How can you assess an employment agency or an executive recruitment firm?
A lot of recruitment agency owners worry about the valuation of their business. How much will a buyer be willing to pay and where do they stand in the market. There is never a simpler answer to this complex question.
Here are some vital industry statistics to consider:
Classified under SIC 7361, there are over 36,000 employment agencies of all types and sizes in the US alone. The industry as a whole generates a very impressive $29.9 billion in annual revenues and employs some 448,000.
Yet an average staffing firm is small: with annual gross revenues of around $1,000,000 and a staff of 13. The vast majority of recruitment companies are privately owned.
Valuation methods
Successful staffing firms with consistent history of above average profitability and steady earnings growth are highly desirable acquisition targets. Recent sales of such companies give you an objective market evidence to estimate your company’s worth.
The usual tools are valuation multiples that relate the actual business selling prices to their financial performance.
Typical valuation multiples used for market-based recruitment company valuations are:
- Business enterprise value to gross revenues or net sales.
- Enterprise value to net income, EBIT and EBITDA.
- Business value to total assets and owners’ equity.
Since the business valuation multiples are derived from similar employment agency sales, your business value estimates can be calculated as a range, from low to high, or a single value such as the median or average.
Example – valuation of an employment agency using multiples
To illustrate how comparable business sales can be used to value a staffing firm, let’s consider a typical business with these financial parameters:
- Annual gross sales: $1,000,000.
- Net income: $45,000.
- EBITDA: $62,350.
- Total business assets: $112,550.
- Owners’ equity: $55,200.
To estimate the firm’s fair market value, we pick a set of reasonable valuation multiples and calculate the results as follows:
| Multiple | Multiple value | Business value |
| Business value based on gross revenue | 0.45 | $450,000 |
| Value based on net income | 12 | $540,000 |
| Value based on EBITDA | 6.75 | $420,863 |
| Value based on total assets | 5.5 | $619,025 |
| Value based on owners’ equity | 10 | $552,000 |
| Average Business Value | $516,378 | |
Calculating the goodwill of a recruitment firm
Established professional business services firms, including employment agencies, can create considerable business goodwill. Often, the value of goodwill exceeds the appraised values of the business tangible assets. Consider using the classical Capitalized Excess Earnings method to calculate the value of business goodwill and total business value.
This serves to complement your market-based business valuation and provide additional insights into the value-creating factors in your company.
Income-based valuation of recruitment companies
For smaller owner-operator managed firms, the Earnings valuation method is an excellent choice. You can calculate your business value as a multiple of its earnings and account for a number of key financial and operational performance factors.
For larger staffing businesses looking for outside financing or anticipating substantial changes in earnings going forward, the Discounted Cash Flow method is the preferred technique. Consider using a number of scenarios in your business valuation such as the best case, worst case and base case outcomes.
Each should be associated with different earnings forecast and risk assessment. The business valuation results you get can be averaged or used to establish a value range. Both formats are acceptable for formal business appraisal reporting.
Conclusion
However, valuing a recruitment business is not all about hard financial calculations. Each business has its own way of operating and could have a unique business model. Owners need to be aware enough to identify niche factors and understand the value to different acquirers accordingly. And of course, deal structure can impact valuations as the vendor and the acquirer trade risk for value.
