Preparing a business for sale

Peter Crush

Thinking of selling your agency? Make sure you do your homework and don’t rush into it, says Peter Crush

News this month that the Recruitment and Employment Confederation expects growth in the recruitment sector of 7.3% for 2013/2014 and 8.3% for 2014/2015, will no doubt have been greeted extremely positively by all in the industry.

But with stable growth expected for the next few years, these predictions also indicate the industry is moving into rare period of symbiosis between larger and smaller agencies.

With established agencies all looking to see how they can take advantage of the pick-up in the market, their gaze is naturally falling on the clutch of much younger start-ups – there were 1,730 and 1,465 new recruitment agencies launched in 2010 and 2011 – agencies that survived the recession, who are also growing and which (for some), are coming into a perfect time to sell up.

To the big players it’s a strategy that makes perfect sense: it’s far simpler snapping up an existing firm with established clients, in a growing niche, than starting from scratch. But, for those wishing to sell, the process is not a quick one, and according to experts, there’s plenty they need to consider before even thinking about retiring to the Bahamas.

“The first thing is to think of selling as requiring at least a two-three three year grooming period,” says Phil Mitchell, partner at Harbour Key LLP. Mitchell says he is currently doing an average of one recruitment agency valuation every month. “Smaller agencies may have reduced staff to survive during the downturn, so they need to get back to strength again, to demonstrate to buyers that they have the people in place to produce the growth the owner says it can achieve.”

According to Mitchell larger agencies are buying mostly into future potential (as well as the niche it serves), based on past experience, which means owners must also do their forecasting homework. “If you say you’re going to grow 8%, buyers will want to know how,” he says. “Are you moving into a new area, or hiring extra people, or training existing people up to be better? These are all questions due-diligence will need clear answers to.”

Lesley Stalker, tax partner at RJP LLP, which advises bosses on how to sell their businesses, says the above is all part of the essential process of getting your affairs in order. And there are other issues: “A big reason sales get jeopardised is because owners have not properly maintained company records,” she says. “While it often seems like unnecessary red tape, bad record keeping sends a warning message to prospective buyers that there might be other accounting or reporting issues to watch.”

Issues owners need to clear up include making sure they do not have too much cash on the balance sheet, ensuring there are no employment claims and that bad debt is erased. They must also clamp down on practices that may not seem to be whiter than white. “Employment Benefit Trusts – a form of discretionary trust, which rewards employees by making payments that favour certain employees or their families (and which does so in a way that defers or completely avoids PAYE, NICs and other taxes) – are a case in point,” she argues. “They’re legal, but HMRC has declared that it now views this type of tax planning activity as aggressive and potentially an example of tax avoidance.”

It’s highly likely that as part of their housekeeping, owners will also have to alter the pay and incentives structure of the main management team. “The main worry buyers have is that the top team leave,” says Will Cookson, partner, also at Harbour Key. “The business has to show it can survive – and prosper – without the boss. Sellers must devise a shares scheme that guarantee retaining top talent, and they must begin the process of demonstrably extricating themselves from the day-to-day running of the firm.”

Obviously, one main drawback of all this, especially when putting in a new reward structure, is that it then becomes very difficult to keep an intent to sell secret. Here though, there does seem to be a split opinion: “You want to sell when your business is in its best shape; if staff get wind of a sale there’s a danger they will jump ship, and that affects the valuation price,” says Mitchell. He adds: “You must keep your cards close till you got the deal nailed.”

However, according to Rupert Cattell, managing director at Turner Butler, one of the UK’s largest brokers for selling mid-sized businesses, owners should be open. “While it’s good to keep the rest of the market unaware, your own people will need to know, and it’s better they do sooner rather than later,” he says. “We often find that when they are told, most people are actually less worried about who the owner is, as long as they know their job is secure.”

Adrian Kinnersley, current managing director of Twenty Recruitment, was involved in a secretive management buy-out of Astbury Marsden. He says the experience has taught him to be very open now. Today all his staff know he intends to sell, probably in six or seven years from now. “Staff aren’t stupid,” he says. “As soon as you start having meetings, people know. You can either deny it, and the rumour mill goes into overdrive, and people leave based on the wrong facts, or be very open. We’re the latter. At Astbury Marsden I was lying through my teeth all the time, and it was very uncomfortable for me.”

Common to all sales though, is setting the price and the terms you want to leave on. Owners need to prepare. Cattell says: “Most buyers price on the basis of the average of the last three years’ returns, and they then produce an upfront sale price, including a deferred payment element – meaning the owner has to stay involved, and hit certain targets to earn their exit.” While agency heads won’t always be able to control these terms exactly, Stalker says there are things they can do. “Owners who can persuade buyers of the viability of the business without them can cut their involvement time post-sale from three years to 18 months. It goes back to getting the business basics straightened up.”

Most agree that defining the right trigger point – a certain level of turnover, or a certain growth percentage – is the emotionless solution to setting the often difficult to face-up-to selling date. But Kinnersley warns not be so prescriptive that you lose your window of opportunity. “There’s no point waiting for a target price if the market has moved on. Too many people have an emotional attachment, then a new downturn hits, and the result is that owners then have to delay the whole process by another five-six years,” he says. “You need to think about where you are in the cycle. Luckily, we’re just at the start of what I think is a longer, more slow-burning recovery.”

For this reason, Kinnersley says the first thing owners thinking of selling a few years down the line should do is network. “Find suitors early,” he advises. “They like knowing who’s around, and when you’re on their radar, they’ll want to watch how you’re doing. If they’re interested, they’ll get involved, so they’re also a fantastic free source of advice.”

But, as Tony Goodwin, founder of managerial recruitment company, Antal International advises, perhaps the best consideration is whether you really are ready for it at all. He says: “Don’t think any disposal is simply going to be a financial transaction; it’s also going to be an emotional one. You need to be sure that you really are ready for the break, for the beach or the golf course. And if you not, are you clear about what you are going to do for the rest of your life?”