Sell Your Recruitment Business: The 5 Key Rules to Executing an M&A Deal

This is part of a new series of Mergers and Acquisitions (M&A) articles written for us by Tim Stead of Squire Sanders (see his biog at the end of the article for contact details).

As the recovery in the economy takes hold, we can see a significant increase in demand for solid, well-run acquisition targets in the recruitment sector. 

We saw a substantial number of deals in the recruitment sector announced in the last quarter of 2013 (for example: New Mountain Capital’s acquisition of Alexander Mann Solutions, Staffline’s acquisition of Magna Recruitment and the acquisition of Red Personnel by Pertemps). 

All of this indicates that companies in the recruitment sector with access to acquisition and investment capital are now returning to the M&A market for bolt-on acquisitions in the recruitment sector as a strategy for growth.

As an expert M&A adviser to companies in the recruitment profession with over 10 years’ experience, owners of recruitment businesses routinely ask me how they should go about maximising the chances of successfully marketing their business for sale and executing a deal.

So, if you are considering positioning your recruitment business for future sale, here are 5 key rules:

1. Package your recruitment business ready to take to market 

Execution risk is present in every deal. Whilst experienced advisers will minimise execution risk for you, the best way to reduce it is to thoroughly groom your business for sale. Start preparing as early as possible, but at least 6 months prior to the sale process. 

Key areas to focus on are:

• Build sound financial reporting procedures, which are based on well-prepared and reliable monthly management accounts and cash flow statements. 

• Stretch your budgets and forecasts by all means, but make sure they are realistic – a buyer will have confidence in future projections if you demonstrate you have a good track record of meeting previous years’ forecasts. 

• Take steps to avoid unnecessary legal risk in the business – the right lawyers will ensure that legal due diligence is a painless process. Ask them to invest some time in working with you to review your standard commercial terms and employment contracts, regulatory and compliance, data protection, intellectual property and litigation.

2. Pre-sale marketing – raise your profile with prospective buyers

If you retain a corporate finance adviser, they will issue a marketing document to buyers known as an Information Memorandum, introducing prospective purchasers to your business. 

Well in advance of any sale process though, you should look to prepare the ground by raising your profile with possible acquirers. Raise the profile of your brand so that you are a familiar name when the business is brought to market. 

3. Know your buyer

Talk to prospective buyers as often as possible pre-Heads of Terms. You will be promoting your business and you will volunteer positive information about it. 

Make this a two-way process though and you can turn it to your advantage. So in return, for volunteering information on your business, consider seeking information on the following issues from your buyer: 

• What is the buyer’s strategy for medium-term growth? How does your buyer see your business as fitting in with that strategy?

• What cost savings and synergies might the buyer look to realise following the deal?

• Have they done deals in the past and, if so, have were those deals successful? If the acquisition did not live up to its potential, what were the issues that arose?

• What are the buyer’s key areas of concern? Where will they be focusing their due diligence?

• How would they fund the deal – do they have cash reserves ready to deploy. Is funding of the deal dependent on third party or internal credit committee approvals?

Answers to these questions will help you understand what value the buyer sees in your business and will help you in price negotiations later in the process. 

4. Negotiate important points when you have most leverage

Sellers can exert most leverage before they have granted exclusivity to a buyer, i.e. usually before Heads of Terms are agreed. If the sale process is well-run, then at that stage bidders will feel in competition to get to exclusivity and can exert significant leverage from this . 

Your lawyers should therefore guide you through the key terms which a buyer might ask for, so that you can identify those which are sufficiently significant to escalate for negotiation pre-Heads. Issues which are likely to be relevant include:

• How will the price be paid? Will all of it be in cash or some in shares? Will all of it be paid on closing or will some be deferred. If part of the price is deferred, what will the buyer offer you as security for payment? 

• What will your role as owner manager be post-deal? Try to avoid any attempt by the buyer to make any of deferred element of the purchase price contingent on your future employment.

• How will working capital assets be treated in the deal, you should expect to be paid for working capital you leave behind in the business. 

5. Minimise your execution risk

Once you have signed Heads with your preferred buyer, your advisers should drive the process as hard as possible to Completion. This can be achieved by careful project management throughout – consider the following:

• Agree a fixed timetable with your buyer at the outset with dates for key milestones such as: completion of DD, circulation of draft transaction documents and completion.

• Respond to due diligence enquiries quickly and comprehensively. Always present information in the best possible light, having thought through how the buyer might react and what its concerns are likely to be.

• Require your buyer to regularly confirm the price and its commitment to the deal in a formal letter. Insist on this when negotiating Heads of Terms.

• As Completion approaches, arrange weekly or daily project management conference calls to run through the complete list of outstanding issues, thereby ensuring attention remains directed on the critical path items. 

ABOUT THE AUTHOR

Tim Stead is a Senior Associate in Squire Sanders’ London Corporate team. Tim advises on all types corporate transactions for clients in the recruitment sector, but the principal focus of his practice is M&A.
Tim has a wealth of experience in exit planning and managing the successful delivery of M&A transactions on time and to budget. He acts on behalf of both buyers and sellers, providing clear and pragmatic commercial advice to achieve clients’ objectives.

If you are considering any form of corporate transaction, Tim would be delighted to talk to you and will provide free and impartial advice, on a strictly confidential basis, without any obligation.
Tim can be contacted at:  tim.stead@squiresanders.com or 0207 655 1413/ 07545 935 607.  LinkedIn: http://uk.linkedin.com/in/timstead/