simply decide to close the doors, but that should not normally be the ambition.
A business owner approaching retirement has an opportunity to finish well. That may mean finding a suitable organisation to take over client relationships. It may mean creating opportunities for staff, ensuring contractors continue to be supported, introducing clients carefully to a successor. There is commercial value in doing this properly, but there is also a matter of stewardship and reputation.
One of the other comments I often make to owners is: “When you look back on your career, how you treated people through the transition of your business may matter more than the details of the financial transaction. How well you handed over trusted relationships may matter most when you look back.”
The final measure may be the transition
Small business owners should be realistic about equity value long before they want to retire.
If meaningful personal wealth still needs to be created, then recognise that early enough to do something about it. Keep working. Generate profit. Build wealth outside the business. Reduce dependencies where possible. Give yourself time.
And when the time comes to leave, do not judge the outcome solely by the sale price. For a small business, the objective should be to preserve the economics of the exit, not reproduce the machinery of a larger transaction.
A good exit may involve modest equity value, a period of continuing income, a sensible handover of clients, good outcomes for staff and contractors, and the owner gradually stepping into retirement or another type of work. That can be an excellent outcome.
The final measure of a small recruitment business may not be the price achieved on exit. It may be the quality of the transition.
This article is part of HHMC’s Appropriately Corporate series for staffing and recruitment business owners, exploring growth, leadership, valuation and transaction readiness. If these issues are relevant to your business, we would be pleased to continue the conversation.
