Top 10 tips for buying a recruitment business

The recruitment sector is moving from strength to strength as confidence in the economy rallies and unemployment continues to fall year on year.

A greater demand for temporary and full time workers has made the prospect of owning a recruitment business (or increasing existing market share) far more appealing to the savvy investor.

These top 10 tips can guide you through the minefield of owning or taking over a new recruitment business.

1. Staff and consultancy contracts: a recruitment business relies on the quality of its staff and contacts. It is vital that contracts of employment and consultancy agreements are scrutinised to ensure that a target’s personnel cannot simply walk away with clients and staff to set up on their own.
2. Standard terms of business: the target’s standard terms of business will protect the value of the business after it is purchased. If they are in poor shape, clients may simply be able to terminate existing deals or engage temporary workers without additional charge. Any such agreements must be reviewed to ensure that the value of the business does not simply evaporate after purchase.
3. Preventing the seller competing after sale: recruitment is a relationships business and it is all too easy for a seller to set up shop and take the clients with whom they have a good rapport with them. It is therefore vital that the purchase agreement imposes well structured restrictions to prevent direct competition after sale.
4. Whether the business’ operations are legally compliant: sector specific recruitment businesses must carefully consider the rules and regulations which are applicable to particular industries (such as healthcare). The business’ terms and conditions must also deal carefully with the notoriously challenging rights and duties which are acquired by temporary workers. If the previous owners have not dealt correctly with such issues, a business’ agreement may be challenged, penalties incurred or employment claims brought.
5. Premises: if the target’s location is critical to its profitability, it will be essential to acquire its existing premises. If the business does not own its premises, the terms of any existing lease will need to be examined with care. If there is only a short time left on the lease, it may be sensible to require the Seller to obtain an extension before purchase. It should be ensured that there are no defects in the title or incorrect planning permission attaching to any property owned by the target. A full set of title searches should be undertaken as part of the pre-sale review.
6. Change of control clauses: beware of potentially onerous or unwanted provisions in the target’s contracts which are triggered if the business is purchased by another party.  An obvious example would be a change of control clause, i.e. a clause stating that if control of the target changes (such as on a business purchase) the other party has the right to terminate.  If a contract is key to the operation of the business and contains such a clause, written waivers from key clients will be necessary to protect the value of the investment.
7. Undisclosed liabilities and warranties: if shares are being purchased rather than just the business’ assets, the purchaser will take on all of the company’s existing liabilities. Unpaid bills, tax liabilities, legal actions and employment disputes all may be passed to the unwary investor. A thorough due diligence review of the targets existing operations is always strongly advised to find out the real value of the target and to unearth hidden liabilities. The share purchase agreement should then be drafted thoroughly to ensure there are protections against hidden liabilities which have not been disclosed.
8. Intellectual property issues: it is prudent to consider whether the company has a logo or distinctive brand that needs to be protected. Where inventors, designers or external developers have contributed to a concept or design it is imperative to check that the target has acquired formal assignments of all intellectual property which it claims to own. It is also good practice to establish whether there are any potential third party infringements to avoid unnecessary expenditure and uncertainty in establishing IP rights post completion.
9. Company registers: a company is required to maintain a set of up to date company registers at its registered office. Whilst it is an offence not to have company registers many companies neglect to do so. It is therefore important to ensure that the target has complied with this obligation and, if it has not, it should be made a condition of purchase that a set of registers be reconstituted prior to completion.
10. Heads of terms: once the initial investigation by the Buyer is complete, it will be in a position to make an offer for the company. It is not essential, but is advisable, for a heads of terms to be prepared setting out the outline terms of the deal. This should include the key elements of the transaction such as the price, any liabilities or service contracts going forward, any conditions and a timetable. Confidentiality can be agreed between the parties, and if necessary a period of exclusivity reserved to the Buyer so that it may undertake its due diligence and finalise the transaction documents. It is advisable that you ask a solicitor to review any Heads of Terms prior to any signed agreement to ensure the terms are only expressed as binding where absolutely necessary.

Debenhams Ottaway is an REC legal business partner. They have expertise in buying and selling recruitment businesses and advise recruitment agencies of all shapes and sizes across the UK.