How are recruitment businesses being valued? City Comment
12 December 2013
If there is one topic which clients ask me about the most, it's valuation. Either a specific ‘How much is my business worth?’ or a more general ‘Are valuations increasing?’
Thu, 12 Dec 2013 | By Philip Ellis, principal, Optima Corporate FinanceIf there is one topic which clients ask me about the most, it's valuation. Either a specific ‘How much is my business worth?’ or a more general ‘Are valuations increasing?’
The former is a very difficult question to answer without having a thorough understanding of the business in question, and I despair when people who profess to be able to advise business owners give either unrealistic or ill-informed valuations.
Valuing a business requires knowledge of so much more than a profit number. Even presented with a meaningful, suitably adjusted profit figure does not enable a value to be estimated. Suppose a business makes £300k profit this year. The valuation would be markedly different if profits for the previous year had been the same, £100k or £750k.
Or suppose that one business making £300k profit has a well-balanced client spread whilst another has just one client. How different would those valuations be?
Despite the difficulty in assessing the value of an individual business without thoroughly understanding it, it is possible to comment on general trends and sentiment in the market. As observed in my November article, UK plcs have joined private equity in making acquisitions. HR firm Penna's acquisition of Savile Group has since been announced, reinforcing the message. This is a show of confidence in the medium-term prospects for the market as a whole.
Valuation is intrinsically linked to confidence. This can causes bubbles (think dotcoms when investors were confident a new world was emerging) and crashes (think customers queuing outside banks to withdraw their money) at the extreme ends of the spectrum, but if more deals are completing, that will build confidence and encourage other acquirers to feel the time is right. More active buyers will equate to an uplift of valuations and I expect to see that manifest itself in 2014.
We have a peculiar set of circumstances today. Owners recognise that the next couple of years are generally expected to be positive, so profit levels and valuation multiples are likely to increase.
It would seem logical, therefore, that owners will wait before selling. However, I believe that, after such a long period of not being able to realise a respectable value for businesses, there are a lot of tired owners who planned to sell a few years ago and are now quite prepared to accept a reasonable price for their business. This makes it a good time for buyers to acquire assets at attractive values, given the outlook.
An increase in deal volumes is also likely to herald a welcome acceleration in the pace at which deals are done, simply because there will be another buyer waiting in the wings if the preferred bidder for a business starts dragging their heels. Advisors will also become busier, so will want to close one deal and move on to the next one.
Sectors in which we have seen strong recent performance include IT, digital, energy, engineering and some areas of infrastructure. This is not an exhaustive list and within any sector there will be both strugglers and stars.
So, whichever sector you are in, if you are thinking of selling you can expect interest from potential buyers in 2014 and if you are acquisitive, there will be businesses to evaluate in 2014 which should represent good value if you take a medium-term view.
The former is a very difficult question to answer without having a thorough understanding of the business in question, and I despair when people who profess to be able to advise business owners give either unrealistic or ill-informed valuations.
Valuing a business requires knowledge of so much more than a profit number. Even presented with a meaningful, suitably adjusted profit figure does not enable a value to be estimated. Suppose a business makes £300k profit this year. The valuation would be markedly different if profits for the previous year had been the same, £100k or £750k.
Or suppose that one business making £300k profit has a well-balanced client spread whilst another has just one client. How different would those valuations be?
Despite the difficulty in assessing the value of an individual business without thoroughly understanding it, it is possible to comment on general trends and sentiment in the market. As observed in my November article, UK plcs have joined private equity in making acquisitions. HR firm Penna's acquisition of Savile Group has since been announced, reinforcing the message. This is a show of confidence in the medium-term prospects for the market as a whole.
Valuation is intrinsically linked to confidence. This can causes bubbles (think dotcoms when investors were confident a new world was emerging) and crashes (think customers queuing outside banks to withdraw their money) at the extreme ends of the spectrum, but if more deals are completing, that will build confidence and encourage other acquirers to feel the time is right. More active buyers will equate to an uplift of valuations and I expect to see that manifest itself in 2014.
We have a peculiar set of circumstances today. Owners recognise that the next couple of years are generally expected to be positive, so profit levels and valuation multiples are likely to increase.
It would seem logical, therefore, that owners will wait before selling. However, I believe that, after such a long period of not being able to realise a respectable value for businesses, there are a lot of tired owners who planned to sell a few years ago and are now quite prepared to accept a reasonable price for their business. This makes it a good time for buyers to acquire assets at attractive values, given the outlook.
An increase in deal volumes is also likely to herald a welcome acceleration in the pace at which deals are done, simply because there will be another buyer waiting in the wings if the preferred bidder for a business starts dragging their heels. Advisors will also become busier, so will want to close one deal and move on to the next one.
Sectors in which we have seen strong recent performance include IT, digital, energy, engineering and some areas of infrastructure. This is not an exhaustive list and within any sector there will be both strugglers and stars.
So, whichever sector you are in, if you are thinking of selling you can expect interest from potential buyers in 2014 and if you are acquisitive, there will be businesses to evaluate in 2014 which should represent good value if you take a medium-term view.
