Recruiting firm due diligence

A buyer under a letter of intent on a recruiting firm is really trying to answer one question in several different ways: how much of this business actually belongs to the firm, and how much belongs to specific people who might not stay? Every diligence step below is, in one form or another, testing that same question, because the financial statements of a recruiting firm are usually simple and rarely where the real risk hides.

Build the mandate-by-mandate picture yourself

Request a schedule of every placement over a meaningful trailing period showing the client, whether the mandate was retained or contingency, the fee, and whether the client has placed other mandates with the firm before or since. This is the single most informative document in a recruiting-firm acquisition, because it turns a single trailing-revenue number into a picture of how much of that revenue is genuinely likely to repeat versus how much came from clients who may never call again.

Verify restrictive covenants exist and actually hold up

Ask for the actual signed non-solicit and non-compete agreements with every recruiter who generates meaningful revenue, not a representation that they exist, and have them reviewed for enforceability — a covenant drafted too broadly in scope or duration can be struck down or narrowed by a court, which means it may offer far less protection than its presence in a file suggests. Recruiters with no agreement at all, or one that predates their current role and never covers what they actually do now, represent a materially higher flight risk than the seller’s summary may imply.

Quantify every open placement-guarantee obligation

Get a complete schedule of placements still inside a replacement-guarantee window, including the terms of each guarantee and any early warning signs — a candidate already struggling, a client already unhappy — that the seller may know about but not have surfaced. An undisclosed cluster of guarantee exposure discovered after closing is one of the more common sources of buyer’s remorse in these deals, precisely because it looks like ordinary revenue right up until a client invokes the guarantee.

• Mandate-by-mandate schedule: client, retained versus contingency, fee, and repeat-client history
• Signed non-solicit and non-compete agreements for every revenue-generating recruiter, reviewed for actual enforceability
• Full schedule of open placement-guarantee obligations and any early signs a guarantee may be invoked
• Direct confirmation of recruiter or employment-agency licensing status with the relevant provincial regulator
• Candidate-database ownership and structure — firm-level system versus personal recruiter contact lists
• Review of how candidate personal information is collected, stored and handled against applicable privacy obligations

Confirm licensing and candidate-data handling directly

Where Ontario’s licensing regime for recruiters and temporary help agencies applies, confirm the firm’s standing directly with the regulator rather than relying on the seller’s representation, and separately review how the firm handles candidate personal information, since recruiters take on privacy obligations under federal law regardless of whether provincial licensing applies to them at all. A firm that has been careless about either is disclosing something about how carefully it has been run more broadly.

What a finding actually means

A recruiter without a signed non-solicit who has never shown any sign of wanting to leave is a real but manageable risk; a senior recruiter who generates a large share of revenue, has no covenant at all, and has already had informal conversations about starting their own shop is close to a deal-ending finding, because the value the price is based on can leave with them almost immediately. Treat findings on the mandate schedule and the guarantee liabilities the same way — the size of the number matters less than how concentrated and how disclosed it already was.

Speak to key clients directly where the seller will allow it

A seller’s summary of client relationships is only ever one side of the story, and where the seller is willing to permit limited, carefully sequenced conversations with the largest clients, those conversations tend to reveal more than any document review can — whether the client sees the relationship as belonging to the firm or to one recruiter, whether there is an active competing search underway, and how the client feels about an ownership change in general. This has to be handled carefully, typically later in the process once a deal looks likely to proceed, precisely because premature outreach can unsettle a client relationship the deal depends on.

Check receivables and collection history on placement fees

Placement fees, particularly on contingency work, are sometimes disputed or delayed if a placed candidate leaves early or a client questions whether the guarantee period was properly honoured, so review the accounts-receivable aging and collection history specifically for placement invoices rather than assuming they behave like ordinary service billings. A pattern of slow-paying clients or repeated disputes over guarantee timing is a sign of friction in how the firm manages its client relationships that is worth understanding before you take on those same relationships yourself.