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Building for an exit strategy

LAUNCHING A RECRUITMENT BUSINESS will be seen by many as a risky venture, but launching one in the depths of a recession – and aiming to build it for a medium-term exit – was seen by some as an impossibility. And yet that’s what my CEO and MD embarked on with Twenty Recruitment, after exiting their previous company in 2007 in a £17.5m management buy-out.

Life’s short and everyone wants that return as soon as possible, but growth can kill. Therefore, one of my priorities was to bring a disciplined approach to financial management and to ensure a tight handle on cash flow. It was important to know when the cash would run out as the founders wanted the company to stand on its own as quickly as possible, although it had funding initially.

This means not only having a business that is established and scalable but also has further value to add. The founders knew from first-hand experience how different it feels when you have an equity stake in the business you are running and wanted to recreate that feeling. It’s important from an exit point of view to demonstrate the retention of key personnel, so we developed an incentive scheme. Each group of employees has their share class and options in it, so there is a relationship between the profit they generate and the percentage they own.

It was important for us to talk to advisors early on which gave the organisation an independent critique on the overall strategy. I have found that if you keep in touch, the advisors can be clear to any potential suitors about your value proposition as they’re involved throughout.

Obviously, one of the major advantages of the experience of the CEO and MD is being able to work back from the exit point and know what the finished picture should look like. That brings me to another key element of my role: ensuring it is easy for potential buyers to understand that information. I need to be clear, with an understanding not only of what management information we need but also how to produce and use it consistently, so we have valid records when the time is right. That management information will become the basis of our valuation, so our valuation model using KPI forecasts can be backed up with proven ratios, rather than ‘gut feel’ projections.

Once we defined the information and used it to create targets, it was about building a track record of delivering them. This involved a five-year plan with annual budgets as well as the ability to react to market fluctuations and stay on forecast. The original plan was for £5m-plus profits after five years and, on our current trajectory, we are on target. Then, there will be a trade sale, private equity acquisition or listing. My job is now based on keeping us on track.

As we get closer, my job is also to ensure we don’t damage the value we have created.

I need to be constantly wary of anything high-risk that could put buyers off or make them lower their valuation by keeping a handle on compliance. From my perspective, this means clean audit opinions, no outstanding HMRC issues and nothing ‘exotic’ tax-wise.

It’s also my responsibility to deliver the information we will need. For example, I’ll need to back it up with signed contracts as well as having the information to demonstrate solid forward revenues. I have known a deal to be at risk at the eleventh hour because no one could find the lease to the office premises.

Last but not least, I have ensured I have a first-class back-office team so when the time comes and my focus is on the deal, my team has the right processes in place to keep the cash coming in and KPIs on target. We are in year three of a five/six-year journey- we’re profitable, we’ve opened a US office, and we’re on target to be one of the fastest-growing companies in the UK this year. It’s a pretty exciting place to be. ?

Greg Cook is CFO of Twenty Recruitment Group

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