Recruitment and labour hire business valuations.

Permanent and temporary revenue are different businesses

Recruitment and labour hire firms often report a single revenue line, but the earnings behind it come from two models with different risk. Permanent placement earns a fee when a candidate starts, so income arrives in lumps, depends on the consultant who made the placement and falls fast when clients stop hiring. Temp and contract work earns a margin on every hour a worker is on assignment, which recurs for as long as the assignment runs.

The valuer separates the two and treats them differently. Permanent fees are read across several years to see through a strong or weak period; temp margin is read by month to see how many hours are on hire, how long assignments last and how much of the base carries into the next year. A firm that is mostly temp with a long-running contractor book has a more predictable earnings profile than one that lives on placement fees, and that difference is reflected in the risk applied.

Gross margin is the number, not billings

Labour hire billings include the wages, superannuation, payroll tax, workers compensation and other on-costs that pass through to the worker. The business keeps only the margin. Two firms with identical billings can have very different economics. The valuation works from gross margin and examines it per hour, per placement and per client.

The margin then has to cover consultants, back office, systems and insurance before it reaches profit. Owner salaries and any family members on the payroll are adjusted to a market rate, and the SDE and EBITDA guide explains why the choice between those measures matters in a business where the owner may also be the top biller.

Consultants and clients are where value can leak

This is a people business, and the valuer will ask which consultants generate the margin and what would happen if each of them left. A desk that produces a large share of gross margin from one person is a concentration risk. Employment contracts, restraint clauses, notice periods and commission structures all bear on how much of that margin would survive a departure. Whether a restraint would be enforced is a question for your lawyer; the valuer takes a view on how much protection it realistically gives.

Client concentration is examined next. Terms of business, preferred supplier agreements, rate schedules and the history of each account show how contracted the work is and how easily a client could move it. Labour hire clients in particular can switch providers with little notice, so the length and stability of each relationship matters more than its size in any one year.

Payroll funding is the working capital question

A labour hire business pays its workers weekly and collects from clients weeks later on whatever terms have been agreed. The gap is funded by the business, and it grows with every additional worker on hire. Many firms use a debtor finance or payroll funding facility to bridge it. The valuer needs the facility terms, the debtor ledger and the ageing so the normal level of working capital can be assessed and the facility balance treated correctly in the equity bridge.

Growth makes this sharper. A firm that doubles its hours on hire must fund roughly twice the weekly wages before the cash arrives. A forecast that shows the margin without the funding it needs is incomplete, and our working capital guide covers how the requirement is estimated.

Licensing and the database sit in the risk assessment

Some states and territories require labour hire providers to hold a licence, with conditions and reporting obligations attached, and the rules vary by jurisdiction and change over time. The valuer will ask whether the business holds what it needs where it operates and whether any conditions or notices are outstanding. Confirming the position is a matter for your lawyer; the valuation treats an unlicensed or non-compliant operation as a material risk to be disclosed.

The candidate database is often described as the firm's main asset. In practice it supports the earnings rather than adding to them. Its usefulness depends on how current the records are, whether candidates have consented to contact, and how many placements actually originate from it rather than from job boards or referrals. A well maintained database reduces the cost of filling roles, which shows up in margin.

Records that sharpen a recruitment or labour hire valuation

The questions to have ready

An owner or adviser preparing for a valuation should be able to say what share of gross margin comes from temp versus permanent, which consultants and clients account for most of it, how payroll is funded and what facility is used, what licences apply and whether they are current, and what the margin per hour has done over the last three years.

Valuation Group is based in Double Bay, Sydney, and works with owners and their accountants Australia-wide by phone, video and secure document exchange. Tell us whether the matter is a business sale, a shareholder exit or another purpose, and we will scope the work from there.

General business valuation guidance. Service suitability, specialist input and fee are assessed for the individual matter.