Selling your business has never, and never will be, an easy process. Every industry has its challenges when it comes to M&A and the recruitment industry is no different.

Although it shares many of the common challenges faced across the board – in particular the squeeze on valuations and valuation mismatches between owners and buyers – there are some factors that remain the sole preserve of the recruitment industry.

Having an early understanding of these – sometimes unique - challenges is integral to delivering the best possible value in any sale as it provides you with time in which to mitigate and dismantle the various barriers they erect.

Here we take a look some of the challenges faced by those in the recruitment industry when it comes to selling a business, along with some pointers on how to overcome them:

1) Reliance on people

Despite advancements in tech and AI, recruitment remains, and will always remain, a people-focused industry. Although AI can assist matching through candidate and role sourcing, it cannot replace the need for that ‘Human touch’. While this sparks opportunities for entrepreneurs, it also creates the biggest barrier to M&A. From a buyer’s perspective, they are often unwilling to splash out cash on a business whose prized assets could walk out the door on day one.

If individuals have been secured with long-term contracts then this can create long earn out periods that can be enough of a value drag for a buyer to pull the plug on the deal entirely. Locking your best consultants is imperative to maximising value, but this doesn’t mean signing them up to restrictive, locked down contracts – give them reasons to stick around through generous commission schemes and a rewarding company culture.

2) Integration clash

Merging two businesses can be a complex and challenging process, and this challenge is only heightened when people businesses are involved. Employees working within recruitment agencies tend to be comfortable working within their parent company’s culture and trying to change that is often met with a backlash. This can then combine with point 1 and be a trigger for consultants to leave. Making clear that you have an integration plan is important to a buyer and it will give them comfort that culture clashes can be avoided.

3) The rise of tech and AI

The well publicised rise of tech and AI in recent months and years is changing the way the recruitment industry works. Whilst people are still integral, adoption of tech and AI is becoming increasingly important to increase the efficiency of the process. Not riding the AI wave and being left behind is a drag on your business as any potential buyer will see non-adoption as a sign your business could be left behind.

4) Talent shortages

Whilst the rise of remote working and job switching has positively impacted the industry, increasing repeat business and opening up a wider candidate pool, some areas of the recruitment industry are facing a talent shortage. The industries that have been hardest hit by talent shortages are the blue collar industries and this is mainly due to the unavailability of workers since Brexit. If there are talent shortages in an industry, it counteracts any plethora of available jobs and can cause buyers and investors to switch focus away from that industry.

Constant analysis of the industry you operate in is therefore essential to identify any potential talent shortages. Meanwhile, a strategy to counteract this could be to diversify your offering to spread the shortage risk.

Oliver Roper is an Assistant Manager - M&A at Shaw & Co

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