How do we assess Value in a boutique recruiting organization?

Building a recruiting organization is tough work. A recruiting firm is quite different than any other company in any type of industries. Why? The basic nature of our work is different from the rest of the world. We (as recruiters) don't have measurable assets that we can sell when it comes time to find a potential buyer. What can a potential buyer see (as measurable assets) in a recruiting organization?

As recruiters, we can normally say that our 'client lists' are our prized possession - however, the hard reality and truth of recruiting is that if an 'Account Manager' or a recruiter is not servicing an account for a specific length of time, the customer WILL go somewhere else. That's just harsh reality. Also, the relationship between the customer and the firm is normally built by the Account Manager and not by the recruiting organization. If the account manager leaves the firm, there's no stopping that the customer will not follow that account manager.

Now, I know that there are non-compete and non-solicitation clauses that can prevent this, however, most of the times, these non-compete and non-solicitation clauses don't hold up in a court of law. Also, if the account manager is doing such a great job servicing the customer, there's no stopping the customer from 'hunting down' that recruiter wherever he is in order to once again receive that same level of service. So, if our customer lists can easily leave a recruiting organization, the question lies, what else is left that remains a measurable asset to the firm?

Maybe the answer is people. Building a recruiting organization with strong people and forming a team might provide some value to a potential buyer. The only way that I can see value to a recruiting organization is having deep relationships with the clients. This means having more than one point of contact with the customer and servicing the customer in various ways (not just in recruiting, but maybe in organization development, HR strategy or providing a profiling service that will profile jobs against potential candidates). In this way, the customer will be hard to leave a recruiting organization because the organization has 'poked' the customer in various and different pain points. Now, the recruiting organization can dig deeper into culture of the organization and finally analyze why the potential candidate worked or did not work.

It is hard to assess value in a boutique recruiting organization that just does permanent search. The amount of fees (although substantial) are significant but the relationship is very transactional instead of strategic. If a firm just does contingent permanent search only, it is very hard to retain the client for 2 - 5 years. If a customer's organization is well-managed (to be realistic, most of them are not!), there should be growth and more potential business to the recruiting organization. However, if the organization is not well managed, recruiting firms can make their money on replacement and employees leaving the customer organization.

The kicker here is that 'how do we know that the customer will use the same recruiting organization over and over again'. Let's be frank: There is no loyalty from the customer in recruiting (we - as recruiters - might think we have that big exclusive assignment only) but I can tell you that exclusivity is a myth. Exclusivity might last at most two weeks and if a recruiting firm does not perform within that timeframe, there's no reason why that the customer can't go shopping around. I understand that upfront retainer fees can prevent this - but with the plethora of recruiting organizations on the market providing payment upon hire services, why would a customer pay upfront?

As you can see, customer loyalty has very little value when assessing a permanent boutique recruiting organization. A firm can say that they billed $1M in fees (in a good year) in the last two years, but there is no guarantee that this trend will continue for the future. How can a potential buyer pay a business owner of a permanent search organization if he knows that these fees are not guaranteed in the upcoming years. Unfortunately since past successes do not predict future performance of a recruiting organization, it is hard to assess pure value to a potential buyer of a recruiting firm.


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Comment by Joshua Letourneau on August 17, 2010 at 10:16am
As Exec Search Firms have no guarantee of residual revenue (considering there is no staffing element to the firm), this means we cannot project any future earnings.

A business valuation is derived by projecting all future earnings, then discounting back to Net Present Value (accounting for inflation and the time value of money). Sprinkle in the depreciated value of your assets (do you own your own building?) and perhaps some "goodwill" (i.e. brand name), and there is your business valuation.

Mathematically, this is near 0 for 99% of firms.

The issue here is that when you buy a Recruiting firm, you're buying the Recruiters; the "Producers". Unless you have some guarantee that they're not going anywhere (which they most likely will), you're wading into a pool of serious financial risk.

After all, most "Producers" move on to start their own firms. They'd rather keep 100% of their billings (minus operating expenses), than give half back "to the house".

Good article and food for thought :)
Comment by Brian Pho on August 17, 2010 at 10:46am
@Joshua: So I guess your view on Recruiting firms -- stay away from purchasing one since they are a high financial risk.... Bottom line - there is no value to a recruiting firm... if the producers have the ability to leave....
Comment by Craig Silverman on August 17, 2010 at 12:09pm
The value is based on many things including the staff, the leader, the track record of success, client lists, assets such as office location, technology, freshness and size of database, your brand value in the market, etc... I recall an agency in one market with several offices and a recruiting staff of nearly 100 recruiters that placed perm only selling for a large sum of over $10M, but they owned their niche and geography. Value in a contract staffing or temp business is easier to calculate since they have a recurring revenue stream and various formulas that looks at gross margin, growth rate, niche market, EBITA, etc. can be used to come to a number. Having acquired over a dozen staffing firms in my past experience I would be happy to speak with you if you want to go over any specific questions...

Happy Hunting

Craig Silverman
650-543-1408
View Craig Silverman's profile on LinkedIn
Comment by Paul Alfred on August 17, 2010 at 12:30pm
I have to agree with Craig on this one .... It really comes down to how you protect and package that asset ... I have see a number of recruiting companies sold successfully over the years ...
Comment by Brian Pho on August 17, 2010 at 12:34pm
@Craig: Good point. Thanks for the comment. I am always wondering what is really the worth of a recruiting firm. I guess as an independent - there really is no value UNLESS you can build a team of producers....
Comment by Sandra McCartt on August 17, 2010 at 2:24pm
3X average net earnings, before tax for last three years, factor owners salary for the last three years. Includes all fixed assets, database. Owner agrees to stay for a period of one year to transition clients. Non compete for one year following end of the year when owner leaves. There is always value of "bluesky" with a going concern whether a team of producers or an individual recruiter/owner if firm has been in business for a period of time.
Comment by Thyaga on August 20, 2010 at 4:11pm
Craig, thanks for sharing your insight.

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