RecruitHub works daily with experienced recruiters who are exploring their options in entrepreneurship, fielding hundreds of questions on the best way to start and scale a recruitment business.
These are the most common myths.
Starting your own recruitment business is an exciting step – the chance to take command of your financial future and channel years of experience into a company that you own and control.
But the process of starting up can be clouded by lack of information, misconceptions and inaccuracies.
To help bring clarity to the process, we’re sharing our conversations and tackling 10 of the biggest myths about starting up, head-on.
Without further preamble… let’s get stuck in!
We have prepared this resource to help future founders overcome some uncertainties they might have.
#1 “It costs a lot of money to start up”
Although investors exist who will plough hundreds of thousands of pounds into new recruitment ventures, lots of start-ups launch with humbler origins and significantly less cash in the bank.
For most founders, start-up capital consists of approximately 6 months’ living expenses safely stashed away – enough to keep the lights on until the first few deals begin to land.
Those who don’t have the cash saved can access investment on very competitive terms, usually retaining 80-90%+ of their equity, or use loan options to repay what they need to borrow to get going.
Whatever a potential founder’s scenario may be, it’s rarely inability to finance the launch which will hold things back – even with rent, mortgages and other bills to pay.
In many cases, would-be business owners wait years in employment in the mistaken belief that they aren’t financially ‘ready’ to start building their own company, when in reality they have options to begin creating a valuable asset for themselves and transforming their earning potential much more easily than they realise.
#2 “Non-competes block recruiters from launching”
Restrictive covenants and non-compete agreements in the recruitment industry vary tremendously in scope and quality, but in most cases they are very unlikely to entirely prevent a recruiter from starting their own business.
There is often a gap between what is written in a contract and what is legally enforceable in a court of law – so what you see is not necessarily what you get.
Often this ‘gap’ creates opportunity for recruiters to exploit poorly-worded covenants and get going.
Even with the most tightly-constructed restrictions, consultants are likely to be prevented from immediately re-engaging their recent client and candidate base for anything from 3 to 12 months – but there will usually be no total block on their ability to go solo.
When restrictions are watertight, founders need to look at the most effective ways of preparing their business to prospect and engage a new customer segment as quickly as possible until the covenants expire.
#3 “Building revenue is the same as building value”
#4 “A ‘true entrepreneur’ does everything”
- In sales, an hour of a founder’s time can be extremely valuable if it is spent successfully pitching to a key customer that becomes the company’s next big account – something maybe only the founder is a strong enough salesperson to do.
In recruiting, an hour of a founder’s time adds important revenue if spent negotiating with a senior candidate for a large fee, where nobody else in the business has the acumen or influence to close the deal.
In marketing, an hour of a founder’s time can be deeply influential if spent briefing a creative team on a brilliant new campaign idea that will unlock new opportunities or empower consultants.
In hiring, an hour of a founder’s time creates real value if spent successfully persuading a top biller to join the team, locking in hundreds of thousands of pounds of future revenue or the potential to open up new markets.
In strategy, an hour of founder’s time can change the course of the company if spent making the right decision about how to diversify clientele, incentivise teams, retain top performers or maximise profitability…
Conversely, an hour of a founder’s time:
Is extremely low value if spent on manually building lists of sales prospects (they won’t do this task any better than an intern would, if given correct instructions).
Is worth next to nothing if spent on basic financial administration (something any numerate person is able to do).
Is wasted if spent on fixing IT issues, writing basic process documentation from scratch, updating spreadsheets or performing any of the hundreds of distracting tasks that can feel ‘important’ but are actually very low value.
#5 “Trial and error is the best way to learn”
- Developing, training and then losing staff or closing offices through poor employee performance management and retention can set a company’s growth back by many months, if not years.
Mismanaging finances, investment or employee compensation drains management time and can put a company under severe financial strain.
Structuring teams incorrectly causes personnel issues that take huge amounts of time and investment to resolve, damaging team morale in the process and letting competitors into the market.
Branding, market segmentation or business model errors can irreparably limit an agency’s growth potential.
Gaps or weaknesses in employment or director contracts lead to vast legal bills and huge distraction, or to the loss of key personnel or customer accounts.
Ineffective technology planning and poor data management throttle a company’s ability to scale, creating ticking time-bombs that explode later down the line, diverting management attention and company funding away from vital growth projects.
#6 “All investors offer the same thing”
For many founders, taking some form of investment is essential in order to make their ventures possible.
Whether it’s some extra help paying the bills in the form of a salary or additional capital to accelerate growth through early hiring, there are plenty of people who start recruitment companies assisted by someone else’s cash.
This doesn’t mean, however, that all investors can be lumped together as ‘offering the same thing’ – neither in terms of the rates and conditions on which they invest, nor the additional value they may add on top of their financial contribution.
In fact, the variation can be staggering at times, with some investors requesting up to four or five times as much equity for the same cash investment as others.
Founders who fail to explore their options fully and ‘shop around’ for the best deal can literally cut themselves off from hundreds of thousands of pounds of future reward – based purely on the terms on which they accept the initial cash boost to get their company started.
Investor partnerships aren’t just about initial equity percentages either – they should also allow for future scenarios as the business grows and evolves.
Often founders are encouraged by investors to build out their ‘wishlists’ for the tools and resources they’d like to have when starting up, as this inflates the initial cash injection required and therefore allows the investor to demand a bigger piece of the pie.
A more collaborative approach is to examine whether the business really needs everything that is scheduled to be funded by start-up capital, or whether it can purchase or fund some of it organically through profit as it begins to generate income.
And, while every investment arrangement should result in a win-win deal, there are certainly routes and approaches which keep the founder’s long-term interests firmly in mind – and others which are tilted heavily in the investors’ favour.
#7 “Low-cost accountants can manage finances”
One of the biggest areas of concern for most first-time business owners is financial management – usually the area of operations they’ve had the least exposure to (if any at all), and a potential minefield if not handled correctly.
For many, reassurance comes from knowing that accountants can be engaged to ‘deal with’ core company financial matters for very competitive rates – £1,000 per year or less for small businesses.
But there can be confusion around what these types of basic accounting packages actually provide, and – critically – how much support and guidance will be available to founders during the running of their companies on a day-by-day basis.
In practice, financial decision-making is an ongoing part of operating a company, not something which can be swept aside and processed once per year.
- Investment & loans
- Corporation tax
- VAT / GST
- Client invoicing
- Invoice factoring
- Credit control
- Cashflow forecasting & financial modelling
- Contractor management
- Bonuses, commissions & incentive pay
- Perks & benefits
- Currency exchange & international trade
- Shares, grants & options
And much, much more…
Though basic accounting packages can seem attractive, they usually involve little more than processing and filing legally-required data – often providing little or no input to the vital role that effective financial management plays in shaping and enabling growth.
Having access to expert financial resources saves enormous time on self-education, ringing around networks and paying external consultants.
#8 “It doesn’t matter who you hire first”
When it comes to growth, many new agency owners fall into the trap of building their cash reserves without much thought as to who or how they will hire to grow their business.
With a basic notion that ‘more heads = growth’, they approach hiring without a long-term business strategy in mind, feeling confident that more capacity must be a good thing – and that consequently it doesn’t matter much who is hired first, as long as they’re productive.
Many have no clear basis for deciding whether to opt for a full or split desk model, nor do they link the design of compensation plans with the strategic objectives of the business.
They hire people based on whether or not they can find a way to turn them into a profitable ‘head’ or ‘desk’, without thinking much beyond the immediate 12 months ahead…
Consequently, their companies grow haphazardly.
Along the way, they structure teams, incentives, market segmentation and management tiers not around an effective and cohesive roadmap, but around whoever they happen to bring into their organisation.
And, while this approach can work, it’s a very risky game to play.
Agencies are built on people, and behind almost all successful founders are a handful of key hires that were brought into their companies at the right time and who have dramatically helped shape and accelerate business growth.
Conversely, hiring the wrong people in the wrong order can create major obstacles to scaling a business, forcing companies to work around gaps in skill sets and letting the ‘tail wag the dog’ regarding how teams grow and function.
#9 “Owning everything creates the highest return”
Some recruiters considering starting up are reluctant to own anything less than 100% of their equity and 100% of their business revenue, working on the assumption that anything other than 100 must mean ‘less for them’ overall.
In reality, this all depends on the contribution that other business partners make to the total revenue, profit or value of the company.
If those sharing equity or income make no positive contribution to the founder’s ability to create value, it’s true that the founder is at a disadvantage by giving anything away.
But you don’t have to look far in business to find examples of people doing phenomenally well without ‘owning everything’:
- Jeff Bezos owns 11% of Amazon
- Elon Musk owns 20% of Tesla
- Jack Dorsey owns 2% of Twitter
The huge majority of successful business owners leverage financial, operational and strategic input from others to focus their own time on maximising their overall return.
Sharing a percentage of success (X%) with highly incentivised parties pays off significantly as long as those parties add value and generate proportionally higher returns (>X%).
With the right partners, it’s a straightforward calculation to make.
#10 “It’s easy to launch, scale and sell”
The dream of selling a recruitment business and retiring as a multi-millionaire is a major lure for new founders getting ready to create their own firms.
It’s the ultimate step up in personal wealth creation – to go from earning a salary and a commission as part of someone else’s company, to owning and running an organisation that could be worth a life-changing sum of money.
And the dream is real – every year, successful founders around the world cash out of recruitment and staffing companies that they’ve built with their own sweat and graft, pocketing rewards that elevate them to new levels of financial security and altering the course of their lives and those of their families.
But for every recruitment business that sells, there are thousands that never do.
- Some aim to sell but fail to lock in the right buyer and deal, drifting onwards years past their target exit date and dragging the founder into running the company long beyond what they had envisaged. Key staff who had been motivated by the promised exit see that it isn’t happening and move on, leaving the founders battling a talent drain that can cause the value of their agency to shrink alarmingly.
- Others struggle to build critical mass, never bolting down a strong enough core team to scale the business past a certain size, and owners resign themselves in frustration to running a ‘lifestyle’ business because they know they’ve not created anything valuable enough for it to make financial sense to sell.
These frustrations are common across all industries, but are particularly prevalent in the recruitment sector where the low barriers to entry make it simple to set up a company, and create an illusion that it’s ‘easy’ to build and sell a high-value business.
To understand the challenge, it’s helpful to step into a buyer’s shoes.
- To begin with, buyers in the UK market are choosing targets from among some 40,000 total agencies, so competition is intense from the start.
- Secondly, buyers are calculating the probability that an agency’s commercial performance will continue after the acquisition is completed (i.e. the risk that key personnel or key customers will be lost, that the business doesn’t function post-sale as it had done pre-sale, that it can’t survive without the founder, or that new competition enters the market and erodes the revenue base).
- Lastly, buyers will need to be convinced that they agency they are acquiring (and at the price they are paying) is not something they could build themselves more cheaply – by launching a competing brand and investing in their own sales team.
These few considerations – along with hundreds more – are all part of the rigorous scrutiny that goes into exploring potential acquisitions, and to build a company which withstands these inspections and emerges in the buyer’s eyes as truly worth a mutli-million-pound price tag is no simple feat!
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