Running a business offers you many benefits, from controlling your own destiny to realising your financial ambitions.
Throughout your journey, it’s likely you’ll consider your exit plan, visualising what it looks like and when you want to exit.
A common approach* to valuing a business is to multiply the annual profits, known as EBITDA (earnings before interest, tax, depreciation and amortisation) by a fixed multiple in order to reach a price, often referred to as ‘enterprise value’.
- EBITDA x multiple = enterprise value
In 2018, the average enterprise value / EBITDA multiple increased 17% throughout the year from an average of 9.1x in January to 10.8x at the end of December, according to BDO.
There are several criteria that influence the multiple and are based on the wider considerations buyers go through when purchasing a business.
What qualities do they value in a business? What would influence them to pay more? Why might they pay less and what do they view as vulnerabilities or risks?
By viewing your business from a buyer’s point-of-view, you’ll be able to evaluate business performance across a number of key criteria.
To help you understand what influences a buyers offer price, we’ve listed 10 things you should seek to enhance.
Potential buyers will want to ensure that they’re buying a business that is on an upward trajectory. Analyse your business’s growth in the last financial year. What is your profitability? What’s your topline growth? Is your trading activity trending upwards?
Strong management teams
Can you demonstrate that your business has a strong management team? What’s the average tenure? What’s the career path? Do you provide leadership development programmes? Potential buyers will want to see evidence that the team they’re going to work with are performing at a high level and buy into the company. Crucially, they will want to see evidence that the decision making isn’t constrained to the owner – your business will be more sellable if the owner is less involved.
Market sector expertise
Moving into new markets requires business process, structure, the right people to lead and increased marketing spend. Potential buyers will seek evidence that the business has a strong level of sector knowledge and capability. Being able to demonstrate sustained market sector expertise (placements, stronger margins, profitability, clients, growth, star performers) can add significant value.
Potential buyers will want to see evidence of team billing history, average tenure and career growth potential. Within the billing numbers, clients will look at the risks associated with leavers. Crucially, buyers will want to see evidence that the billing is evenly spread and not weighted towards one consultant. For e.g. 10x consultants billing £300,000 per year is riskier than 20x consultants billing £150,000.
Technology and infrastructure
An advanced recruitment tech stack and clearly defined business processes executed by a highly skilled team increases business confidence. BDO’s Recruitment Sector Insights 2018 report highlighted the importance of technology “as the big firms target, through M&A, those with the software to drive their recruitment offering forward.”
Potential buyers will be interested in not understanding not only the amount of profit, but what the profit represents as a percentage of the overall turnover.
Ashley Lawrence, Chief Executive Officer at Trinnovo Group discovered during his MBA that a recruitment business that has higher permanent revenue over contract revenue will receive 1-3 times valuation. Whereas, an agency focusing on contract revenue over perm will receive 7-11 times multiple.
Lawrence concluded that to optimise a business valuation firms should focus on driving contract recruitment weighted at least 60/40 to ensure certainty of earnings and better cashflow to increase the multiple.
BDO stated that 20% of transactions in 2108 involved an overseas buyer, which highlights how buyers are seeking access to new geographic markets. For all sales, both locally and internationally, providing evidence of consistent billing in locations where talent pools are squeezed will make your business more attractive.
A balanced and diverse group of customers is paramount to achieving a higher business valuation. Potential buyers look closely at customer concentration. If they deem the concentration to be at risk or vulnerable owing to a high concentration or reliance on one client, the offer received could be much less.
More on Sonovate and concentration
Potential buyers will want to see metrics such as staff turnover, retention rates, training programmes, incentives and benefits packages. Having a well ingrained business culture will enable the buyer to develop the employee brand proposition with ease.
*PEM Corporate Finance, view NFI (Net Fee Income) as a better performance indicator for recruitment agencies (over EBITDA), and is calculated as the total placement fees of permanent candidates, the margin earned on the placement of temporary candidates and the margin earned from advertising.