Recent offers that are backed by private equity for recruitment firms OPD and FDM Group have signalled clearly that private equity remains very interested in the recruitment sector as a source of deals. So how do recruiters achieve the best deal if private equity comes knocking?

Once any recruitment business has attracted the interest of private equity investors, business owners are faced with negotiating terms with often highly seasoned deal-makers. At stake is a deal which, if successfully agreed, can deliver the owner a fair price, secure an equity stake for them and their employees, while avoiding over-burdening the business with debt.

Manage competitive tension
As a rule, owners should avoid being drawn into negotiations with a single private equity house. Retaining a healthy level of competition between a number investor bidders is essential in improving the terms of a deal and in avoiding ‘attrition’ of these terms later on in the process.

Equally and opposite, it often does not pay to be speaking with too many potential investors as this can cause some to withdraw their interest due to ‘over-competition’. Negotiating with three or four houses often provides the best results for owners.

Assess the overall deal
Private equity deals are different to a trade sale, where the key objective is usually to maximise day-one price. Instead, private equity deals involve a complex interplay between the day-one valuation of a business and the proportion of ‘newco’ new equity which will be held respectively by the vendor, employees, future employees and the private equity investor. An owner’s deal can often be maximised by taking a lower day-one price if this allows them to retain a greater share of equity for the future and to lock in and incentivise a wider number of employees.

Get the difficult issues on the table early on
Most businesses have at least one hidden ‘difficult’ issue which owners are reluctant to disclose. This may be a recent downturn in trading, loss of key staff or a significant on-going legal case. The good news here is that private equity investors are experienced at getting comfortable with such issues. However, it is critical that the issues be disclosed early on. Waiting until a due diligence team uncovers the issue is a sure-fire way to ensure that private equity reduces its price or, worse, pulls out because of a lack of trust in the owners.

Therefore, owners should identify the difficult matters early on and work out with the help of their advisors how best to present these to potential investors.

Seek the right advice
Private equity deal-making is relatively a highly technical area of M & A finance, tax and law. For owners, appointing a reliable and expert advisory team early on is critical, as this team is responsible for attracting and assessing offers, leading negotiations on behalf of owners, protecting the vendor and employee rights in the various legal documents, and project-managing the deal through due diligence and to completion. An experienced team of specialist private equity deal advisors can often be the difference between ending up with a good or a bad deal.
In conclusion, securing a deal with private equity still remains a possibility even in the current market. Ensuring that any deal agreed is attractive depends on managing the level of competition among potential investors, assessing total returns (and not just day-one cash), and having the support of an advisory team with the right expertise. If all this is done successfully, owners can achieve attractive and flexible deals which are not possible with many trade buyers.

Tim Evans, director Catalyst Corporate Finance