Become financially independent in 5 steps (without selling up)

Did you know that according to research done by corporate financiers Rycroft Glenton, only 0.2% of recruitment companies are ever exited in a trade sale?

Even if their research was 1000% inaccurate, that’s still only 2% - not great odds if you’re relying on a sale to fill your retirement fund.

There are several reasons for this, but the main one is most recruitment firms aren’t attractive to potential buyers.

Whilst you can sell anything, if the price is right, the big bucks come for those recruitment firms that have specific attributes. Here are a sample: -

1.      Regularly delivering an EBITDA of more than £1m.

2.      A track record of continual growth

3.      A varied client estate without dependence on a few key clients.

4.      A great management team.

5.      The success of the business does not overly depend upon named individuals

6.      A system to win high-value new clients (not a person).

You may not be able to match those high-value attributes, or you may not want to make the sacrifices necessary to achieve them, even if you can.

So, does that mean you’ll never reach your goal of financial independence?

Far from it, there’s an alternative way to extract value from your business and it’s called a Cash-Cow-Lifestyle model. Let me explain all about it.

What is a Cash-Cow-Lifestyle Recruitment Business?

Put simply; it’s a company designed to maximise profits without undue stress and sacrifice required to run it.

This means you can have plenty of money and time to live a good life whilst having enough extra money to draw out and invest each year to build your retirement fund. All in a relatively short period of time.

Delivering those results means growing the business to the size that generates the profit you need. Then you slow down growth significantly, instead directing your efforts towards maximising efficiencies.

The effect of this on your bottom line is astounding.

I’m often asked if building a Cash-Cow-Lifestyle company means you can’t grow and sell.

The answer is no, it doesn’t mean that.

In fact the opposite is true. A Cash-Cow-Lifestyle business is a significant first step to building a Scale-4-Sale business.

Step 1: How much is enough?

The first step is understanding what profit your business should deliver to give you the life you want and leave you enough to draw out and invest in your retirement fund.

The first part of this is easy. Think of all the material things you need each year and put a price on them: mortgage for your dream house, living expenses, nice cars, holidays, school fees, clothes, eating out etc. Then add 10%.

The second part is not so easy and requires the skill of a wealth manager who can run a lifetime cash flow for you. This will include all future expenditure until you die.

I’ve been having mine done every year since 1995 and have found it invaluable.

This gives you the value your fund needs to be so you can retire at your chosen age and live the life you want. It’s then relatively simple to reverse engineer that number into one which tells you how much you’ll need to invest each year to build that fund in the time you have.

Now you know the figure that your company needs to deliver for you to live a great life and allow you to retire in style at the age you have chosen.

Step 2: get the basics in place.

When you start your business, your focus should be to get the foundations in place.

Settle on your IT stack; define processes; create a decent client estate; build a small team around you; save some cash in the bank, make a profit and develop a reputation clients and candidates value.

Towards the end of this time, you can define your key drivers: -

·        Mission – the BIG goal the whole company is focused on

·        Vision – what it’s like to be a stakeholder of your business

·        Values – the rules of operation everybody must obey

·        Goals – what you want to achieve in the next financial period, usually a year.

A bit like a new house that you need to live in for a while before renovating it, it’s best to run a company for a couple of years before deciding on your key drivers.

From a standing start all this can take up to three years but at the end of it you have a viable and stable business.

However, the business is probably still heavily dependent upon you and it would break if you grew much bigger. This happened to me and not only did I have a mini-nervous breakdown, but my company ground to a halt.

Which takes us onto the third step.

Step 3: profit, safety and an easier life for you.

This is where you take what you have and make it super-efficient, highly profitable, and scalable.

The first thing you will need is metrics

Profit Per Person

The first metric I encourage everybody to measure, from day one, is the profit per person.

It’s very common for percentage profit to drop as a recruitment company grows. Often the more rapid the growth, the more rapid the drop.

One of my clients told me a company he’d worked at made the same net profit with 100 employees as it did when they had just 36. Imagine all that headache of management for no extra money at the end!

Profit per person is easily calculated. Simply divide the monthly net profit by the number of people in the company. With this metric you can detect whether you are becoming less profitable as you increase headcount.

Quality Metrics

The second set of metrics I recommend revolve around quality

Another negative side effect of hiring a lot of people in a short space of time is that your service levels can drop and clients become dissatisfied with the level of service they are getting.

They may start using other suppliers more or even in extreme cases, throw you off the PSL.

To protect against this, you need a combination of internal efficiency metrics (KPIs) and external client satisfaction (VotC) feedback. With those in place you should see the downturn long before it has a calamitous impact and pull service levels back up to where they belong.

Let's start with some Efficiency KPIs.

Efficiency

Now we need to look to make the team efficient.

This, once again, will involve metrics.  Specifically, metrics that indicate efficiency, because improving everyone’s performance is impossible without knowing where their weaknesses and strengths are.

Having run the business for some time by this point you should be able to recognise what excellent performance looks like in terms of:

·        revenue earned

·        percentage vacancies turned into revenue

·        CV submission to interview to offer to placement ratios and so on.

These all need to go into a performance dashboard which is monitored monthly at three levels; per person; per team; the whole company.

Just a tip , you’ll want to build a series of dashboards that contain all the company’s key metrics, not just efficiency. With that you can, in theory, manage the business from a beach in Acapulco.

Your objective is to bring each of your team to be at least 80% of maximum efficiency through a combination of training and coaching. Those who cannot achieve this may need to be let go.

Securing your team

Depending on the nature of your team at this point, you may decide to lock in your key people with a share option scheme. I did this in both of my businesses – the first paid the staff £3m and the second about £1m.

It was worth every penny.

Whenever you lose somebody, even in a Factory model (much more preferable than a 360 based model), a chunk of your revenue goes out the door. The less staff-churn you have, the more profit you’ll make and the less you will be pulled back and down into the business to fill in for senior team members.

Secure your Freedom

Finally, you must identify and remove or reduce any key dependencies in the business. If any part of the business depends upon the experience, skills, network, or knowledge of specific individuals (including you), it should be identified and resolved.

To be scalable, a business should have no aspects of its success dependent upon any named individual.

It can take up to four years to achieve the above changes, but when completed, you’ll have a scalable business that does not depend upon you, or anybody else, for its success. As it grows, it maintains its service levels and profitability.

Easy, profitable, and safe – does it get any better?

Step 4: financial independence

Step 3 should take four years or so to complete, meaning your business will be seven years old.

Throughout these seven years, the business continues growing. At some point it will have begun generating the profit number you need. The one that lets you live a great life and still have enough to draw out and invest in your retirement fund.

When you reach this milestone, you have a choice:

grow very slowly (a net increase of one employee a year) or ramp it up.

It’s not an easy choice.

Having grown a business from zero to £40m in a decade, I can tell you that the faster you grow, the more sacrifices you’ll need to make. It’s a simple equation.

More employees + more clients = more stress

With that stress comes demands on your time which can lead you into neglecting your family and perhaps even your health.

The question is: is the price worth it? Only you can answer this.

The good news is you can have your cake and eat it.

These stresses are all but wiped out if you grow slowly and keep your core team together.

When making your choice, you should keep in mind that every year you are drawing out spare cash and investing it into your retirement fund. 

You will reach your magic number at some point. Meaning your investment pot is large enough that you can retire or take a back seat. Reaching this stage should take, roughly, another 8 years.

Job done! Now it’s time to consider your exit.

Step 5: the exit

I exited both my companies in a trade sale. The first for £24m to an American company and the second for £15m to a UK company. Most people aren’t that lucky, but you don’t need to be.

There are two points to note before we get into this. If you have followed steps 1 - 4 above you should have: -

1.      Financial security. You have a full retirement investment pot that means you don't need to sell . Whatever you get for the business is the icing on the cake and you can negotiate hard.

2.      A profitable, scalable company. If you have built a highly profitable company that doesn’t depend upon any specific people for its continued growth, somebody will buy it.

I can’t guarantee how much you’ll get, but it will be a lump sum and earn-out.

You could engage a corporate finance house like Rycroft Glenton to help you sell the business or if you have a willing and able management team, you could undertake a management buyout.

Finally, if it’s a very small team, you could give your people the business. I’ve known a few owners do this over the years.

The important thing is that you have options because you are financially secure.

Mission accomplished.

Summary

A Cash-Cow-Lifestyle recruitment company can either be your end goal or the first step to growing a Scale-4-Sale business.

Whatever you do, remember that your business should work hard for you, not the other way around!

If you have a clear idea of what your business needs to deliver to you in terms of lifestyle (a combination of money and free time), job satisfaction and financial security, you stand a greater chance of building a company that delivers it for you.

Avoid growing at a speed that outpaces your ability to keep service levels and profitability at optimum levels and remove the key-person dependency, so your business keeps its shape and remains secure.

Don’t forget, the key milestones are 3 years, 7 years, 15 years and out. Over to you now.

We regularly run workshops on building Cash-Cow-Lifestyle and Scale-4-Sale businesses because owners want to understand how the models could work for them.

If you’d like us to inform you when we have a Masterclass on either one, please click here and tell us how to reach you.