Philip Olagunju Assistant Director

Valuing a recruitment company - factors to consider

Many recruitment business owners often start-up their companies with an already well-developed exit strategy in place – these strategies frequently conclude with the sale of their business to the highest bidder.

By Philip Olagunju

We are often asked to provide business valuations for recruitment company owners in order to help shape and inform these exit strategies, and we see a number of commonly occurring factors that influence valuation.

One of the many traditional methods of valuing a business is by applying a multiple to a normalised level of EBITDA (Earnings before Interest, Tax, Depreciation and Amortisation). However, when valuing recruitment businesses, it is industry practice to apply multiples to NFI (Net Fee Income). NFI is seen as a better performance indicator for recruitment companies across the sector, 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. For larger recruitment companies, NFI also includes the outsourcing, consulting and pay-roll margin earned by the recruitment process outsourcing function (RPO).

Typically, we are seeing NFI multiples of 1.5x – 2x being paid for recruitment companies, many of which are displaying the following characteristics:

  • Growth – businesses that can demonstrate increasing profitability, as well as top-line growth, over the medium term are usually valued at a higher rate than a business with a flat or declining trading history
  • Strong management teams – a business that is run on a day-to-day basis by an autonomous management team that is separate from the Vendor tend to generate higher valuations
  • Market sector expertise – large depth of knowledge in a sector, or across a number of sectors, carries intrinsic value to a potential purchaser
  • Varied customer base – having a wide spread of placements with many clients decreases risk for a potential purchaser, hence businesses with this characteristic will attract higher NFI multiples 
  • Large number of star performers – consultants are the key assets in recruitment businesses, hence there is always the risk of these “assets” walking out of the door following a change of ownership. Businesses where revenue generation is spread across a number of consultants are valued highly
  • Well established back-office – When a potential buyer approaches a business with solid systems and procedures in place, it greatly increases confidence in the business and enhances value

Get in touch with the PEM Valuations team to discuss your business valuation requirements.