Starting your own recruitment business – part 2

OK so you have checked off the groundwork from part # 1:

  • You checked your contract for restraints, clauses and potential issues that could impact your ability or timing to set up a business
  • You have settled on a niche or target market taking into account your location, experiences and the needs of the business community
  • You have written a business plan setting out what you are going to achieve, how and when

Once again please remember – you can do all this without re-mortgaging the house. Opening a business is a serious endeavour that will have a big impact on your life and your family. A good way to test your plans is to have someone interview you about it. When I say someone I don’t mean Auntie Maud or Jeff from the golf club – I mean someone who is going to grill you, who knows what they are talking about and who understands the type of business you are going to create. If you don’t come away from the meeting with a desire to re-tweak your plan then its probable that you are talking to the wrong person. Business is serious and its much better to challenge yourself at the planning stage than leap into a market only to find that you got it wrong.

How much money do I need to set up a recruitment business?

We have an online tool you can use that helps with forecasts: http://www.recruitonline.com.au/commission.calc

Most new recruitment business start out focussing on permanent only, 1-2 people partnerships. In some cases there are arrangements that each party gets 100% of what they bill and splits the overheads 50/50. This might seem a great way for a couple of “friends” to set up a venture but it will cause problems down the track:

  • It doesn’t matter how good you both are there will always be times where one is out performing the other
  • If you are in the same niche then you are competing for work but if you are in different niches then you are subject to different business cycles
  • You might both have worked well when you had a manager but are you really going to share identical levels of drive, enthusiasm and old fashion gumption?

I’m not saying there are not thousands of successful recruitment partnerships across the globe, I’m just pointing out the inevitable and speculating what options might be available to you if you choose this path.

Another way to start a business is to set up a propriety limited company and have all the sales paid into the company. You set up equitable salaries to pay yourselves and a commission structure that rewards performance. You might decide not to draw a salary for the first few months to give the business a chance to save money. Having a shareholder’s agreement to cover a few things is also crucial:

  • The process for dispute resolution
  • The amount or % of money that gets retained in the company and what is disbursed as dividends, bonuses and salaries
  • The limit on individual spending without consultation
  • The amount or % of revenue that will be dedicated to marketing & advertising that is not COGS (*)
  • Anything that is important to you!
  • When and how the agreement is reviewed

* – COGS: Cost of good sold – When you advertise on jobs board that isn’t a marketing expense it is part of COGS because that is an expense of your supply channel that is directly linked to revenue. (It is of course part of your market profile which is marketing but I would not account for it under your “marketing budget” as you might find the budget evaporates leaving no money for promotional expenses).

So how much was that?

Sorry – what I’m trying to say is that the structure you choose, number of partners and type of entity all contribute how the mechanics of distributing profit will impact on how much money you will have to put in. Your business planning no doubt includes a budget that you have given to your accountant to review which should give you some idea. Some essentials include:

  • Legal Fees to inspect your terms of business and corporate documentation: $2,000 – $4,000
  • Accounting fees to help advise you on the best way to set up a entity and financial planning: $3,000
  • Insurance: $2,500
  • Logo: $100 – $2,000
  • Web site: $50 – $3,000
  • Six months of Phone [use VOIP!] / ADSL / Mobile fees: $1,200 (+ $480 per additional staff member)
  • Six months of payroll costs: You get this from your business plan.

Important note re payroll costs: If you have $10,000 and you put it into a business and pay yourself back as wages to obtain a tax deduction then you could be paying superannuation, payroll tax, worker’s compensation and tax withholding in addition. Alternatively you can loan your business money and it pay it back later. This is a good way to inject a short term capital injection that helps fund the start up costs but ultimately the business pays you back so you get regular post taxed money. Make sure that you check this out with your accountant first as there may be legislation specific to your region and circumstance that needs to be considered.

Add this up and you will probably end up with a figure around $40,000+ and up from there. You will note I have not included rent, lights & power and temporary payroll funding costs. It is quite possible to start a recruitment business from a home office if you are doing remote interviewing using technologies like Skype or interviewing candidates at mutually convenient locations. We have a number of clients who reside outside the locations that they place candidates and for them getting candidates to come to the “office” just is not possible. If this fits your market then you can consider holding off on renting premises until your business warrants it.

I want to do temps!

Good luck. Temporary businesses can be extremely profitable and some are relatively easy to start out. The difficult part is the profitability black hole and funding the wages. There are a number of financial products to help you fund a temp payroll typically either and overdraft or debtor financing / invoice factoring. In either case the second most important task you will have outside recruiting will be credit control.

  • Lets say that you have a $5 gross margin on temps that are costing you $25 / hour
  • That is $190 gross margin per FTE week per temp with a cost of $950 and an invoice value of $1,140
  • For a single recruiter you will need 15 temps out to get just under $3,000 per week
  • Each week you are going to need to cover over $14,000 in wages and related costs
  • You will no doubt put 7 day terms on your invoices and no doubt find out that most companies pay in 30 days
  • That’s $57,000 of cash that you will consume in ‘ideal’ circumstances per recruiter

Cash is King in temp businesses. Cash is King. If you are going to do temps make sure you understand how much money you have access to and what you will need to fund your payroll. It is not uncommon for a start up recruiter to set up a business only to find that after a few years they no longer work a desk but run numbers and credit control.

What is the profitability black hole?

When I take out a term deposit I invest money. After some time the investment pays me back my outlay plus interest. When you start a temp recruitment business you will need to invest cash, lots of cash into it. Because you’re awesome you will get a swag of clients and business booms, so you take on another recruiter and then another. You probably running 150-200 temps so you need a payroll person & credit controller. Soon workplace injuries creep in so you have to have an OH&S person. No one has time to answer the phone so you need a receptionist. All these costs add up and you are struggling to be profitable. You have the idea that a dedicated marketing person will help bring in enough extra business to achieve a comforting level of profitability. And so on..

Temporary staffing business can grow quickly, clients can rack up big debts in a few short weeks and clients can change suppliers in a heartbeat. A good temporary business has the iambic pentameter of a stock market floor – busy, bustling noisy, phones ringing, people moving in and out of interviews, etc. It is not hard to find that in all this activity you can get distracted by the growing numbers and end up creating an engine and structure that needs to be fed. This might be a good way to buy yourself a job but it might not be a great way to get return on investment unless your plan is to start, build and sell.

Summing up:

It is possible to create a very successful recruitment business in temporary or permanent placements for a very small initial investment. The purpose of this article was to help point out some of the things that you might not have experienced in your recruitment career prior to starting your own venture. There is a great deal of money to be made and independence to be had in starting your own business but it is not without risk and should not be entered without thinking it through. I urge you to seek professional advice and ask other business owners what they think before you put money behind your idea.

There are a great many small business recruiters who started out where you are who would welcome to opportunity to have a coffee and a chat about how they did it. Don’t be shy in using LinkedIn to contact them or if you want connect with me: http://www.linkedin.com/in/piersrowan

This article is getting a bit long so I will leave some other ideas for the next one including: day one, time management and shortest path to customer.

All the best and thanks for reading.