How to start a recruitment business
The recruitment industry is booming, and now’s a great time to get involved. Get the lowdown on starting a recruitment business, including expert advice on business models and regulation.
If you’ve ever looked for a job, or ever hired for one, you’ll know about recruitment agencies. If you run a recruitment business, you’re essentially a professional matchmaker, with your lonely hearts being jobseekers and companies looking for the right talent.
Within this field, the variety is huge – you might be recruiting for full-time, part-time, permanent, or temporary roles across almost every sector of the economy. Your client might be a startup that needs temp cover for their receptionist, or once you’ve achieved sufficient scale, a megacorp that hires over 1,000 people a year.
Driven by the millennial tendency to switch jobs regularly, the UK recruitment industry continues to grow rapidly. In 2018/2019, statistics from the Recruitment & Employment Confederation (REC) showed that total turnover had increased by 9% to £38.9 billion, and that the number of recruitment companies rose by 2% to 31,140. Moreover, Companies House data analysed by recruitment finance provider Sonovate showed that 8,456 recruitment businesses were registered in 2019, compared to just 2,556 in 2010.
With a new majority government in place and an end to the Brexit saga just about in sight, the future also looks bright – with the REC forecasting the recruitment industry to grow by 4.6% in 2019/20, 3.0% in 2020/21, and 5.9% in 2021/22.
While you can technically start a recruitment business with no experience of the sector, you’ll be much better placed if you work in the industry first to develop vital skills and build up a contacts book.
This in-depth guide will cover the following areas:
Create a recruitment business plan
As with any business, don’t do anything before you’ve created your recruitment business plan. Our easy-to-use template will take you through each step of the process, but you essentially need to cover the following points:
- About you – Discuss what makes you a good fit to run a recruitment business, and why you want to run one. Discuss your experience, contacts, qualifications, and personal qualities, and make sure to sell yourself
- About your business – There are a wide range of recruitment types, so you’ll need to make clear exactly what your recruitment business aims to do. Which sectors do you want to work in? Do you want to focus on full-time or part-time employees? Is there a particular demographic you feel an affinity with and can target? You’ll also need to explain staffing, and crucially, how you plan to finance your business.
- Market research – Here you can go into more detail on your target market and competitors – how are you going to stand out and attract business? Identify a geographic area that you’ll initially focus on – even if you don’t have an office to start with, you’ll likely need to meet candidates and clients in person, so choose the location for your business carefully.
- Costs and business forecast – Here, you’ll need to outline all the costs your business might incur – everything from website development to office space and business insurance. You’ll also need to give a realistic business forecast that explains how much profit you’ll make in Year 1, Year, 2, Year 3 etc.
Recruitment pricing structure
One of the most important decisions you’ll make is how to price your services. This should be a crucial part of your business plan.
The fee you charge will vary depending on whether you are recruiting permanent or temporary staff.
Rates vary, but research by recruitment training company Social Talent indicates that you can expect to charge a one-off fee of 15-20% of the role’s annual salary for most roles, with this rising to 25% for roles that are particularly difficult to fill. This matches the view of Tim King of IT recruitment specialist Matchking, who charges his clients 20-25% of the employee’s annual salary.
This assumes that you operate on a contingency basis – in other words, that you’re only paid once the job has been filled by a candidate you put forward. In this case, you’ll often be competing with other agencies.
The other option is retained recruitment, where you are exclusively assigned to find candidates for a role. This usually involves a more in-depth process, and is often associated with more senior roles. Consequently, you are able to charge more – 30% is common, while experienced professionals in specialist niches charge up to 50%.
You’ll also be expected to factor a rebate into your fees, where you return part of the fee if the hired candidate leaves the job after a certain period of time. Again, the period and percentage returned varies between agencies.
This variation in fees reflects the fact that recruitment can involve many different processes, from writing job ads to interviewing candidates, and even conducting reference checks. As a recruiter, how many of these tasks you take on will determine the fee you charge.
When starting out, you may also want to be flexible with your fees in order to build long-term commercial relationships.
Things are a little more complicated when you’re hiring temporary employees.
You’ll need to factor in the following:
- The cost of the worker
- Holiday pay
- National Insurance
- Your desired margin
These costs are initially paid by the agency, before being reclaimed from the client.
The rate may also vary depending on whether the position is fixed-term or paid by the day.
The same Social Talent research found that for a fixed six-month post, agencies would charge 12-15% of the equivalent annual salary (not the six month period the employee was being hired for).
For a temp position that paid £300 a day, agencies would charge around 15%, so approximately £45 per day in this case.
For both permanent and temporary workers, some agencies are also shifting to a flat fee structure, as this can make them more attractive to clients.
Find your niche
As a newly established recruiting agency, you’re unlikely to survive unless you develop a specialist area. Trying to compete in the general recruitment space is incredibly difficult given the established brands and high visibility of the major players.
Many of the most successful smaller scale recruitment agencies have prospered by sticking to a specialist area they know inside out.
Adam Bolton gave great insight into how he started ABrecruit from scratch on the Undercover Recruiter blog. What really comes across is how he always knew he wanted to focus on .net development, and how he leveraged his experience in this area. He knew the field, knew the people, and knew how to appeal to both companies and candidates – a plan that resulted in a thriving company which has now been going for seven years.
A look at the Startups 100 reveals similar success stories – JHP Recruitment has prospered by focusing on veterinary recruitment, Debut has made waves with its clever platform for graduate recruitment, and The Dots is providing creative professionals with a new way to be seen and hired.
If you can, follow their lead.
Like any other startup, new recruitment businesses can prosper by doing what their larger competitors can’t (or won’t) do.
Being agile is the key. Adam Bolton of ABrecruit made the decision early on to work from 8am to 9pm on weekdays and all day on Saturday – a punishing schedule that enabled him to talk to candidates outside work hours, and have relaxed conversations about what they were really looking for. It’s a great example of the sort of creative thinking you’ll need to employ to make your mark in the early days.
Depending on what sort of candidates you’re targeting, you may also need to consider tech-driven solutions. Already, the job search has largely shifted from laptop to mobile, and the likes of Tempo are trying to reinvent the recruitment process by using AI, video, and rich CVs that include ratings and reviews. All this has the potential to hugely streamline the recruitment process – Tempo boasts that its fastest hire was made in just 27 minutes.
Further along in the process, the traditional supremacy of the interview is also under threat – with alternative and complementary solutions including soft skills assessments, job auditions, and even virtual reality.
As a recruitment startup, keeping on top of these trends is key. While you may not have the established reputations and brand awareness of the big boys, you’re ideally placed to innovate and operate more efficiently.
Recruitment startup costs
There are only two things you definitely need to start a recruitment business – a phone and an internet connection. You can even use your personal mobile at the outset, although a dedicated business handset could cost you as little as £6 a month – check out our guide to the best business mobile phone plans for more info.
However, to really spread your wings and fly, you’ll want to invest in the following:
If you’re a recruitment agency, your website is really, really important – it’s the public face of your business, and it’s how candidates and companies will judge you.
There are a huge range of options available, as detailed in our guide to small business website costs. If you want to take the DIY approach, companies like Wix and Squarespace offer packages for around £10 a month, while a professional web design company should charge you around £1,000.
Make sure your site is set up for mobile – a recent report from recruitment platform Glassdoor found that 58% of Glassdoor users are looking for jobs on their mobiles.
You can find software that promises to help you with practically every aspect of your business, but two areas are really worth looking into for recruitment businesses – CRM software and accounting software.
- CRM software – CRM stands for Customer Relationship Management, but as a recruiter, you should think of it as Candidate Relationship Management. Numerous pieces of bespoke software are available to help you easily keep track of who’s applied for which job, and sort candidates according to skills and experience.
- Accounting software – Not many people (apart from accountants) love the financial side of running a business – running payroll and putting together tax returns can quickly make you question the wisdom of getting set up on your own. However, while you’re unlikely to be able to afford an accountant in the early days, investing in accounting software that lets you track expenses and payments could really pay dividends. You can make sure you stay on top of your finances, and don’t have any sleepless nights when it comes to filling in your tax return.
You might start off in your bedroom, but sooner or later, you’ll want to find a proper space where you can meet candidates and run your business. A co-working space is a great first step, getting you out of your living room but saving you the responsibility of single-handedly renting a space. You can find out more in our in-depth guide to the costs of co-working, but expect to pay anything between £100 and £600 a month in London depending on location and facilities. Outside the capital, prices fall dramatically – with a co-working space in Sheffield, for example, costing approximately £200 a month.
As a recruitment business, you shouldn’t need much in the way of equipment. The days of fax machines are long gone, and contracts can be electronically signed using services like Docusign. Make sure you have a good phone and internet connection, as well as a selection of private spaces where you can meet candidates.
Location is also important: you’ll want to ensure you’re based somewhere that’s easy for candidates to get to, and also consider whether there’s a part of town which is a particular hub for the industry that you specialise in.
There’s no getting around this one – as soon as you employ your first member of staff, you’ll need employers’ liability insurance that covers you for claims of up to £5m. It’s also a good idea to consider getting public liability insurance, which would cover you if anything happens to a candidate or client on your premises, while any vehicle used by the business must have a motor insurance policy in place. For the full lowdown, see our business insurance hub.
Recruitment is commonly associated with two things – high salaries and high turnover.
Let’s tackle salaries first. While this is likely to be your biggest ongoing expense, it’s a bit of a myth that recruiters are always on high salaries. Nationally, PayScale data indicates that the average UK salary for a recruiter is £25,839 – notably below the UK average of £30,420 a year (or £585 a week).
Of course, this masks significant regional variation, with LinkedIn Salary data indicating that the average for a recruiter in London is £30,000 – compared to £27,000 in Manchester, £24,300 in Sheffield, and £23,000 in Leeds. Of course, you’ll likely need to also factor in commission, which averaged £5,000 according to PayScale and £10,000 according to LinkedIn.
In terms of staff turnover/staff churn, there’s no doubt that this is an issue for recruitment businesses, with rates commonly cited that are double or even triple the national average of 15%. The common turnover factors still apply – make sure you’re open to flexible working, and that salaries keep pace with the industry at large – but dealing with rejection is often cited as the most difficult part of working in recruitment.
It might therefore be a good idea to ensure that a system is in place for employees that are struggling. For a startup, this could be as simple as an empathetic senior member of staff that can offer the benefit of their experience. As you grow, investing in dedicated mental health support could really pay dividends.
With a recruitment business, awareness is key. You need everyone to know what you do, and how you go about it – which makes marketing really important. Consider targeted digital and social media marketing campaigns, as well posting on online job boards.
While it can be difficult to know how much to spend, make sure you don’t commit to a campaign before you know it will deliver a solid ROI. Start small, and then scale up if you see positive results.
Project management software
With so many things to juggle, using project management software can make a huge difference to your recruitment business. Easily keep track of everything that needs to be done, and instantly see which tasks are overdue. Some programs can even automate processes completely to significantly improve efficiency.
Financing your recruitment business
Given the myriad costs discussed above, making sure you can finance your recruitment business should be one of your first priorities. Given the delay between outlay and financial return, cash flow is a common issue for recruitment agencies.
Alongside trying to secure investment or a business loan, make sure you consider invoice factoring. This is common in recruitment, and is a great way to manage a temporary shortfall – find out more in our guide to invoice factoring fees.
Two finance providers that specialise in the recruitment industry are Sonovate and Quba Solutions.
Sonovate specialises in invoice finance, allowing businesses to borrow against their outstanding invoices in order to free up cash and pay their contractors on time. It has already funded over £500m in invoices to date.
Quba Solutions is a contract finance provider that offers finance and back office services to recruitment firms. Its packages allow you to easily generate invoices, chase payments, and ensure that your cash flow remains positive.
Recruitment laws and regulations
The main piece of legislation that covers the recruitment industry is the Employment Agencies Act 1973. If you want to set up a recruitment business, you’ll need to make sure you know this legislation inside out. The REC has a helpful guide, and this infographic helpfully summarises the main points.
Source: Agency Central
Alongside members and key figures from the world of recruitment, the REC has also created the REC Code of Professional Practice, which aims to promote consistent standards across the industry. This covers the following 10 areas:
- Respect for Laws
- Respect for honesty and transparency
- Respect for work relationships
- Respect for diversity
- Respect for safety
- Respect for professional knowledge
- Respect for certainty of engagement (ensuring that workers are fully informed of the pay and working conditions for the role they are being employed in)
- Respect for prompt and accurate payment
- Respect for ethical international recruitment
- Respect for confidentiality and privacy
As is the case with any business, starting a recruitment agency is not for the faint hearted – but following the steps laid out above should ensure you avoid some common pitfalls.
Starting off with a good business plan is crucial – one that makes it clear what your business strategy is, has detailed cash flow forecasts, and demonstrates your in-depth knowledge of your target market. If you’re starting out with no recruitment experience, then taking on an employment franchise could be a great option – and regardless of whether you’re franchising or going it alone, choosing the right pricing structure is key.
The UK recruitment industry is already a crowded market. Finding your niche is extremely important, as is having an innovative mindset that’s open and ready to implement new recruitment solutions.
With initial costs likely to include a website and marketing, and later steps on the ladder entailing expenses like office space and CRM systems, having the right finance in place should be a cornerstone of your business strategy. Finally, make sure you have an in-depth knowledge of the UK’s employment agency legislation to ensure you’re operating legally.