Business valuation of employment agencies and executive recruiters

Are you appraising an employment agency or an executive recruitment firm? 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.

Business valuation methods for employment agencies

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:

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 Multiple of Discretionary Earnings valuation method is an excellent choice. You can calculate your business value as a multple 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 a different earnings forecast and risk assessment. The business valuation results you get can be be averaged or used to establish a value range. Both formats are acceptable for formal business appraisal reporting.

Want to find out more about recruitment agency valuation?

A look at the valuation methods the professional appraisers use to value a business.

Valuation multiples and business enterprise value

If you are looking for a reliable source of valuation multiples to estimate your business fair market value consider the free resources readily available to you.

One of the most reliable sources of valuation multiples are regulatory filings made by public firms involved in mergers and acquisitions of private companies.

In the US all public companies are required to file statements disclosing material changes in the company’s ownership with the Securities and Exchange Commission (SEC). Shareholders of such firms have a legal right to know the key facts about such mergers and acquisitions, and especially how it affects the value of their stock holdings.

To meet this requirement, the filing public company needs to perform the valuation of the merged and acquired firm. This is then used as the basis to determine the per share cash value of the stock to be cancelled or an exchange ratio calculated to roll over the existing shareholders into the surviving firm’s stock.

To ensure that the business value is determined in a consistent and verifiable manner, public companies report their valuation results on the so-called enterprise value basis. This includes the market value of the acquired company’s equity plus debt capital, less cash and cash equivalent liquid assets.

Once you know the reported enterprise values and financials of similar private companies, you can easily calculate a number of key valuation multiples to use for your own firm’s value estimation:

• Enterprise value to business gross revenues or net sales.
• Enterprise value to EBITDA, net income or free cash flow.
• Enterprise value to business total assets.

Since all merger and acquisition filings are subject to the SEC scrutiny, you have the solid assurance of consistency and accuracy of the comparable business sales reporting. The result is a highly defensible and accurate basis to estimate your business value.

Note that the enterprise value-based valuation multiples are very useful to establish the value of similar private firms. This is because the underlying transactions resemble the typical private business acquisition scenarios:

• They involve transfers of controlling ownership interests.
• The discount for lack of marketability is accounted for if the acquired firms are private, as they often are.
• Financial statements are adjusted to bring them in compliance with the GAAP accounting standards.
• The business enterprise value is what private business buyers get in a transaction structured as a typical asset purchase.