We were engaged to assess the value of a small recruitment business to assist in the potential sale of the business.
What was evident from the outset of this investigation was the co-operation and excellent documentation on the financial position of the business. Experience suggests that the market is prepared to pay slightly higher figures for businesses that have maintained and have readily available financial records.
It was evident from our discussion with Business Brokers who have sold businesses in this industry that it is currently a difficult market and that many of the sales have been a result of a strategic purchase by another recruitment or labour hire firm. It was also noted that many of the smaller recruitment firms, like the subject business, were sold with some form of Earn Out clause in the contract. This Earn Out clause would be to help ensure that as much goodwill is passed on to the new owner/s of the business. Therefore it was assumed that a hypothetical sale of this subject business would involve an Earn Out clause of some form.
A majority of the Business Brokers commented that many of the businesses for sale in this industry were on the market for extended periods, and in some cases the businesses on the market declined in financial performance. This is an important note, comparing the subject business with similar businesses on the market today would suggest a lower opinion of value for this business. It was concluded that many of the businesses on the market at the moment have been on the market for extended periods and that prices had been reduced to both encourage a potential buyer and reflects a decline in the business whilst on market.
We were able to source some comparable sales most of which were of larger firms. Data from these sales presented evidence on assessing the business on a multiple of PEBITDA. Therefore it was concluded that this would be the best option to assess the business.
Ideally one of the comparable sales had a business sale that had very similar, yet slightly lower, financial results. Using the comparable multiples as a guide, a risk/return assessment and calculation was used to arrive at a multiple. This produced a multiple that whilst higher than the range suggested in the comparable sales, it was felt that this was not unreasonable and therefore was adopted.
The task to arrive at maintainable Future Earnings was a little more difficult due to the nature of the industry and fluctuating earnings. Ultimately it was decided that the market would most likely discount the 2016 interim results (even when annualised and normalised) as it was not a completed financial year. However, what the interim 2016 financials do provide is evidence that historical earnings are maintainable. The calculation to arrive at a maintainable PEBITDA was an average of the last three years.
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