Why are placement fees and contractor margin valued differently?
A placement fee is earned once, when a candidate starts in a permanent role. Next year's placement fees depend on consultants winning new roles and filling them, which makes them closer to sales income than recurring income. Contractor margin is earned every week a contractor works, for as long as the assignment lasts, so a book of running contractors behaves more like recurring revenue.
A valuer separates the two, looks at each one's history and drivers, and avoids applying one multiple to the combined turnover. Turnover is a poor guide anyway: contractor billings include the contractors' pay, so a labour hire business can show large turnover on thin margin.
How is contractor margin measured?
Margin is what remains after contractor pay and on-costs: superannuation, payroll tax, workers compensation insurance and any other costs of employing or engaging the contractor. The valuer checks margin by client and by contractor, how long assignments typically run, how many contractors are on long-term assignments, and whether margins have been squeezed when client agreements were renewed or retendered.
Working capital matters more than in most agencies. A business that pays contractors weekly and is paid by clients a month or more later needs funding to grow. That funding need, and any debtor finance facility, comes into the valuation, because a buyer has to provide it.
How much does the business depend on its consultants?
Recruitment is a relationship business. If a handful of consultants produce most of the fees and hold the key client relationships, the income is as durable as their commitment to stay. The valuer looks at fees by consultant over several years, consultant tenure and turnover, restraint and non-solicitation terms, and whether the candidate database and client records belong to the business and sit in its systems.
Client concentration is measured alongside: a contractor book built on one large client, or a preferred supplier arrangement up for tender, carries more risk than the same margin spread across many clients.
What does a recruitment agency's income look like once separated?
Illustration only, not a market multiple. The figures are hypothetical and rounded. They show why turnover is a poor guide and why the source of fees matters.
| Line | Hypothetical agency | Note |
|---|---|---|
| Contractor billings to clients | $6,000,000 | Hours worked at client charge rates |
| Less contractor pay and on-costs | ($5,100,000) | Pay, superannuation, payroll tax, insurance |
| Contractor margin | $900,000 | Recurs while assignments continue |
| Permanent placement fees | $700,000 | Depends on new roles being won and filled |
| Net fee income | $1,600,000 | Margin plus placement fees |
| Placement fees written by one consultant who has resigned | $250,000 | Tested for whether those clients stay |
How does labour hire licensing affect value?
In Victoria, labour hire providers must hold a licence to operate. The Labour Hire Authority says that where the legal entity supplying workers changes, for example to a new company, the new entity must apply for its own licence and cannot provide labour hire services until the licence is granted. That matters in an asset sale to a new company, because the buyer may not be able to supply workers on day one.
If you operate outside Victoria, check whether that state or territory has its own scheme. A valuer records the licence position for each jurisdiction, any conditions or compliance history, and what a buyer would need before settlement.
Which methods are used for recruitment agencies?
Capitalisation of maintainable earnings usually leads, with owner and consultant pay restated to market, one-off income removed and a normal level of working capital assumed. The contractor book can be cross-checked as recurring margin, projected with the assignment run-off the business's own records show. Obligations to refund fees or replace candidates who leave soon after starting are treated as a cost of recent placements. The ATO recommends a secondary or cross-check method where possible.
What do we need from you?
Exports from your recruitment and payroll systems are usually enough to start.
- ·Three years of financial statements and the current year to date
- ·Placement fees and contractor margin, split by client and by consultant
- ·A list of running contractors with start dates, charge rates and pay rates
- ·Client agreements and preferred supplier arrangements, with renewal dates
- ·Consultant agreements, including restraints
- ·Labour hire licence details and any compliance correspondence
- ·Debtor ageing and any debtor finance facility
What does a recruitment agency valuation cost?
Every valuation is a fixed fee, agreed in writing before work starts, and it does not change with the value concluded. For a whole agency, or shares or units in it, the band is set by the agency's total annual turnover, excluding GST. Exactly $3 million is Medium; exactly $10 million is Large.
Add-ons are $495 per retrospective (past) valuation date and $795 per additional entity. Delivery time starts once payment and all required information have been received.
| Package | Annual revenue of what is valued | Fee | Delivery |
|---|---|---|---|
| Small Business Valuation | under $2 million | $1,495 + GST | 2 business days |
| Medium Business Valuation | $2 million to $3 million | $2,495 + GST | 3 business days |
| Large Business Valuation | $3 million to $10 million | $3,495 + GST | 3 business days |
| Over $10 million | above $10 million | quoted in writing before work starts | delivery date agreed before commencement |
| Expert report (dispute or court) | any size | $4,495 + GST | delivery date agreed before commencement |