At some point in their business careers, most owners of City search businesses will have dreamt of selling their firm. No more early starts, troublesome clients or worries about cash flow and staff defections. Instead a fat cheque and balmy relaxing days...
But wait a minute, why haven’t more of them sold to eager domestic and international buyers keen to consolidate or enter new markets during the boom years? Market conditions aside - is it due to a lack of investor demand over the years? Or have most City search firms missed a trick and unwittingly rendered themselves unattractive to potential buyers?
Personally, I’ve dealt with numerous investors in the recruitment sector. In the process, a clear picture has emerged about what potential buyers look for when investing. From this, we can deduce why most City search firms fail to sell and why they will never attract buyer interest.
“The market has changed dramatically,” said one City veteran deal maker in the sector recently. “I can only think of two pure front office boutiques which have sold for good valuations in recent memory. Mike Brennan sold AlexMann Financial Markets and Peter Evans sold The Consulting Group. Of course, other recruiters such Tony Goodwin of Antal (Moscow) and Dan Chester of GRS have sold out for good valuations but these have not been pure front office. Some got very close such as Kinsey Allen but for reasons unknown the deal never materialised. The ones who managed to sell probably structured their businesses from inception with a view to selling,” he adds.
So why are well known brands failing to attract interest? “It’s a combination of things” says our City veteran. “In the overwhelming number of cases there is nothing to buy – it’s often just a handful of billers in an office. Admittedly they will be good producers and profitable but there will be nothing of substance for a buyer, as many are lifestyle businesses. When there is something with potential, the owner will often have an unrealistic expectation on price or structure making a deal impossible.”
This takes me back to my earlier point. The owners of most City search firms have made a fundamental error when building their business (and when you think circa 90% of recruitment businesses in the UK have less than ten staff you’ll understand why). Buyers want a business of size and substance which is scaleable both domestically and internationally.
Purchasers want to buy growth; they want to see client relationships which are not only deep but widely spread across an institution; client concentration is important but there shouldn’t be over- reliance on too few customers; they look for a good spread of risk across markets, geographies, clients and people; they will look for proven managerial abilities and strong processes and procedures as well as quality and consistency of revenue.
Crucially, however, an investor will be reluctant to buy a business which is centred on one or two individuals. Taking this into consideration it’s easy to understand why so few sell - let alone at good valuations. Most City firms pride themselves on being a boutique which offers a highly personalised service with the Principal(s) all too often being the person who holds key client relationships.
“Recruiters are often their own worst enemy” says our City veteran. “They hold onto relationships and are loath to give up control or delegate meaning they can never grow beyond a certain size and are ultimately unsalable. Of course there will always be exceptions” he adds. “There are small scale self-styled Private Equity investors out there but everything comes at a price” he warns.
Some people are aware of the reality. Our veteran deal maker points to an emergent trend in the City recruitment markets. “A new breed of entrepreneur is emerging. They are younger, focussed on exit and have a clear plan for their lives post-business and a sale is a stepping stone in that process. As such they are structuring their business from day one for sale.” I’ve noticed this too and predict that we will see a rash of sales in about 3 years time as the new generation of recruitment entrepreneurs manage to exit leaving the City old guard behind.
And what will become of the traditional boutique business owners? “There has been talk of mergers driven by the market down turn but a marriage of convenience rarely works” says our City veteran. “Most likely they will wither on the vine watching whilst the new breed emerges and exits.”
The author is a recruitment entrepreneur with significant experience in building, buying and selling businesses across a range of markets.