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The State of Mergers & Acquisitions in the Recruitment Industry Today

The Recruitment International M&A Masterclass | Sydney, Australia | February 2015
by

Rod Hore

on 25 February 2015

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Transcript of The State of Mergers & Acquisitions in the Recruitment Industry Today

01
CONTENT
I’m going to sell at the top of the market
BUSINESS VALUE
NORMALISED PROFIT
Adjusting the revenue and expenses to reflect the business as if someone else was running it.  
NET WORKING CAPITAL
Most easily described as cash plus debtors less creditors less staff entitlements
Takes into consideration shareholder loans and bank debt
Staff entitlements include annual leave and other obligations

LIFESTYLE COMPANY
Owner has characteristics that show the business is not growing or not changing to market conditions.

These might be:
Small
Little growth for years
Withdraws significant profits (does not reinvest)
Works mostly the same clients year on year
Has another “job” eg property investment
Does not change or improve processes to meet circumstances.

OWNER DOMINANT
Owner has strategic intent, investment strategies, and a continuous improvement attitude.

These might be:
Sustainable size
Strategic planning
Investment in management level staff
Investment in marketing & sales
Investment in new business models
Strong analytical focus
Seeks external input

CORPORATE
The business could, if it so desired, undertake an IPO – they are “pre-IPO” status.

Characteristics would then be:
size
predictable revenue and profits
less reliance on founders
multiple shareholders
external board
strong management team
auditable financials
strong corporate governance
a great understanding of risk

01. RECENT ACTIVITY
WHAT IS YOUR BUSINESS MODEL?
Client
Candidate
I’ll sell for $3M
I heard they
got $10M
My mate was
offered over
5 times
My accountant told me I’m worth 6 times
TYPE OF COMPANY
Lifestyle Company
Owner-Dominant
Corporate
Global, Listed
Duration of business


Location


Brand, website & Social Media presence


Candidate database **


Technology adoption **
DESIRABLE FEATURES
Leadership


Client mix and client relationships


Sector or sector mix


Sales focus


Office
03. DRIVERS OF VALUE
02
03
04
05
Recent Activity

Terminology and Definitions

Drivers of Value

Valuations are Changing

Current Business Values and Models
{1981-2008}
{2009-}
Growth uncertain
HR & Procurement controlling purchasing processes
Increased regulation
Traditional recruitment processes under threat
Global players positioning themselves across geographies and in new models
PRE FINANCIAL CRISIS
Continuous growth – the industry “emerged”
Low barriers to entry
Unsophisticated buyers of service
Low assessment of risk
POST FINANCIAL CRISIS
{ These are features that
may attract more buyers but don’t add “VALUE”

as business valuation is ultimately based on
a profit multiple
}

{A lack of these may make a buyer
decline to offer
}
FUTURE PERFORMANCE
services business value:
“The risk associated with earning future profits”
Past performance is interesting but is not what is being sold
Risk analysis on future profit is critical
Sustainability, in all its forms, is the biggest part of risk assessment
{ Average of last three years profit is not a valuation method }
SUSTAINABILITY
SIZE
VS
POINTS OF FAILURE
staff
clients
capital
PERMANENT
TEMP/CONTRACT
VS
{ This is one of the major
“DESIRABILITY”
factors and one of the major determinants of value for smaller ANZ businesses }
Plenty of discussion on the need for sustainable revenue
Perm-dominant recruiters are usually valued lower (and may be unsaleable)
Temp/Contract needs to be a significant contributor in most sectors and most geographic locations
recommended contribution at the Gross Profit (NDR) level
50%
70%
should be the aim for some sectors (eg IT)
< some sectors have little Temp/Contract >
THERE IS SO MUCH MORE!
{ The Recruitment Industry has skills and experience that Corporations need }
Today’s recruitment industry is so much more than perm recruitment and temp/contract recruitment:
{ Smart buyers are seeking value-added capabilities }
SOW
Online Staffing
RPO
Provider to MSP/VMS
Consulting
Why would a client return your call when they have been approached by some of your peers?
02. TERMINOLOGY & DEFINITIONS
A multiple of normalised profit before interest and tax excluding working capital
Sydney, Australia
February 2015

The Recruitment
Note:
EBIT, not EBITDA
05. CURRENT BUSINESS
VALUES AND MODELS
CANNOT DISCUSS VALUE WITHOUT
DISCUSSING STRUCTURE
1. Deal structure impacts price
Seller wants cash upfront
Buyer wants to pay in the future, based on performance
2. Structure is the result of a risk & reward negotiation
SELLER
BUYER
SELLER
BUYER
CANNOT DISCUSS VALUE WITHOUT
DISCUSSING STRUCTURE
3. There are many aspects that change the risk profile
Major risks
Shares in the transaction
Partial sale
%
( like contract renewals)
VALUE:
STRUCTURE:
{Multiples have barely changed for over a decade but profits have fluctuated wildly}
SOME DEALS
GOOD
Purchase of
BUSINESS ASSETS
for
CASH
is still the most common mechanism
multiple
6-24
50%
upfront and then
month earn-out
2.5-4.0
MOST DEALS
1
2
3
4
VALUE:
STRUCTURE:
{Without a contractor book, value is difficult to justify.}
multiple
50%
upfront and then
month earn-out
<3.0
Sustainability is a major issue
WHAT AM I BUYING?
more variation
earn-out
Totally based on
eg perm pipeline or contractor book
NON-FINANCIAL
6-24
FUTURE PERFORMANCE
CORPORATE BUSINESS
VALUE:
STRUCTURE:
multiples
HIGHER
usually an upfront purchase of shares
The purchasers of these businesses may include larger overseas companies or Private Equity investors.
There are some examples in Australia and New Zealand; there are many examples in other countries.
LIFESTYLE BUSINESS
OWNER DOMINANT BUSINESS
04. HHMC OBSERVING
CHANGING VALUATIONS
CHANGING VALUATIONS
Many, many smaller businesses
Not all agencies are thriving in the new environment
Large volume of baby boomer businesses
CHANGING VALUATIONS
$.5M
$1M
$1.5M
$2M
$2.5M
Difficult to reduce risk for acquirer
Often receiving lower valuations (may not achieve sale)
In demand
(can achieve higher valuations)
{Below 500K EBIT}
{Above 2M EBIT}
EARNINGS BEFORE INTEREST & TAX
5
10
15
YEARS
Multiples
Profits
INDUSTRY IS MATURING
Better owner-dominant and corporate businesses are rare
Better understanding of risk
CHANGING MARKET
The future of the recruitment industry is exciting!
There is room for all types of business models within the industry.
rod.hore@hhmc.com.au
HHMC AUSTRALIA PTY LTD
+61 2 9221 7596
+61 419 401 210
But there are implications in the business model you choose.
M&A
twitter.com/rod_hhmc
au.linkedin.com/in/rodhore
What percentage of your placed candidates were found fresh off a job board?
LIFESTYLE COMPANY
IMPLICATIONS
The distinction between
NICHE
and
VOLUME
is becoming more apparent
We can’t hide from Global influences
There are new models that progressive companies are positioning themselves for
Australia is a desired target
Our time zone is emerging
International
MASTERCLASS
Largest markets in the world: #2 Japan; #6 Australia
China, India, Hong Kong, Singapore and New Zealand are important
Full transcript