Starting a new business is a journey filled with excitement and, naturally, a few challenges. Today, we’re going to guide you on a step-by-step journey to launching your own background check business. This sector has seen tremendous growth over the years, and your entrance into the industry could be your passport to financial independence and professional satisfaction..
A background check company offers background screening to individuals, corporations, and organizations. These services will allow an employer, landlord, financial institution, organization, or individual to quickly verify that the applicant is who they say they are. Background check services typically provide pre-employment screening to investigate a job candidate’s qualifications, employment history, criminal records, credit checks, and other elements within a person’s life so that the hiring company can make an informed hiring decision.
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The background check services industry in the US has experienced steady growth over the past few years. According to IBISWorld, the background check services industry has grown 2.1% each year over the last five years and is expected to reach $4.3 billion in 2023.
One of the main drivers of growth in the industry is a higher demand for employment background checks due to concerns over workplace safety, legal compliance, and fraud prevention. Another factor is the rising popularity of online dating, which has increased requests for personal background checks.
There are some large companies in the background check space to be aware of. A few of which include:
- HireRight – 17.8% market share
- First Advantage – 15.9% market share
- Sterling Check – 13.8% market share
One of the dominant trends in the background check industry is the growing adoption of digital technology. This evolution includes online portals for easy access and user-friendly applications to streamline the process. There’s also a heightened emphasis on data privacy and security, driven by more stringent regulations and heightened public awareness. Employers are focusing more and more on comprehensive background checks, leading to an increased demand for specialized services.
Another trend to take into account is the demand for quick, real-time background checks. The trend for businesses to conduct virtual hiring and offer remote work arrangements is set to continue. This leads to a greater need for digital identity verification and other online screening services. As a result, the background check services industry is poised for growth, driven by regulatory compliance, safety concerns, and the need for digital identity verification.
The target market for a background check service can include any organization or individual that needs to screen individuals for any given reason. Preparing a thorough market analysis will help you develop a specialization.
Potential market segments to consider are:
- Employers: Many businesses require pre-employment background checks as part of their hiring process to ensure that a job applicant has a clean record and is qualified for the position.
- Landlords: Property owners and management companies may want to conduct background checks on potential tenants to verify their employment and rental history and credit report.
- Education institutions: Education institutions: Background checks can help screen applicants and run a reference check for positions such as teachers, coaches, and support staff.
- Healthcare providers: Healthcare facilities may need to conduct background checks on potential employees to ensure they have the necessary qualifications and certifications and are not prohibited from working in healthcare due to a criminal record.
- Individuals: Some people may want background checks on potential business partners, caregivers, or other individuals for personal reasons.
Each target market segment has its unique needs and challenges, and understanding these can help you tailor your services effectively and ensure your background check business’s success.
Checklist To Start A Background Check Business
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The background check business is a lucrative and highly rewarding field, but starting one requires careful planning. Entrepreneurs need to familiarize themselves with the legal requirements of handling personal information.
To guide you through the process, we’ve created a checklist that covers the key elements needed to start a background check business.
Step 1: Research the Market
Before you embark on the adventure of launching your own background check business, it’s smart to first establish whether there is enough demand for your services. Researching the market and understanding demand are fundamental steps in the journey of any entrepreneur. Why is that, you ask?
Well, let’s think about it like this. Starting a business is like hosting a party. You could go all out, arrange the best venue, food, and music, but if your guests don’t show up, it’s all for nothing. In the business world, your customers are your guests, and your services are the party. You want to make sure you have a guest list – your potential customers – before you throw the party.
Now, how can you research the demand for a background check company? Here are some cost-effective ways and resources to consider:
Online research: The internet is a vast, free resource that can give you insights into your market. Look for recent news, articles, reports, and discussions about the background check industry. This can help you understand the current state of the industry, trends, and potential challenges.
Surveys and interviews: Reach out to potential customers directly. Ask businesses, landlords, or educational institutions in your area if they use background check services and what they look for in a service provider.
Networking events and industry conferences: Although these might require a small investment, they can offer valuable insights. You can connect with other professionals in the field, and often, these events feature discussions about the current state and future of the industry.
Social media and online forums: Websites like LinkedIn, Reddit, or industry-specific forums can provide insights into your potential market. Look for discussions about background checks or join groups related to human resources or property management.
Through all this research, you aim to understand the size of your potential market, what potential customers are looking for, and how well these needs are currently being met. If you find a substantial number of potential customers whose needs aren’t fully satisfied by current offerings, you may just have found a market gap that your background check business could fill. Your business is a solution looking for a problem to solve. Make sure the problem exists before offering the solution.
Step 2: Create a Business Plan
Creating a detailed and thoughtful business plan isn’t just a box to tick off on your startup to-do list. A business plan is like having a GPS for your entrepreneurial journey. Without it, you’re setting off on a trip without a clear route – you might eventually get where you want to go, but you’ll likely take a few wrong turns and hit a few roadblocks along the way. With a business plan, you have a path mapped out from where you are now to where you want to be.
Now, let’s dive into some specific sections that hold high importance in a background check business plan:
Market analysis: You’ve done your homework and researched the market. Now, it’s time to show off your findings. Include the demand for background check services, any gaps in the market that your business can fill, and an analysis of your competition.
Service description: In this section, detail the services your background check business will offer. Will you specialize in employment background checks, tenant screening, or something else? Your offerings should reflect the market need you identified in your research.
Marketing strategy: Due to legal restrictions, background check services may not be as straightforward to market as other types of businesses. You’ll need a clear strategy to reach your target market segments, build trust, and convince them of the value of your services.
Financial projections: Lenders are going to likely spend the most time going over the projections. They want to see you did your homework and that the business is capable of generating enough profits to repay any loans.
Related: How to write a business plan
Step 3: Register the Business
The next step in starting a background check business is making sure it is fully registered. This process involves several legal steps, and while these steps might seem tedious, they’re really about setting a firm foundation for your venture.
Each state has different regulations, so let’s cover some of the common things to look out for.
Forming a business structure: One of the first steps you’ll need to take is to determine the legal structure of your business. Common structures include a sole proprietorship, a partnership, a Limited Liability Company (LLC), or a corporation.
Sole proprietorships are quite straightforward to set up and involve lower startup costs. But if liability is a concern, an LLC or corporation could be a better fit as these structures offer personal liability protection.
Related: Comparison of business structures
Business name registration: After registering the business structure, you may need to register your business name. This process will vary depending on what business structure you pick. Sole proprietors and partnerships will often be required to register a “Doing Business As” (DBA), while corporations and LLCs register with the state during the formation process.
During this time, it’s also a good idea to check if the name you want is available as a web domain, even if you’re not ready to set up a website yet.
Obtain business licenses and permits: A background check business is subject to specific licensing requirements, which can vary by state. For example, some states require background check businesses to hold a private investigative agency license. Also, you’ll likely need to comply with the Equal Employment Opportunity Commission (EEOC) and Fair Credit Reporting Act (FCRA), which governs how background check information can be used.
Depending on your location, there will also likely be a variety of general licenses or permits needed before opening. This could include a business license, seller’s permit, and Employer Identification Number (EIN).
Step 4: Source Funding
With the business registration out of the way, the next step is making sure you have access to the funding needed to start.
For many, personal savings form the bedrock of their startup capital. This route is advantageous as it allows you to avoid loan repayments, freeing up cash flow in the early days of your venture. However, retaining some savings for any unexpected costs or challenges that might arise as the business evolves is a good idea.
The average cost to start a background check business falls around $10,000 to $50,000. If the costs are on the lower end, many entrepreneurs manage to cover the entire investment from their personal savings, dodging the need for outside funding. But if the startup costs veer toward the higher end, you may need a blend of personal savings and other funding sources.
Traditional bank loans are often a go-to choice for many entrepreneurs. However, it’s worth noting that lenders typically want to see that you’ve invested around 15%-25% of your personal funds into the business, alongside a credit score of over 650 and sufficient collateral to secure the loan. If the bank considers the loan too risky, they might suggest opting for a Small Business Administration (SBA) loan guarantee to minimize their risk.
Another option that isn’t often thought of is microloans. Microloans are smaller loans, typically offered by nonprofits and mission-based lenders, to assist small businesses. They are relatively easier to get compared to traditional loans and may come with educational and consulting support as well.
Angel investors are another potential funding source. These are individuals, often with a high net worth, who are willing to invest in businesses they find promising. They might be particularly interested in your background check business if they see a local demand or have a personal interest in your niche. However, securing angel investment can be challenging as they often seek high-growth, scalable businesses with a substantial potential return on investment.
Each business and its needs are unique. It’s essential to evaluate all possible funding sources and choose the ones that fit best with your specific circumstances and business model. The goal here is to secure enough funding to comfortably cover your startup costs and maintain your business operations until you begin to generate steady revenue.
Step 5: Establish Partnerships with Data Sources
To successfully run a background check business, securing reliable partnerships with data sources and background screening providers is important. Here’s some tips on how to do so:
Identify potential partners: Start by listing all potential data sources and background screening providers. Your list should be based on your service offerings, whether they are local, national, or international background checks.
Establish relationships: After shortlisting potential partners, initiate contact. Use industry events, professional associations, and online platforms as a means to connect.
Assess quality and dependability: The accuracy of data from your partners is paramount in this business. Therefore, evaluate your potential partners for their reliability, accuracy, and promptness. It is recommended to run some tests to ensure that their data is reliable and up-to-date.
Agree on terms: With reliable partners identified, negotiate the conditions of your partnership. This process includes clarifying expectations, defining responsibilities, and discussing costs. Be clear and assertive in this phase to ensure a fair agreement.
Adhere to regulations: Ensure all partnerships conform to applicable laws and regulations. These may include privacy laws and the Fair Credit Reporting Act (FCRA). You may need to consult a legal advisor to help ensure compliance.
Building effective partnerships takes time, effort, and careful consideration. But with the right partners, your background check business can deliver top-notch services to its clients.
Step 6: Set Up Pricing
Pricing your services in a background check business requires a fine balance between covering your costs, staying competitive, and delivering value to your customers. A few considerations when setting pricing include:
Understand your costs: First, you need to get a clear understanding of your costs. This includes direct costs such as purchasing data from sources or screening providers, as well as indirect costs like operational expenses, marketing, and overheads. Getting a grip on your costs ensures that your pricing covers these and leaves room for profit.
Analyze the market: To price competitively, you need to understand the market rate for similar services. Research your competitors’ pricing strategies. Are they charging per report, offering subscription plans, or have they adopted a tiered pricing structure depending on the depth of the check? This can provide you with valuable insights.
Value proposition: Pricing should also reflect the value you provide to your customers. If you’re offering comprehensive, nationwide checks and quick turnaround times, you might command a higher price point than a company offering basic local checks.
Pricing structure: Decide on your pricing structure. Will you charge per report, offer packages for a certain number of checks, or provide an unlimited monthly subscription? Each model has its pros and cons and impacts how customers perceive your pricing.
Test and adjust: Pricing isn’t a one-time decision. Test your prices, monitor how your customers respond and adjust as necessary. You might find that you need to lower your prices to attract more customers or raise them because you’re offering high-quality checks that clients find valuable.
Step 7: Create the Marketing Strategy
When it comes to marketing a background check business, there are a number of practical avenues you can explore. Here’s a mix of online and traditional methods that can help attract clients and grow your business.
To get noticed online, a nice looking website is typically the first thing to work on. Then, to get the website noticed, list your business in relevant directories. This not only improves your visibility but also lends credibility to your business. Popular options include LinkedIn, Yelp, and the Better Business Bureau. Also, don’t forget to claim your Google Business Profile. This free tool helps your business show up on Google search and maps when potential clients are looking for services like yours.
In addition, social media platforms like LinkedIn and Twitter can be excellent channels for connecting with potential B2B clients. Share insights, industry news, and updates about your services to engage with your audience.
On top of digital marketing, there are a number of traditional channels that can be used to market a background check business.
The old saying, “it’s not what you know, it’s who you know” still holds true in business. Joining local business groups or your Chamber of Commerce can provide valuable networking opportunities. These groups can also host events, workshops, or seminars where you can meet potential clients. Developing relationships with community partners, such as law enforcement and academic institutions, can also generate referrals and boost credibility with potential customers.
Targeted direct mail can be effective, especially for local businesses or businesses in a specific industry. Sending introductory letters or postcards with a special offer can attract new customers. In addition, advertising in industry magazines or local newspapers can help you reach a wider audience. You could also consider sponsoring events or trade shows to get your brand in front of potential clients.
Step 8: Hire & Train Employees
A background check business can be run just by the owner, while others will start with employees. Taking the step to hire employees for your background check business is a significant move, and it’s vital to approach it with a clear understanding of the types of roles you need and the legal aspects involved.
In a background check business, typical roles might include Data Analysts, who are crucial for interpreting data and generating reports; Customer Service Representatives, who ensure clients’ needs are met promptly and professionally; and Sales Representatives, who are tasked with attracting new clients and maintaining relationships with existing ones. Depending on the size of your operations, you may also need an Operations Manager to oversee the day-to-day running of the business.
Before you begin the hiring process, you’ll need to comply with certain legal requirements. These include obtaining an Employer Identification Number (EIN) from the IRS, which is necessary for tax reporting purposes. You’ll also need to set up a system for withholding taxes, reporting new hires to your state’s directory, and complying with labor laws, such as providing a safe work environment and adhering to wage laws. It’s also essential to understand and comply with laws prohibiting discrimination in hiring under the Equal Employment Opportunity Commission (EEOC).
Step 9: Prepare to Launch
As you gear up to start your background check business, there are a few additional steps to consider. Every business will have different needs, but here are some common final tasks.
First up, it’s good practice to secure business insurance. General Liability Insurance is a good starting point for most businesses, providing coverage against things like third-party injuries, property damage, and legal costs. Also, consider Professional Liability Insurance, which covers claims related to errors or negligence in your services.
Next, setting up your bookkeeping system is essential. Keeping accurate records of your income and expenses will not only help you monitor your business performance but also make tax filing a breeze. Whether you do it manually, hire a bookkeeper, or use software like Wave Accounting (FREE) or Quickbooks, ensure you have a reliable system in place.
Formal contracts will be a key part of your business. For instance, you’ll need service agreements outlining what your clients can expect from your background check services. It’s wise to have a lawyer help you draft these to ensure they’re thorough and legally sound.
As for banking, it’s recommended to open a separate business account. This helps keep your personal and business finances separate, simplifying bookkeeping and reinforcing your business’s legal standing.
There are various background check software offerings that can streamline your operations. Look into platforms like TazWorks, Accio Data, or FRS Software. These tools can help with things like data management, report generation, and integrations with data sources.
As for the grand opening, plan a launch strategy that effectively spreads the word about your services. This could involve a special promotion, press release, or event.
This material is property of StartingYourBusiness.com
Common Questions When Starting A Background Business
How much does it cost to start a background check business?
The background check services industry is considered to have low barriers to entry. That said, it is a highly competitive industry that continues to experience significant technology changes. Therefore, it’s important to note that the expenses for a background check business can vary widely depending on your business model, the target market, location, and the competition in your area.
The cost to start a background check business can vary widely depending on several factors, but on average, you might expect to invest somewhere in the range of $10,000 to $50,000. Here’s a breakdown of what those costs may include:
Business formation: Setting up your business structure, such as an LLC or corporation, could range from $50 to $500, depending on your state and whether you use a service or DIY.
Licensing: Depending on your state, certain licensing, such as a Private Investigator’s License may be required. This could cost anywhere from $50 to $1,000.
Office space: If you choose to lease a professional office space, your costs will significantly increase. However, many start their background check business from home, which can minimize this expense.
Equipment: Your largest equipment expense will likely be a good computer system and printer. Budget around $1,000 to $2,000 for a quality setup.
Software: Specialized software can range from $100 to $500 per month, but you’ll only need one month’s worth to get started.
Marketing: Initial marketing costs might be between $500 to $3,000 for things like a website, business cards, flyers, and digital marketing.
Insurance: Initial insurance costs are typically around $500 for the first year.
Professional services: Budget around $1,000 to $2,000 for a lawyer to draft contracts and an accountant to set up your bookkeeping.
In addition to these startup costs, it’s wise to have three to six months’ worth of operating expenses on hand. This buffer can help you manage unexpected costs and get through the early days of your business, where income might be less predictable. It’s not an upfront cost, but a practical consideration to ensure your business’s stability.
How profitable is a background check business?
Calculating the potential profit of a background check business requires a careful analysis of both revenue and expenses. Remember, your earnings can significantly vary based on factors like your business location, pricing strategy, clientele, and operational efficiency.
As a starting point, let’s say your background check business conducts 20 checks per day, each priced at $50. This would yield daily revenues of $1,000. Assuming your business operates 22 days a month (considering weekends off), the monthly revenue would be around $22,000.
Now, let’s consider expenses. A significant part of your expenses will include payments to data sources, employee salaries, office expenses, marketing, and operational costs. Let’s say these total around $10,000 per month.
So, if you subtract your expenses from your revenue ($22,000 – $10,000), your business could potentially make a monthly profit of $12,000, or $144,000 per year.
It’s essential to remember that this is a rough estimate. Your profit will depend on how efficiently you can manage your expenses and how effectively you can maximize your revenues. The key is to provide top-notch service, maintain strong relationships with your clients, and consistently seek ways to improve your operational efficiency.
What skills are needed to run a background check business?
Credentials and professional know-how: To assure your clients that they are in good hands and all information is accurate, private, and secure, we strongly recommend NAPBS accreditation. It will certify that you have a solid understanding of information security, good business practices, verification service standards, research and data standards, and legal and company compliance requirements. In addition, you will need knowledge of state and federal laws related to background checks and be familiar with the types of background checks commonly requested, such as criminal history, employment verification, and credit history checks.
Good communication and customer service skills: You will need good oral and written communication skills to interact with clients, understand their requirements, and provide concise and understandable reports to help them make decisions. In addition, excellent customer service skills, ensuring that reports are delivered on time and well presented, will help build and grow your customer base.
Analytical skills: Since you’re dealing with a large volume of data, it’s important to have the ability to analyze and interpret information quickly and accurately. You need to ensure the data you provide to your clients is valid, up-to-date, and relevant.
Tech savviness: Many background checks are performed online using various databases and software. Comfort and technological proficiency are essential to efficiently run the business and adapt to new tools as they become available.
Attention to detail: Background checks require meticulous attention to detail. A missed data point or overlooked piece of information can have serious implications.
Ethical standards: Due to the nature of the information being dealt with, maintaining high ethical standards is a must. You must be able to handle sensitive information professionally and confidentially.
Sales and marketing abilities: To grow your client base, you need to be able to sell your services effectively and market your business to potential customers.