The valuation of private companies in the recruitment sector is always a hot topic, particularly among owners considering a future exit.

Here are some lesser-known facts from the experts about how recruitment companies are valued.

1. Valuations offered by buyers usually reflect the strategic impact of an acquisition more than the quality of the business itself. This is why buyers are more likely to pay a higher price for an average business that adds to their strategy than for a better-managed business that does not.

2. Sensible private company valuations are based on normalised earnings before interest, taxation and amortisation (EBITA), not on sales or net fee income (NFI), profit after tax or anything else.

3. When you do the maths, a 5x-EBITA-multiple sale price equates to around 10-12 years of post-tax dividends.

4. There is always the potential to gain or lose further exit value in a balance sheet. Good M&A advisors know how to protect balance sheet value (while business brokers tend not to).

5. From a seller’s perspective, the best earn outs increase price beyond the day-one valuation, other earn outs only secure it.

6. Private equity buyers do not think about valuation in terms of multiples. Rather, they work to a target of IRR (internal rate of return), which in simple terms is a function of the amount of cash invested, cash returned upon exit and the length of time in between.

7. If a sale is attempted but fails, valuation is reduced by around 10-50% depending on how the sale process and its confidentiality has been managed. This risk is one reason why not all M&A advisers and their fees are the same.

8. A valuation is only a true valuation if a deal completes.

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