How to start a recruitment business

There are many questions to consider when deciding how to start a business. With a recruitment agency, you must always consider how to attract the right candidates, the costs involved, which revenue model you want to emulate, and what recruitment technology to invest in.

This in-depth article will include tips and insights covering how to build a successful UK recruitment firm.

You can also use the below steps to build your business plan. If you haven’t already, check out our business plan template for more guidance on what to include.

The context and background

So, should you start up a recruitment agency?

Currently, job vacancies in the UK remain higher than they were before the COVID-19 pandemic. According to the Office for National Statistics (ONS), 857,000 job vacancies were live in the UK at the end of August 2024, down from approximately one million a year before.

This creates a challenge for employers to find the right talent and skills to fill them. It also presents an opportunity for entrepreneurs to build a successful recruitment agency business in a highly lucrative market.

New recruitment agencies will face competition though. According to the latest Recruitment Industry Status Report 2022/23, there were just over 30,000 recruitment agencies in the UK in Q4 2022.

 So, there is plenty of scope to start a successful recruitment business.

Step 1. Decide the focus

The first step is to decide whether to start a general recruitment agency or focus on one particular sector.

If you have specialist knowledge, focusing on one industry could be the right choice, particularly at the outset.

Your business can become an expert in that sector once you’ve built an identity and a brand. That is attractive to skilled candidates who want to deal with recruiters with high levels of knowledge. These candidates usually attract higher salaries, and, for your business, higher fees.

This decision can be a conundrum. On the one hand, focusing on a sector with many vacancies means many roles for your business to fill. The flip side is sectors with many vacancies may not be attractive to qualified candidates.

Areas with skills shortages, like technology and engineering, have vacancies but suffer from a lack of qualified candidates. This makes recruiting harder, though potentially more lucrative if you can source the right candidates.

“Look at where the gaps in the market are to understand where your firm could grow,” says Michael Goodwin, Founder of boutique recruitment investor, Jigsaw Equity. “It’s a good idea to take a long-term view at the very start – think about possible future expansions into aligned sectors.”

Step 2. Keep it general

Operating a general recruitment agency may give you more candidate options, vacancies and clients, but you could be stretched and lack expertise, creating a competitive disadvantage.

Next, decide whether to operate a brick-and-mortar business as well as an online operation. You need a website that candidates can upload CVs to, search vacancies from, and hiring firms can advertise. It is also a lower cost option for start-ups.

However, you may need some form of office space to interview candidates and meet clients. Co-working office spaces can be a lower cost option than a permanent office space.

Step 3. Research your competitors

Next, you’ll need to carry out a competitor analysis.

“It’s important to understand the competition and how your firm can differentiate itself,” says Goodwin. “Looking at how competitors work and who their clients are will help you see where the gap in the competition is.”

Speaking to businesses to find out which recruitment service they use and what they think of it can be advantageous. Checking LinkedIn and job boards like Indeed and CV-Library to see which recruiters use them and how they operate can also positively support this activity.

There are many niche job boards and specialist recruitment agencies. If you set up a specialist recruitment company, studying your competitors to identify their strategies and limitations and who their clients are can also make you want to identify their weaknesses, and create solutions that address these.

Step 4. Research costs and sale prices

Costs are a crucial issue for startups, especially in the first year when they can derail a business.

There are a number of crucial decisions to make when it comes to cost and pricing. These include:

• Office space: determine if you need physical space, how much, and whether location or online focus is more important.
• Equipment and technology: budget for computers, office equipment and tech tools like Google Adwords, job boards and cloud storage.
• Marketing and advertising: Allocate funds to build your brand, attract candidates and gain clients.
• Revenue models: consider cost-per-acquisition (CPA), or commission-based models for earning revenue, usually 10-25% of the job’s salary.
• Flat fees: these work for budget clients but can be challenging for hard-to-fill roles.
• Other costs: this includes business registration, insurance, bank fees, utilities and staff wages.

Step 5. Create a business plan

Creating a business plan for your recruitment agency can help you secure funding or a business loan from your bank.

Ensuring you have access to funds to get through the first six months is vital as it takes time from receiving initial commissions to getting paid after you have successfully placed a candidate.

“Business forecasting is the most important tool for avoiding catastrophe,” says Goodwin. “Creating a business plan that covers the basics – growth, marketing, client acquisition and so on – puts you in a robust forecasting position. This minimises risk, helping you to manage the inevitable peaks and troughs in your income.”

The business plan should illustrate your business aims and how you plan to get there. It must be clear on costs, how you will achieve revenue targets and how you will market your services and win business.

Step 6. Decide how to use technology

Leveraging the right tools and technology is essential for streamlining your operations and staying competitive.

Most job searches are now online, with LinkedIn and other platforms offering valuable insights into recruitment companies and recruitment tech (retech tools). While LinkedIn is still essential, new tech – especially artificial intelligence (AI) – can really help to speed up the recruitment process.

Just be mindful of costs when exploring new tech, as it’s easy to get distracted by the latest tools.  Start with an applicant tracking system (ATS) to improve communication and save time. You might also need software for checking qualifications, attracting candidates, and recording interviews.

AI screening tools can help reduce manual work, and video interview software is perfect if you don’t have an office. Take a closer look at your business to figure out where you’re struggling – whether it’s finding the right candidates or managing lots of applicants – and use tech like talent intelligence systems or screening tools to tackle those challenges.

Step 7. Attract clients, candidates and staff

Landing clients and finding top talent are key to running a successful recruitment agency, and it all starts with a smart, hands-on approach.

• Approach potential clients with a pitch that’s tailored to their needs. Make sure to do your research on the company first before reaching out.
• Call decision-makers at companies to talk directly about their recruitment needs and back this up with a business email and social media campaigns.
• Tap into your network through industry contracts, in-person or online events or community groups, and use LinkedIn to connect with potential clients.
• Attract qualified candidates through clear and engaging job descriptions that stand out from the competition.
• Build a candidate pool through recruitment software to help manage your applicants.
• Actively look for candidates through LinkedIn, job boards, CV databases and social media to post roles and find people.
• Screen candidates by using quick questionnaires, online assessments or psychometric tests to help narrow down your shortlist.
• Hire your own staff with the same strategy, or consider freelance recruiters to keep costs low while you scale.

Should you start a recruitment agency?

Launching a recruitment agency can be an excellent business opportunity but it is a challenging task with many competitors.

Most founders have experience in the recruitment sector. This is an advantage because you can draw on previous experience and industry contacts to help.

However, there is no reason why someone without specific experience in this sector cannot build a successful recruitment agency.

Operating a recruitment agency does require a range of skills. You need to understand the job market, particularly the sectors you are recruiting for. You need to be an excellent communicator managing client meetings, assessing candidates and regularly interviewing them.

You are selling a service, so sales and business development skills are important. You also need to understand employment law, HR, salary and remuneration structures and other employment benefits.

“You will need to set up systems for vetting candidates, running background checks, verifying right-to-work documents, and ensuring legal compliance when hiring,” explains Bayliss.

What else should you consider?

Before diving into the recruitment business, it’s important to reflect on key practicalities and personal considerations to ensure you’re fully prepared for the challenges ahead.

• Are you prepared to work evenings and weekends? After all, many candidates will only be available for interviews at these times.
• Are you able to use existing contacts if you have previously worked in recruitment? You need to check if any non-disclosure agreements or contractual clauses impact your ability to do this.
• Do you have extensive knowledge of a specific industry? If so, you should decide whether to focus your business on one specific area.
• Be crystal clear on what funds you have available to spend on start-up costs and what should be set aside to get you through the first six months.

What are the different types of recruitment agencies?

There are many different types of recruitment agencies. Some are online-only and some mix online with a high street presence. There are also many specialist recruitment agencies.

Permanent recruitment

This is the most common type of recruitment agency and regularly places people in permanent, full-time roles. Once the agency has filled the role for the client, the client will look after their new employee’s pay. Many agencies recruit for both permanent and temporary roles.

“General recruitment agencies tend to have a broader client base and easier access to candidates but there is more competition,” says Bayliss.

Temporary recruitment

These agencies specialise in placing candidates in temporary roles. Organisations recruiting for temporary roles do so because they may have a busy, seasonal period, one-off project or need cover while another employee is on maternity leave. Often, a temporary recruitment agency will manage the employee’s pay and tax for the duration of the contract.

“Temporary staffing agencies tend to have good steady income but they are lot more labour intensive and can have cash flow problems when staff need to be paid weekly, but invoices are paid on a 30 or 60-day timeline” Bayliss warns.

Freelance recruitment

With the rise of the “gig economy”, there are now recruitment agencies that specialise in matching freelancers with short-term company requirements who want a specialist to work on a short-term project.

Social recruitment

Any type of recruitment agency can use social recruitment to find candidates. It involves posting jobs on social media so that people who view the post can share it or recommend others for the role. It is a cost-effective way to increase eyeballs on the vacancy. People who recommend candidates can earn a small commission.

Niche recruitment

This is where an agency sets up as a specialist for a particular industry. It targets candidates who want to build a career in a specific industry. Recruiters can narrow down their candidate search. One example is Onlydatajobs.com.

It focuses on particular roles within a certain sector. Agencies who operate vertical or niche recruitment services need a forensic understanding of the sectors they operate in, and fees here can be higher.

The downside, according to Bayliss is “the client and candidate pools may be restricted.”

Executive recruitment

Some recruitment agencies specialise in recruiting C-suite level executives and highly qualified staff. Companies hire agencies to find top candidates who may not be actively looking for a new role, hence the term “headhunting”.

Executive recruitment firms will find a number of suitable candidates and refer them to the companies after finding out if the candidate is interested in the role. Again, fees for this premium service are higher than for other types of recruitment, but “those posts can have long application processes and take a long time to get to invoice.” suggests Bayliss. 

How much does it cost to start a recruitment agency?

The cost of setting up a recruitment agency depends on many factors, including whether you need an office or not.

A recruitment agency can start with little upfront costs, if you operate predominantly online, from your home office and have the necessary technology to do so. Avoid any overheads until you really need them.

As mentioned, you need funds to get through the first few months before you start banking revenue. Costs should be split into two areas, 1) set up costs (such as business registration and licensing) and 2) operational costs. 

Essential costs

• Office equipment: this includes computers, laptops, printers and even providing internet access to those working remotely as well etc.
• Business website: this usually costs between £500 – £2,000 or you can develop a basic website yourself by using WordPress or a similar service. You will need a recruitment database within it. This may be a one-off cost or a regular expense if you are looking to keep an eye on search engine optimisation (SEO) practices and be high-ranking when it comes to search results. 
• Access to CV databases: candidates upload CVs to these for employers to review. Recruitment agencies can access these CVs for a fee and advertise their vacancies on job boards to a wider audience.
• Utilities and insurance: even if you work from home initially, you’ll still need to pay for heating and lighting. You also need professional indemnity insurance and public liability insurance if candidates and clients visit your office. Insurance costs around £500-£1,000 annually depending on the coverage and location.
• Marketing: you will need to advertise your presence but to start with you can do it yourself with low-cost options and by building a social media presence, supplemented by online advertising.
  
• Membership fees and subscriptions: by joining industry bodies and LinkedIn Recruiter you gain access to lots of resources, knowledge and, crucially, contacts for a relatively low cost.
• Other operational costs: employing various forms of recruitment software such as applicant tracking systems (ATS) or CRM tools which can easily rack up monthly costs of between £50 – £300.
• Office space (if needed): this could easily also cost between £500-£2,000 per month depending on location.
• Staffing costs: if you’re hiring a small team, this will vary, but salaries for recruitment consultants can range from £25,000 to £40,000+ annually.

Legal and regulatory considerations

Recruitment is a heavily regulated industry with many rules around HR and employment law, including the Equality Act 2010.

• Comply with key laws: ensure you follow the Employment Agencies Act 1973, Conduct Regulations 2003, Income Tax (Pay As You Earn) (Amendment No. 2) Regulations Act 2015, and agency worker regulations.
• Seek legal advice if needed: for specific issues, consult legal professionals, but also check out free resources from Acas and the government website.
• Join professional bodies: becoming a member of organisations like REC or CIPD can give you access to legal advice and industry support.
• Understand industry regulations: knowing the laws that govern recruitment helps protect your business and ensures fair, unbiased hiring.
• Follow data protection laws: be aware of GDPR and right-to-work verification rules when handling personal data.
• Have contracts in place: ensure you have legally binding contracts with clients and candidates, covering fees, liabilities and guarantees.
• Handle payroll correctly: if offering temporary staffing services, make sure to apply tax and social security deductions legally.

Final thoughts

Starting a recruitment agency offers many opportunities for a business owner. The UK has higher levels of staff turnover than it used to have and more temporary or gig worker options. This means more candidates and companies need to access expertise in placing the right people in different roles.

However, recruitment is a complex and highly competitive sector. Any business owner considering setting up a recruitment agency needs to research and plan thoroughly across a number of areas including the jobs market, recruitment technology, managing cash flow and budgets, business planning and employment law to make it as profitable a venture as possible, and for years to come. 

Once you’re ready to take the plunge, we recommend downloading our free business plan template so you can formalise your above ideas and start finding the perfect talent.