As I speak to lots of recruiters who want to build their own recruitment company, after all my profession is investing in startup recruitment businesses, I get a fair few whose goal from day one is to build to sell. Is this really a smart move?
As with most questions like this it depends who you ask. It also depends on circumstance. For example, if you have a substantial amount of cash and the plan is to grow big quickly with a rock-solid plan, the necessary expertise and a very clear future event such as AIM listing then yes, this can be a very good idea. However, as my contact is generally with aspiring business owners with only sufficient cash to go down the more organic route, i.e. mostly funding growth with cash from profit, it’s my opinion the answer is yes AND no. I explain as my blog goes on why my answer is both.
Why do you want to sell?
In the conversation I have with recruiters who want to build to sell, I ask why? It may seem like a dumb question to some ‘to be rich’. However not everyone’s ambition is fuelled by the desire to be wealthy. I, for one, was more motivated by the satisfaction I would get from the achievement of building something from nothing to a size someone wanted to pay me in excess of 7 figures for, so if this is the reason then I would say yes, definitely it’s a good idea. But if it’s purely to cash in a large sum to retire off or have a fleet of supercars and a boat moored off the South of France, then I would say the answer is yes AND no.
How much are recruitment businesses worth?
In my forthcoming blog ‘How to value a recruitment business’ I will go into more detail on how recruitment businesses are valued. However, I can tell you now it’s hard to put a value on a recruitment business. But for the purpose of my point, we can use the industry average of 4 X EBITDA for permanent recruitment businesses and 8 X EBITDA for contract businesses. EBITDA is earnings before interest, taxes, depreciation, and amortization, which in simple terms mostly means profit. For those unaware of how businesses are valued this is often a surprise, they assume they’d be worth much more. I would add that if you do get an unsolicited approach from a buyer who wants your business for a specific strategic reason these can go up, but in general the above is a good guide.
Interesting post. Also interesting to know what my business is worth using the x EBITDA - thanks for this.