Staffing M&A Series

SThree never made a single acquisition, but built ten distinct brands organically within the company and approached that internal growth as a third-party investor might.

“We weren’t philosophically against acquisitions, but we preferred to back individuals from inside the company and conducted a similar due-diligence process that an external investor would.”

“I always had multiple potential acquisitions being pitched to me every week but 95% of them wouldn’t pass a basic commercial health check. There are an awful lot of very mediocre businesses aspiring to be bought”

“It was never our initial motivation or explicit intention to build a business for sale. If your sole ambition is anchored to that idea then paradoxically you’re unlikely to deliver on it. But if you concentrate on building a great business, then there will always people interested in buying it”

“The percentage of businesses that are actually sold is tiny in comparison to the numbers of business owners that aspire to sell. Most owners are better off acknowledging this and enjoying the considerable perks of a successful lifestyle business rather than preparing for a sale that in all likelihood will never happen.”

Have the information when and where you need it

“What’s intuitive isn’t necessarily right and what’s right isn’t necessarily intuitive. Any claims you make for  business performance have to be able to hold water when investors and buyers scrutinise them. They’re going to ask a lot of questions and you’re going to want that information to support your answers when you need it.”

“It’s a peculiarity of the recruitment industry that so many successful businesses still run with deep-seated operational inefficiencies, invisible/undocumented processes, and a distinct lack of reporting.”

Ask yourself if you know in detail which activities add value & drive growth and which don’t? Can you use that insight to create a robust, scaleable & replicable business model? Is the understanding of what best-practice looks like in your business based on facts or just habit? 

If your success is dependent on a handful of top performers, a significant project, or a small pool of major clients, then your business is running risks  that will become apparent during any due diligence process.

“Fact-based decision making is not just about positioning your business for a sale. Every company  should have the information and insights into business performance to make better decisions on how to run it even if a future exit is never likely.”

How secure is your value and how do you prove that

Investors are going to run through the initial checklist on financials, business propositions, rates, systems, operating costs, and forecasts.

“Once you’ve passed that stage, be more than another “me too” business, there has to be a differentiator that sets you beyond the pack.”

“Investors are going to dig into how specialised, futureproofed and potentially globally viable your total addressable market is and how easy it would be for you to replicate successful expansion. They want to see the reality of execution, but also evidence that you understand what has made you successful to date so that you can continue that success going forward.”

“SThree repeated what we knew well. It was a case of variations on a theme. High margin niche specialisms was our focus, we found a system for landing and expanding in new markets and stuck to that.”

“Having a  system that allows you to know your numbers and identify operational efficiencies is essential to make your business sale-ready.”

“There are lots of potentially important KPIs that have a role in driving profit but the single most important metric is the spread of NFI within your business, not just  the crude average NFI per consultant – it’s the distribution of performance. The mode is as important as  the mean. There has to be a healthy spread that’s not concentrated on small pockets of elite performers or irregular situations.

You can use data to reverse-engineer what your top performers do differently/better and signpost that for lesser performers so they can improve. That both de-risks the business & drives superior profitability    and consequently your business is a lot more attractive. It has to be bigger than a collection of individuals to be scalable over time. 

 “That’s what investors want to see, they want to know you have a formula, a modus operandi.”

Will it survive the acquisition

“Ultimately, you’re buying a people business where  the assets go home at night. Any exodus of talent will take their value and revenue with them. Any investor has to be  confident that leadership flight is not going to be a major issue.”

The mitigation could be equity or other financial incentives that encourage retention, but the best mitigation is tiers of reliable management armed with the processes and systems to capture, codify, and breed performance. 

Systems and processes are the foundations.. “Going from one hundred heads to two hundred heads, or four locations to eight, isn’t twice as difficult, it’s exponentially more so. Complexity in a business does not increase in a linear way.” 

“At SThree, we built our own systems in-house to manage the increasing levels of complexity. Now there is a whole Rec-Tech ecosystem available. If I was doing it again now, I’d use best-in-class systems from specialist players rather than look to build your own, but the solutions you buy must be customisable for your specific needs. 

Churn is the most overlooked metric in recruitment

“Landing in a business tomorrow, the first thing I’d do is fully audit the end-to-end process to identify what’s creating value and what’s not. 

“I want to know how we make the machine replicable and therefore scalable and what systems and tech are going to help enable that operation and which aren’t. The most overlooked metric for me is churn.”

Companies with lower levels of staff churn are simply better companies. Within a company, the best teams are invariably the ones with the lower churn and the underperforming teams will almost certainly have retention issues. 

“There’s a fatalism in the recruitment industry that churn is an unavoidable corollary of working in pressured conditions, but it’s a lazy attitude because the right management interventions can have a massive impact on churn. If it was simply a reflection of the industry then churn levels wouldn’t vary much within or between companies, but we know they do

Churn is a catchall indicator for lots of things, positive and negative. As such, it’s a measurable indicator of how well a manager manages. If Churn isn’t a KPI that has some bearing on calculating  a manager’s bonus then it should be. It reveals things  that would be otherwise hard to put your finger on. Better managers have better churn. That’s a simple fact. 

“You have to ask what’s sustainable and what’s scalable, and for us, reducing churn was a good metaphor for running a better business.”

About Russell Clement

Russell joined three people in a single office and spent almost three decades helping shape that company into what is now the SThree Group. A FTSE listed  business with a market capitalisation of over £500m and one of the top 20 global staffing brands. During his tenure, the Group scaled to over 2,200 staff, in 64 offices, across 18 countries. Russell became CEO in 2004 and led the Group’s flotation on the LSE. Since retiring in 2012, he has been NED to a number of high-growth agencies and a private investor/NED Chairman in several recruitment tech businesses.