7 Questions on Mergers & Acquisitions in Recruitment Answered!
At Engage Sydney, we were joined by Paul Masters, Managing Partner at Sovereign Private as he moderated a panel featuring top recruitment leaders with vast experience in recruitment mergers and acquisitions (M&A), both on the buyer and seller side. The panel featured James Hone, Founder & CEO of Bluefin Resources Group, Peter Acheson, CEO at RGF Staffing APEJ and Ross Thompson, CEO of PeopleIN.
Together the panel shared their expertise and experiences as they answered some burning questions on the M&A landscape. Check out what they had to say below:
1. Apart from financials, what are the other factors that buyers are attracted to/look for?
Ross: “First is the cultural fit, you know we’re a people business so that needs to work. Even if the financials are outstanding, if there isn’t a cultural fit, that chemistry between the leadership groups then it’s never going to work. I actually learnt that the hard way when looking back at my experiences so that’s key.
Flowing from that is the growth opportunities, not just for the business coming into the family, but the family business as well. You really need to work through that pre any completion of a deal. Just to understand how it’s going to work, what investment is needed to make that growth work. If both parties aren’t getting that growth, the deal can go south pretty quickly after completion.”
2. What are the ‘hot sectors’ in the market?
Peter: “I think unequivocally the strongest sector at the moment is IT. I think because IT has a ‘long run’ as an industry, going forward. I would have said Healthcare also, although with some changes coming up in the aged care sector be wary…. also probably the mining/engineering sector is pretty strong as well because of higher resources prices.”
3. Think back to some of the acquisition opportunities you’ve had in the past, or some of the acquisitions you’ve done – is there anything you’ve regretted/any mistakes you’ve made?
James: “Definitely been mistakes, some of them have been quite painful.
One learning is from the buy side – is how you structure your deal on the earn out. What might look to make sense commercially from a technical accounting perspective can affect P&L in a negative way if the acquisition outperforms its forecast significantly!”
Peter: “We bought a permanent business in 2011, [when] we were a strong IT contracting centricity. There were some things about the permanent recruitment market that we didn’t understand.
The big one was the two founders and two owners of the business were exiting and they hadn’t actually been very active in the business prior, for the previous two years, which had created sort of a power struggle with the people underneath them. That was difficult to deal with when we went to integrate the business and roll it into the broader Peoplebank group.”
4. How important is a contracting book? What’s the perfect mix of perm and temp?
James: “I think it’s really important, I mean, I wouldn’t do a deal with a company that doesn’t have a contract base. I don’t think there is a perfect mix. I mean when I sold Bluefin we were 33% contract to gross margin. But we had a clear pathway to go to 50/50 and that was obviously attractive to Outsourcing when I did the deal.
For me personally the minimum is 25% contract, ideally at least 50% plus. I mean the more contract the better, I mean as Pete says you’ve got that annuity and those guaranteed earnings over a period of time. So it’s really important.”
5. With the acquisitions you’ve done, how important is the back office within those acquisitions?
Peter: “Depends a little bit on your philosophy on integrations. I’m a firm believer in full integration and we know you want to be able to leverage strength in systems/platforms. I reckon there’s about half a percent of EBITDA that you can earn as a result of good integration.
Having said that, I worked with a guy, the first chairman of Recruit, who did not believe in integration at all. He believed in keeping things diametrically apart. His view was that what you spend on the integration, you end up losing in value once you’ve integrated it.
But I’m a pro integration person, and I think systems are really important. Particularly the front office, we’re a recruitment business having common platforms in the front office that can be leveraged across the group. I think it’s really important.”
6. When you make acquisitions, once the earn out period is over, do you try to integrate the front/back office system quickly?
Ross: “There’s not a cookie cutter approach to this and I think if you apply a cookie cutter approach then be wary. It’s got to be in collaboration with the company, also if it’s a platform acquisition for you versus. a bolt on that is coming into one of your existing divisions but really just working through with them.
We always start the discussion with ‘how can we help you grow quicker?’ That focuses on them doing acquisitions and leveraging your balance sheet or a strategic hire they just want to do. The owners do get to a point of saying ‘we need to look at systems’. So it’s taking that opportunity to say well this is what we have and being upfront about the journey we’re on when it comes to systems so all expectations are managed.
Understanding their issues and then let that dictate your integration program. At the end of the day, if you force feed you get owners that will be very focused on running top cover for their own teams. Whereas if they are leading it, it’s supporting them to win more work and track more talent into their organisation. All the back house stuff will be sorted over time, a time period that everyone’s comfortable with.”
7. What’s the one piece of advice you would give business owners, in terms of preparing a business for sale?
James: “The key one for me is to have your financials and your management reporting, spot on….year to date operating profit against gross margin, against revenue, contract/perm split on gross margin, like basic KPIs, and having them packaged up, [which] you know inside out is uber important.
If someone can’t communicate that to me, that’s not good. When you’re going through due diligence, you need all of that information so it’s best to have it all set up and going. Also of course it helps you run a great business if you know exactly what you’re performing against.
That’s probably the biggest thing.
The second one is to know exactly what you want from a dollar perspective and what the owners want to do, during an earnout or afterwards. If someone comes to me and says ‘alright we want $20 million and they’ve got a $2 million bottom line business that means you need a 10 times multiple. Most businesses aren’t going to get that, they haven’t thought it through. So knowing how much money you want and aligning that to reasonable multiples is 101 for me. Also [for owners] knowing if you really want to stay on, if so, in what capacity.”
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