Proceed with care

Of all the industries that we advise, the recruitment industry is one that we're becoming increasingly involved in. The disciplines our clients are calling for within this sector span the entire spectrum of everything that MCR offers today, from refinancing or working capital funding right through to pre-lending reviews, debt recovery, sales ledger outsourcing, restructuring advice and support to firms seeking to grow via M&A activity.

And it's no wonder, recruitment is definitely not for the faint hearted - it operates at a very fast pace and comprises enormous diversity in type and size of business operating within it. It's busy, competitive and sales-driven, and
change is constant. Combine this with a myriad of complexities and challenges, not least of all a busy mergers and acquisitions marketplace, and it's not surprising that these can prove too overwhelming for some.

Historically, recruitment has been considered a reasonably safe bet with the ABL market - it's generally time sheet driven, often weekly, so all music to the ears for lenders requiring evidence of income, and track record against concern for minimising their risk position.

Further, recruitment is an acknowledged haven for financed companies as its unique cashflow position, e.g. need to pay workers weekly, but paid at least monthly themselves, working capital requirements and weekly accumulation of revenue debts, makes it ideal for these types of lending facilities.

But this doesn't always mean that it's plain sailing - we wouldn't be getting involved in a growing number of recruitment-based assignments if that was the case.

So, why is this? Well, whilst commonplace across all industries, poor management is particularly prolific in recruitment and is usually the main reason why companies fail. And, within a busy merger and acquisition market, that is also continuing to consolidate, it's easy to see why keeping tight operational and financial controls can be daunting and challenging for even the most experienced manager, never mind the novice, or simply inept. This is particularly apparent in smaller companies, and there are many small or one-man band recruitment firms. Remember, anyone can set up a recruitment firm regardless of experience or knowledge. You don't need any special qualifications, whether management or industry, and are unlikely therefore to understand what the pitfalls may be.

The overall impact of poor management is the same - it brings companies into crisis. It creates lack of direction for the business, lack of a growth strategy, inability to read or understand any of a number of warning signs that could indicate trouble ahead for the lender.

If you add consolidation to the mix, then things stand to get more complex. Many firms are looking to buy up the competition rather than endure it any longer, and growth is generally best achieved by acquisition - growing organically is less viable. Remember, recruitment is an industry, like any other, whose futures are determined largely by the old rules of supply and demand - over supply erodes margins and makes running a successful business more challenging than ever.

Some businesses may be looking to sell for exit, where there is no clear succession plan for instance. Whilst a common reason why many businesses sell, in recruitment this type of deal needs to be viewed carefully by any funder. A business that has been planning an exit carefully will present the best possible position to a seller, with maximum profits highlighted, but this doesn't necessarily mean that all is well.

Too often we're being called in, just months after such a sell, to advise over emcumbered management teams on how best the recruitment sector should proceed with care, www.business-money.com . Business Money- August 2007, 55 Industry View to manage the new business going forward. And let this be a warning sign to lenders, especially to the ABL community which is an increasingly popular source of funding for these types of purchases. The biggest killer to these types of new businesses is their inability to service funding levels or Crown debt. By looking too much at "best case" scenarios and upbeat projections rather than the hard facts presented by historical data, and by rigorous due diligence procedures, lenders can find themselves at considerable risk.

Recruitment businesses looking to acquire, or indeed sell, should only do so when armed with the right professional advice. In this way, they will inherently present themselves as a good risk to lenders. And, will put themselves in the best position moving forward, armed with the right finance and business plan in place, not just for the short term but more vitally in the longer term and demonstrating clear plans for repaying debt.

On restructuring and insolvency transactions, our experience indicates that there is no shortage of third party buyers at good prices which provides more comfort to lenders in distressed situations.

Running and managing a recruitment business has never been easy and, in today's ever changing economic climate where internal and external factors can govern and control the future of entire companies, survival has never been more challenging. But, it shows every sign of continuing to be one of the ABL market's major source of revenue and therefore justifies some special attention moving forward in order that it may continue to be so.