How are recruitment agencies valued?

The most frequent starting point for putting a value on a company is to multiply the annual profits (known as ‘ EBITDA ’) by a fixed multiple in order to reach a price, often referred to as ‘enterprise value’.

‘EBITDA’ is an acronym that stands for ‘ earnings before interest, tax, depreciation and amortisation’ .

While it sounds (and can be) confusing, EBITDA is a way for investors to determine a ‘sustainable’ profit figure for price calculations, taking a variety of temporary or situation-specific factors out of the equation to leave a realistic estimate of the company’s core financial performance.

Using this approach helps a new potential buyer understand how much profit the business can be expected to generate once they take over (assuming no significant changes), and therefore how long it would take them to see a return on the investment they make by buying the business.

While there are plenty of standard methods for calculating EBITDA, there is no one fixed approach. 

Typically, buyer and seller will agree on a basis for calculation before getting too far down the road in discussions, ensuring there is basic alignment from the outset regarding the methodology used to gauge business profitability.

With an EBITDA calculation agreed, attention turns to how much a buyer is willing to pay.

Using a multiple of EBITDA to determine price has some simple logic – the higher the multiple, the longer the investment made by the buyer is at risk.

Commanding a high multiple when selling an agency typically means that there is strong demand for the business, and consequently buyers are prepared to take an increased risk to close the deal.

There are lots of ‘value drivers’ that can boost how much an agency is worth, which include things like:

When it comes to determining ‘enterprise value’ (or EV) – the price of an agency – everything hinges on who is looking to buy the company and why .

Ultimately, a buyer is rarely buying a stand-alone business – they’re investing in what that business will produce once they have taken ownership and control.

This can mean many different things for different people.

A large IT recruitment agency in London may not see much value in buying a smaller competitor in Brighton, whilst a manufacturing recruitment agency in Leeds keen to break into the IT market may see it as the ideal opportunity.

In M&A circles, this ‘fit’ between buyer and seller is often called synergy , and refers to the way two businesses can come together to produce something new – and hopefully more valuable.

There are hundreds of examples of potential synergies, from geography (an overseas buyer entering a new country market) to client alignment (a buyer and seller with complimentary customer lists combining to increase market share).

Naturally, the price offered for any agency for sale is the primary factor to be assessed by the founder(s) and shareholder(s).

But along with price, the structure of any potential offer to buy the company is also important.

Business acquisitions can take many forms and are seldom a case of simply ‘paying the asking price’.

Instead, buyers will offer varying amounts of cash ‘up front’ – sometimes 100%, if they’re extremely keen, but more often making segments of the purchase price dependent on future performance once the business changes hands.

Buyers may also have requirements that key personnel (including owners) remain with the business for a fixed ‘handover’ period, ensuring that the integration of the acquisition goes smoothly.

So, for business owners comparing competing offers, it often comes down to balancing the highest overall price with the securest deal structure – the sale option that delivers the biggest return as safely as possible without pinning too much on uncertainties or locking the founder in to ongoing commitments.