Understanding how a business is valued, and the levers that can be adjusted to influence a valuation is critically important when scaling a business for an exit.
As a shareholder in a business being sold, it can be easy to let personal bias cloud your judgement when valuing the company. Even if you strongly believe the business has the potential to be successful, it’s important to set that feeling aside and analyse the company objectively, as a potential investor would do.
Everyone will have a view over which items are the most important when valuing a (recruitment) business, but from an investor, acquirer or purchaser perspective there are a core set of metrics that can influence that valuation.
A simple rule of thumb relates to applying a market-influenced multiple to the EBITDA of a business. That multiple is typically influenced by a range of factors – and we’ve summarised the main ones here.
Factors that can influence a recruitment company's valuation
Profit
Understandably, a company's profit is one of the most surefire ways of influencing a valuation or multiple. Good turnover to GM/EBITDA conversion and sustainable growth are key.
Margin %
Higher margin businesses, and companies that are sustainably improving their margins will typically see better valuations.
Temp and perm mix
Understand how the split between temporary and permanent recruitment can affect a company's valuation.
Specialisation
The extent to which a business is focused on a narrow(er) range of sectors or services can influence its valuation.
Sector
Aside from the cyclical nature of markets, certain sectors are often perceived as being more robust, offering higher margins and therefore positively influencing any valuations.
Geography
Geographical coverage, either physically or virtually, can support well-developed market penetration, a compelling growth narrative, and influence a company's valuation.
Use of technology
Automation, standardisation and adopting suitable technology can make businesses more efficient and streamlined, with the scale and the success of technology adoption influencing a company's valuation.
Disruption capability
A business either operating in a disruptive sector, or is itself disruptive, can command a higher valuation multiple.
Succession planning
Future investors want to know what happens after they invest, so having a clear succession planning strategy and ongoing narrative is critically important.
Infrastructure
Does the business have the right infrastructure, systems, policies and structure to support ongoing growth? Solid, scalable infrastructure is essential.
Cash
Strong cash flows, and visibility of future cash flows, can support future growth and earnings. Being able to evidence this will directly influence a company's valuation.
Multiple clients & tenure
Whether it's a balanced portfolio or just general diversification, a broad approach to clients, and long-standing relationships are positive factors in company valuations.
Future proof
Companies that are ready for the future, adopting technology, diversifying appropriately, growing sustainably, and are able to change when required, are often perceived as being future proof, and are therefore more valuable as a result.
Market cycle
Markets are typically cyclical, with the appetite for deals rising and falling, just as the multiple valuations change too.
