Whilst profitability is extremely important, it's only one component of value. To create real equity value a business must have some key characteristics:
Strong management team
When investors look at a business, they're looking for a solid management team, a slick and well-run operation, organised and efficient operations and back-office functions, and most importantly, a business that can clearly demonstrate scale.
Boutique businesses rarely attract value. A business that attracts a good market multiple needs to be achieving in excess of £1M EBIT, with a clear plan for growth through its market strategy, customer penetration, and international footprint.
Small businesses often lack brand awareness and an effective marketing strategy. A strong brand is essential for creating value as it enables clients to quickly compare a business to its competitors.
Leadership development culture
Internal employee development is critical for value creation. Employees must be invested in and mentored to succeed.
A combination of both contract and permanent recruitment is essential to attract a higher multiple. Generally a 65% contract and 35% permanent split is the ideal to create fair value.
Stock option scheme
Investors generally like to see key management (between 3-4 people) incentivised through either equity or options to protect existing and future revenues of the business.
Managing cash flow
Good cash flow is critical when attracting investment; investors typically are looking for average debtor days to be around 30 days.
Often, small businesses are sales-led and don't focus enough on corporate governance and high-quality MI, which enables management to make informed decisions on the business.
National and international reach
A good quality business is one where the customer base has a good geographical reach. Investors typically look for businesses capable of expanding both nationally and internationally.
Fees balanced across consultants and clients
Quite often, businesses find themselves in the 80/20 rule, where 80% of the revenue comes from 20% of the workforce. In order to build real value, management needs to ensure monthly revenue isn't over-reliant on only a handful of consultants or clients.
Recruitment Entrepreneur has a proven track record of creating value to mitigate these risks and has the knowledge and expertise to build businesses that can maximise future value.