One of the most common questions in the recruitment industry is: “What multiple are agencies selling for?”
Founders of recruitment agencies spend too much time thinking about the question and what the answer might be.
Not because multiples are unimportant. But because the multiple is largely a reflection of what has been built over many years, rather than how the business performed last year, is performing this year, or is expected to perform next year.
In simple terms, value is often described as Profit times Multiple.
Profit and multiple are related, but they are not the same thing. Profit reflects operating volume and operating efficiency. Revenue rises and falls. Costs rise and fall. Profits improve and decline. Most owners have a good understanding of these drivers because they are a result of the daily activity and are visible in the monthly Profit and Loss statement.
The multiple reflects something quite different. It reflects the characteristics of the business itself. Size, sustainability, forecastability, leadership, client mix and many of the themes already discussed in past articles.
Owners have considerable influence over profit.
Multiples are different. They tend to reflect the category in which the market places the business.
There is very little public information
The search for “the multiple” is made more difficult because there is very little information available to private business owners.
Most publicly available information relates to listed companies, large international transactions and private equity platform investments. Those transactions are interesting, but they often have little relevance to the majority of privately owned recruitment businesses.
As a result, owners naturally compare notes with friends and collect industry rumours. Unfortunately, these stories rarely contain the detail needed to understand what really happened. And almost no staffing company is unique.
Multiples do not change very much
Over the years I’ve formed the view that multiples themselves have changed very little.
Markets change, profits rise and fall, transaction activity rises and falls. But multiples have remained remarkably stable.
If your business characteristics are essentially the same as they were five years ago, even if the profit has changed, then the multiple is likely to be the same.
However, if the characteristics of the business have substantially changed then the category in which the market places the business is likely to have changed. Businesses with:
- greater scale
- stronger leadership
- more forecastable revenue
- less founder dependence
- greater sustainability
are often assessed differently. In effect, they sit in a different box.
Owners do not negotiate their way into another box; they build their way into another box.
In many respects, the discussion around multiples is really a discussion about the characteristics of the business.
Earlier articles have explored:
- how size changes the nature of the business;
- the drivers of equity value;
- forecastable revenue;
- leadership teams;
- sustainability;
- attractive characteristics.
All of these influence the confidence a buyer has in future profits. And confidence influences multiples.
Businesses are subject to intense scrutiny
Owners occasionally believe they can improve value by creating unusually high profits in the period immediately before a transaction.
Buyers and advisers have seen aggressive adjustments, temporary profits, missing expenses, abnormal trading patterns and unusual assumptions many times before. These things receive intense scrutiny.
Almost no staffing company is unique, and most buyers have seen similar situations before.
Ultimately, the objective is to understand the sustainable profits of the business rather than the profits of a particular year.
Structure Can Influence Outcomes
While multiples themselves may be relatively stable, owners can influence outcomes.
Not through the multiple. Through the structure of a sale transaction. As discussed in a previous article, owners may decide to:
- remain involved;
- participate in future growth;
- accept deferred payments;
- retain some risk;
- or seek greater certainty.
These decisions may influence the ultimate wealth created. Not because the multiple changed, but because the structure of a negotiated sale transaction changed.
Multiples reflect value
Over the years I’ve become increasingly convinced that owners spend too much time discussing multiples and too little time discussing the characteristics that determine where their business sits.
Multiples do not create value. They reflect it. And if owners want different outcomes, they usually need to change the business.
Ultimately, the multiple is not a reflection of how the business performed last year or is performing this year. It is a reflection of what has been built over many years.
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.
