Harsh economic times are likely to herald exciting opportunities in the recruitment sector as stronger players take the opportunity to “bulk up” through acquisition or merger.

Even though we may be in a buyers’ market, buyers should resist the temptation to cut corners when carrying out due diligence on potential acquisitions (ie “targets”) and when preparing the purchase agreement.

To help get full value from purchases we’ve produced the following ten handy tips for buyers:

1. Staff and Consultancy Contracts

Much of a recruitment business’ value lies in its staff and contacts.  Check that the contracts of employment or consultancy agreements relating to the target’s personnel are tightly drafted and in particular contain adequate non compete and confidentiality covenants preventing them from competing after leaving the business or from poaching clients or personnel.

2. Standard Terms of Business

Are the target’s standard terms of business in good shape?  Do they comply with the Conduct of Employment and Employment Agencies and Employment Businesses Regulations 2003?

3. Incorporation of Terms

Have the target’s standard terms of business been properly incorporated into all relevant client contracts?  Are processes in place to ensure that this happens?  In a fast moving environment where arrangements will be made quickly over the telephone and by email, it’s all too easy for contracts to be concluded which don’t refer to the target’s standard terms properly.  If they’re not properly incorporated they won’t be binding.

4. Non compete covenants on sellers

The purchase agreement should impose tight non - compete covenants on the sellers preventing them from competing against the target after the sale and from poaching clients and/or personnel.

5. Compliance with The Conduct of Employment Agencies and Employment Business Regulations 2003

Do the target’s operations comply with The Conduct of Employment Agencies and Employment Business Regulations 2003?

6. Sector based compliance

The target may require certain approvals to operate in particular sectors (for instance, Health Care).  Does it have appropriate approvals and are they up to date?

7. Contracts of service or contracts for services

Are the target’s temporary worker pool, employed under contracts of service, making them employees, or engaged under contracts for services, making them consultants?  Whilst the difference between the two is outside the scope of this article it may have a critical effect on the target and its potential liabilities.

8. Premises

If the target’s location is critical, and it doesn’t own its premises, how favourable are the terms of its lease?  In particular, how many years are left to run on it and is there an automatic right to renew?

9. “Poison Pills”

Beware of provisions in the target’s contracts or other documents which may be triggered on a purchase, making the target “indigestible”.  An obvious example would be a change of control clause, ie a clause stating that if control of the target changes (which clearly it will when you buy it) the other party to the relevant contract or document would have the right to terminate it.  Under certain circumstances this could have a devastating effect on the target business, for instance where an approval of the kind referred to in 6. above were withdrawn because control of the target had changed.

10. Undisclosed Liabilities and Warranties

If you’re buying shares in a recruitment company rather than simply buying the business, you’ll acquire all of the company’s liabilities (whether you’re aware of them, or not), so, before you buy, make sure that you investigate its affairs thoroughly.  In particular make sure that you investigate the target’s tax history carefully.  Are there any signs that it isn’t on top of its tax affairs?  Are they transparent and intelligible?  Are tax returns filed on time?  Is the target regularly facing queries from HMRC?  Most important of all, even though you’ve carried out rigorous due diligence on the target, particular if you’re buying shares in a company, make sure that you obtain full warranty protection from the seller in the purchase agreement.

For any queries relating to the above article  contact Hugh Mulley on 01727 735675 (DDI) or e-mail hm@dolegal.co.uk