How to start a recruitment agency
The recruitment industry is vast and fast-moving. Find out how to decide on a recruitment agency business model and what recruiting laws and regulations you'll have to contend with
In layman’s terms a recruitment business, or recruitment agency, is an organisation which matches employees to employers and this can be for full-time, part-time, permanent and temporary positions.
Recruitment companies are used by a wide range of businesses – from small businesses looking for temporary cover for their receptionist to big corporations with an annual intake of 1,000 people or more which can’t physically deliver that many new employees on their own.
Recruitment agencies also operate across almost every sector of the economy, from doctors and supply teachers right through to cleaners and industrial placements.
Whilst it is possible to start a recruitment business with no experience of the sector, someone who has worked in the industry before is going to be in a better starting position and may have existing contacts they can draw upon.
The recruitment industry
According to recruitment finance organisation Sonovate, more than 5,800 new recruitment businesses were launched in 2017 alone – a 20% increase on the previous year.
The Recruitment & Employment Confederation (REC) claims that the total industry for the year 2016/17 was £32.2bn and could grow by 4.7% by 2019/20.
Whilst highly competitive, the recruitment industry has a constantly replenishing and rapidly growing source of business in the form of the job market.
The industry is in the midst of a digital revolution at the moment, with dozens of start-ups disrupting the traditional business models to offer. Some examples include Wiser, which claims to be the only in-house creative and recruitment solution, and Debut, which assesses candidates skills using psychometric games.
Because recruitment is such an expansive industry – crossing every sector imaginable – there’s endless scope for new market entrants and new innovative solutions. Here’s how to start a recruitment agency.
Identifying a core group of sectors you could target with your recruitment business is hard as there is so much crossover. Almost all businesses incorporate a degree of technology or digitisation these days.
Unsurprisingly, Brexit has had a big impact on the supply and demand in certain sectors. According to business growth expert Ian Knowlson, writing for Recruitment Buzz, the top sectors for growth in recruitment in 2018 were:
There are hundreds of sectors your recruitment business could operate in. Do some research into the size of the market within a sector to see if it will be a valid business opportunity. It will also help if you have some experience in the industry you choose to operate in to show potential clients your business is credible.
Consider project management options to organise your new business
Starting a business takes time and money – you might want to consider options for helping to manage the process.
The project management tools are excellent ways to optimise, and even automate, processes to make sure you get the best start possible.
Recruitment pricing structure
One of the most important things you’ll need to think about before starting your own recruitment business is your business plan – how will you stand out from competitors and make money.
And crucial to this, will be your pricing structure.
Most recruitment businesses price their services based on whether the worker they are placing is permanent or temporary.
For a permanent placement, most recruitment businesses take a percentage of the worker’s salary.
On a temporary basis, it’s more complicated as you will need to factor in:
- The cost of the worker
- Holiday pay
- National Insurance…
- As well as the margin you are looking to take, which will depend on the level you’re recruiting on
Tim King of MatchKing.co.uk says he charges his clients between 20-25% of a full-time employee’s salary.
According to research from Undercover Recruiter – after you’ve taken into account advertising, recruitment costs, pensions, holidays, training and everything else – the true cost of replacing an employee on an average salary can be around £50,000.
Recruiters are slowly beginning to move away from the percentage model though, and many recruitment businesses do charge a flat fee rather than a percentage on employee salary.
Types of recruitment agency
There are a number of different recruitment agency business models and some crossover between them.
The below is not an exhaustive list but covers some of the different recruitment models a business might consider.
Specialist/ niche recruitment
Specialist or niche recruiters target particular jobs, sectors or locations.
This allows you to create a focused strategy and tailor your marketing and processes effectively.
The only issue with a niche recruitment model is that you’re likely to encounter a lot of competition in the market. Depending on how niche the sectoris, you could be recruiting for quite a small pool of candidates.
Generalist recruiters are the opposite, covering a broad range of jobs, sectors or locations.
There are some problems with the generalist recruitment model. A lack of focus can lead to an inefficient use of resources. Marketing can’t be targeted and is therefore less effective, and your employees won’t have specialist knowledge to draw on.
You will also have to deal with a larger number of candidates who aren’t applying for a particular job. This means it can take longer to find a job match and make a placement, meaning fewer candidates are placed in any given time.
Like ‘guns for hire’, contract recruiters work on a short-term contract basis in the form of an hourly wage or fixed bid project for a set amount of time.
When the recruiter has filled all available positions with satisfactory employees the contract is over and they will move on to a new job.
In effect a type of specialist recruiter that focuses on placing talent in senior roles such as CEOs, executive directors, CFOs, COOs.
An executive recruitment company may still specialise in placing candidates in key sectors.
Junior/ graduate recruitment
Graduate placement is a very popular business model for recruiters. A graduate recruitment company will often have a roster of client businesses that they work for, placing talented graduates in key roles.
Recruitment start-up costs
Costs for setting up a recruitment business can vary wildly depending on the size of your operation.
Theoretically you could get going with a phone and the internet from your bedroom. A low-end business package could be less than £20 a month – we've run through some options in our guide to business mobile phone contracts and plans.
But if you want a successful, scalable operation you’re going to need a bit more financial backing.
What are your main costs going to be?
The average cost of setting up a website can range from £400 to £10,000 depending on its complexity. There are ongoing costs as well.
You can see a full breakdown of website design costs and providers here.
Software for recruitment services can help take the hassle out of dealing with certain business processes and administrative tasks.
For example, customer relationship management (CRM) software can help you keep track of customer data and offer them an optimum service. Accounting software can help you deal with the headache of payments, taxes and payroll.
Insurance is a must for any kind of business. All businesses must legally have employers’ liability insurance covering you for claims up to £5m if they have even one employee.
Find out about what other business insurance you might need here.
Probably your biggest ongoing financial commitment. According to PayScale, the average salary for a recruiter in the UK is £24,968.
Most recruiters will also work on a commission basis, which is around £5,300.
You’ll probably engage in digital and social media marketing and perhaps even some out of home advertising if it’s effective for your audience.
There’s no definite answer to marketing spend, the trick is not to commit to a campaign before you know it will deliver a decent ROI. Start small and scale up.
Financing your recruitment company
While you can start a recruitment company with fairly low costs, depending on your model, you may experience a cashflow issue. This is particularly true in contract recruitment, where you might need to pay your contractors before your client invoice is paid.
Alongside trying to secure investment or a loan to keep you afloat, invoice factoring is also quite common in recruitment – and can be a good way to manage any shortfalls (you can find out more in our guide to invoice factoring fees).
Sonovate is a specialist finance provider for the recruitment industry. It offers invoice finance – where a business borrows against its outstanding invoices – to help recruiters free up cash to pay contractors on time. It has funded over £500m in invoices to date.
Quba Solutions is a contract finance provider offering finance and back office capability to recruitment firms. You can use the service to generate invoices, chase payments and ensure your cash flow positive.
Recruiting laws and regulations
The main piece of legislation governing the recruitment industry is the Employment Agencies Act 1973. If you’re looking into how to set up a recruitment agency, then you should understand, and adhere to, this legislation.
The Employment Agencies Act covers:
What you can and can’t charge for: You can’t, for example, charge a candidate for finding them work, except in the cases of ‘performers and certain other workers in the entertainment field and photographic or fashion models’, and au pairs working abroad.
What information you can disclose to the client and worker.
Your obligations to check:
- Whether the candidate is suitable for the position.
- Whether the worker has the necessary qualifications for the job.
- Whether the worker and employer are aware of any legal conditions such as work permits or visas that they must meet
How you advertise the job. You must make it clear you’re a recruitment agency.
How your recruitment business deals with candidates under 18:
- You’re not allowed to introduce them to an employer if they are attending or have just left school unless they have ‘received vocational guidance from the local careers service’.
- You must obtain written consent from a parent or guardian.
- You must make sure the candidate has suitable accommodation.
- You must ensure arrangements have been made ‘to cover the possibility of the employment not beginning or of it finishing during the first 10 weeks’.
How you deal with employing candidates abroad or candidates who are from abroad:
- If you use an employment agent abroad, you must make sure they are accredited in that country.
- You must make sure the employer you are arranging the employment with has premises in the UK, unless you have written confirmation it ‘will not be detrimental to the worker’s interests’.
- You must give the employer two character references for the worker from abroad.
- You must not arrange a job for a worker ‘if the rate of repayment of any advance of fare is one-eighth or more of the worker’s basic weekly pay, or the total amount to be repaid is more than three weeks’ pay in the job’.
- You must make sure the worker and employer both receive a written statement in a language they understand giving specific details about the employment or worker.
The REC Code of Professional Practice
Alongside members and key industry figures, the REC has created a Code of Professional Practice to promote consistent standards across the industry. The full list can be found here. These include:
- Respect for the law
- Respect for honesty and transparency
- Respect for work relationships
- Respect for diversity
- Respect for safety
- Respect for professional knowledge
- Respect for certainty of engagement
- Respect for prompt and accurate payment
- Respect for ethical international recruitment
- Respect for confidentiality and privacy
Hiring the right people for recruitment
Recruiting for recruitment can be tricky as recruiters can come from all walks of life. Often it’s not their qualifications or previous professional experience that make them suitable, it’s their personality traits.
That said, experience in sales, marketing or customer services is a good indication they might have what it takes.
A good recruiter will have:
- Sales skills – there’s a lot of crossover between sales and recruitment. In some ways the latter is actually more complicated because you’re trying to persuade two parties to accept your offer: you’re selling candidates to businesses and businesses to candidates and both could reject your offer
- People skills – this term gets bandied around a lot but what does it actually mean? People skills are the ability to effectively communicate and empathise with another, building productive and respectful relationships based on trust
- Negotiation skills – negotiation is the art of reaching an agreement that achieves the optimum result between two parties – essential when making a placement and at other stages of the process
- Self-confidence – rather than brash, arrogant, affected confidence, a recruiter should have a genuinely self-assured confidence that engages candidates and employers alike
A good way to identify a top candidate is to give them a practical challenge in the interview. Recruiting is all about getting on the phone and making calls, so see how they are on the phone under pressure.
HR software and systems for recruitment
HR companies and software providers for small businesses can help to streamline HR processes such as personnel management, record keeping and payroll. Certain packages can also include employment law, benefits, talent acquisition, training, health and safety and strategy.
In recruitment, HR software can help you train and manage the professional development of your employees and allows you to agree certain goals and objectives to work towards.
In need of an HR process but not sure how to manage it yourself? Find software, or outsource the process to make sure it's done right. Click here to click HR services and software.
Recruitment is a fast moving and vibrant sector. And whilst there are new start-ups entering the market all the time, there are rewards aplenty for those with a good eye for an opportunity and the chutzpah to seize it.
Being personable and persuasive will get you far in recruitment. Good luck.