The old saying goes that there are only two sure things in life: death and taxes.
If you are a business owner, you can add a third “sure thing” to the list: you will, at one time or another, exit your business. (Let us hope that it is a voluntary decision, and not forced upon you by either of the first two!)
Unfortunately, the GFC of 2008/09 took the decision-making out of the hands of many recruitment agency owners, who were forced to call in the administrators, fire sale their assets or simply shut the doors as a result of the flow-on effects to the broader employment community. I can guarantee this is not the type of exit you want to end up with after years of pouring blood, sweat and tears into your enterprise.
So, whether an exit is on your horizon in the short-term or the long-term, it is advisable to start thinking about what you can do to your business now to ensure that it attracts maximum value at the time. To do this, you need to do two things: understand the drivers of value, and have a plan.
To prepare your business for a buyer, you need to be able to think like a buyer. The first paradigm to consider is that whilst your business has been your heart and soul for so many years – and may even form part of your identity – to a buyer it is nothing more than an asset. There is no emotion attached to it (the polar opposite of you as the owner). In fact it is not only an asset, but only one of many investment options in a range of asset classes. The buyer’s intention through making an acquisition is to achieve a better return on their investment than if they directed that capital to another option.
The second value driver key to ensuring an effective exit is your business’ risk profile. That is, to what extent is the value in the business put at risk by the exit of its current owner?
And finally, potential buyers are looking at improving the value of this new asset. So whilst you may feel that the business has achieved all it can within its market, the buyer mindset is to ask how can I leverage off what I have bought to expand further? What growth opportunities exist for this business? Where can I take it that my predecessor could not?
The Exit Plan
Have you ever heard the saying if you fail to plan, you plan to fail? With the imminent en masse retirement of the Baby Boomer generation over the next 5-10 years, a significant proportion of the SME market will be up for sale. This is forecast to create a supply/demand imbalance, in which buyers will have a greater number of options from which to choose the best acquisition opportunity, leaving those ill-prepared for sale struggling to find an appropriate buyer.
To ensure your business is well-prepared to stand out from the crowd, here are my top 10 tips for preparing a recruitment agency for exit:
1. Sever the emotional connection. You should see your business as an asset that has commercial value, rather than a result of many years of blood, sweat and tears.
2. Clean up the balance sheet. You don’t want to have personal assets and substantial contingent liabilities (such as employee long service leave, annual leave, etc.) sitting on your balance sheet when you are exiting.
3. Focus on performance. Buyers are always more interested in a business that can demonstrate a sustainable level of earnings – wild fluctuations (or poor performance in general) make them very nervous and less likely to progress.
4. Build your team of specialist advisors. You may see spending money on accountants, lawyers, investment bankers or corporate advisors as excessive, but it is the best investment you can make to maximise your result.
5. Take your time. Allow at least 12 months for preparation before exiting.
6. Move out of the business. As the managing director of the business, start dedicating a significant proportion of your working effort to working on the strategic aspects of the business, rather than on personal revenue generation.
7. Reduce over-reliance on specific clients. If more than 15% of your revenue is sourced from one client, there is an over-reliance and inherent risk for a prospective purchaser. Clients have low barriers to exit and are more often than not happy to switch firms given the right opportunity.
8. Diversify your income streams. The inherent risk profile of a business decreases if it generates reasonable percentages of its revenue from diverse and annuity income sources.
9. Minimise reliance on business owner(s) for revenue generation. Most owners of SME firms are in revenue-generating roles, with many out-performing the rest of their team. If you plan to retire from the business this situation must be reversed, otherwise there is too much risk for a prospective buyer.
10. Systematise the business. Document or automate every policy, procedure and process in the business to support the attainment of a state of self-sufficiency. This serves to minimise the reliance on the business owner, but also increases the pool of prospective buyers to include investors with no recruitment experience.
There are always more considerations – such as ensuring that you have a corporate structure that is exit-friendly – but the above tips are a good starting point for most.
Andrew Cassin is an Exit Advisor and Business Broker licensed in Queensland, New South Wales and Victoria. His company, Acquisiti is premium business brokerage and advisory firm, providing services aimed at maximising the exit result for its clients. Andrew holds a Bachelor of Business and has pursued post-graduate studies in financial services, corporate governance, mergers & acquisitions, and change management. For more information contact Andrew via email at firstname.lastname@example.org