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Selling your recruitment business can be a daunting task, especially if you’re a business owner without prior experience in the field of business sales.

With many of the SSG network lacking exit plans or not knowing where to start, SSG has often found the first question asked is: “How much would I get if I sold my business?”

This article is aimed at recruitment company owners who want to understand the fundamentals of valuing their business but don’t know where to start.

Common Valuation Methods and Their Advantages/Disadvantages

When it comes to valuing your business, several methods are regularly used. Each method has its own upsides and downsides, and the choice of method often depends on the type of business and the sector it operates in.

Here are some of the most commonly used valuation methods:

Asset-Based Valuation: This method calculates the value of your business based on its tangible and intangible assets. It’s particularly useful for businesses with substantial physical assets. However, it may undervalue businesses with strong earning potential but fewer tangible assets. It is not often used for recruitment businesses.

Market-Based Valuation: In this approach, you look at the prices at which similar businesses have recently sold. It’s a straightforward method, but finding comparable businesses can be challenging, especially for small, private companies.

Income-Based Valuation: This method focuses on the income or cash flow your business generates. The two primary techniques within this approach are the Earnings Method and the Discounted Cash Flow (DCF) Method.

 

In our experience, the recruitment industry tends to use the Earnings Method.

Earnings Method: If your business is trading profitably, the earnings method can provide a reliable estimate of its value.

It centres on the concept of sustainable earnings, a dependable measure of the cash profits your business generates each year.

The commonly used approximation of sustainable earnings is EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA provides a clear picture of your business’s operational profitability.

The keyword in all of this is “sustainable”:

  • Any one off or exceptional costs or revenues should be removed from this number.
  • People are important in any business, but particularly important in a recruitment business. A buyer will expect to buy a business with the full market level costs of a team baked into the numbers. This is particularly relevant to SSG Partner businesses because often the founder(s) takes out the majority of their remuneration through dividends rather than salary and bonus. A buyer will therefore adjust profits down to reflect the full cost of a “leader” within the business.

To determine the valuation using the earnings method, you’ll apply a multiple to the sustainable earnings:

Valuation = Sustainable Earnings x Multiple

 

Multiple Ranges:

The range of multiples that businesses can attract is huge. For example the PE ratio (equivalent of multiple used by listed companies) for Google on 27/9/23 was 27.42x. Meanwhile some small private companies with limited infrastructure or poor prospects might have a multiple less than 1x.

The list of variables affecting valuation is almost endless, but include industry, sub-sector, services provided, size of business, quality of management team, visibility of revenues, customer concentration, previous results and growth opportunities to name a few.

In practice, recruiting businesses often see valuation multiples ranging from 1x to 6x of their EBITDA. Below EBITDA of £500k, the multiple is usually 2x to 3x. Please note this is a rough guideline for the reasons mentioned above.

 

I want to sell, what is my first step:

The executive team at SSG partnerships are highly experienced in mergers and acquisitions. Reach out to them as a first step.

 

Conclusion

In the quest to understand your business’s value, this article has aimed to shed light on the art of business valuation. Whether you’re considering taking on investment or selling, estimating your business’s worth is the crucial starting point.

We’ve explored common valuation methodologies, with a focus on the Earnings Method, a preferred choice for recruitment businesses. But, remember, valuation multiples vary widely based on factors like size and growth potential.

 

Reach out to us if you are considering investment or exiting and we can guide your next steps.