Do you have a passion for helping people find the perfect job opportunities? Do you possess excellent communication and sales skills? If so, starting a recruiting agency might be the perfect business opportunity for you.
A successful recruiting agency requires more than just expert knowledge of human resources and our guide will help you understand the business, outline the steps to get started, and answer common questions..
A recruiting agency is a business that connects job seekers with employers. The agency’s key services include identifying job candidates with the right set of skills and experience, conducting interviews, and selecting potential candidates that fit the employers’ specific requirements.
A recruiting agency takes on many hiring tasks, but three main duties include:
- Applicant vetting. Recruiting agencies utilize their talent pool to find applicants that fit their client’s job positions. Sometimes, the agency will need to put out an ad for the position and screen new applicants. The screening process includes hiring tasks such as background checks, reference checks, and pre-hire assessments or certifications.
- Hiring. After screening applicants (sometimes, this means reading through hundreds of resumes), the agency will interview applicants who passed the screening process. This initial interview ensures the candidate is indeed a good match for the role. Finally, the candidate is passed to the client for a final round of interviews.
- Offers and negotiations. Often, the recruiter at the agency is the candidate’s primary contact during the hiring process. So, after the client hires the talent, the agency will likely handle the compensation negotiations and offers for their client.
And sometimes, the recruiting agency will handle onboarding; however, in many situations, the onboarding occurs directly with the business after the hire.
Recruiting agencies are often paid in one of two ways:
- A retainer fee agreement compensates recruiting agencies with a fee upfront for their services. This fee is often an ongoing payment and permits the agency to find hires for multiple open positions.
- A contingency fee agreement pays the agency based on successful hires. The contingency fee is a percentage markup of the employee’s salary, usually between 15% and 25% of the employee’s first-year salary.
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In 2022, the employment and recruiting agency industry generated $46.6 billion.1 Even after annual growth of 14.4% over the last five years, the industry is expected to grow. This growth can be attributed to the ever-changing landscape of work and the ongoing need for businesses to find qualified candidates to meet their specific requirements.
Steps To Start A Recruiting Agency
Step 1: Write a Business Plan
When you’re starting a recruiting agency, writing a business plan is the first step. It serves as a roadmap, guiding you through the early stages of your business and setting the foundation for future success. Here’s why it’s so important:
- Clarifying your vision and goals: A business plan helps you clearly define what you want your recruiting agency to achieve. It makes you think about your long-term goals and how you plan to reach them.
- Market research: Writing a business plan includes doing some market research to help you define your target market and identify the types of businesses and candidates you want to work with. Knowing your target market will help you develop a marketing strategy tailored to their specific needs and interests.
- Competition analysis: A business plan involves analyzing your competitors to provide insights into what others in your field are doing and how you can do things differently or better.
- Budgeting and financial projections: A business plan includes financial projections and budgeting. These projections will help you establish budgets, determine pricing, and forecast revenue and expenses.
Related: How to write a business plan
Step 2: Secure Funding (if necessary)
The next step to starting a recruitment agency is making sure the funding is in place. While many recruiting agencies choose to start small, simply using the owner’s personal savings, this may not always be enough to cover the startup costs.
If personal savings aren’t enough, you can consider a bank loan. Lenders usually ask that you put in at least 15% of your own money towards the total cost. They’ll want to see a strong credit score and collateral, which is something of value, like a car or house. If they need more assurance, a Small Business Administration loan guarantee can be useful. This gives the bank some extra security on your loan.
Another possible source is borrowing from friends or family. If you do this, make sure to put everything in writing to avoid misunderstandings later on.
If traditional lending options are not available, microloans are another option. Local economic development organizations provide these, and some even offer business training along with the funding.
Step 3: Register the Business
The next step of starting a recruitment business involves having it registered and making it legal. Here’s what you need to know:
Choosing a business structure: Before you register, you must decide how you’ll structure your business. There are four main types, each with its own benefits and considerations:
- Sole proprietorship: These are owned by a single person. This structure is the easiest and least expensive to establish, but the owner is personally liable for the business.
- General partnership: If you’re starting the agency with someone else, a partnership is an option. This structure allows you to share both the profits and liabilities of the business with your partner.
- Corporation: This is a legal entity that’s separate from its owners. Corporations offer strong protection to their owners from personal liability, but the cost to form a corporation is higher than other structures.
- Limited Liability Company (LLC): This structure provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a sole proprietorship or partnership.
Related: Comparison of business structures
Forming an LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.
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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: Your state may require specific licenses to operate a recruiting or staffing agency. The names of these licenses vary by state and could include names like “Employment Agency License,” “Talent Agency License,” and “Employee Leasing Company Registration.” So, make sure to check the specific regulations in your location.
There will also likely be a variety of general business registrations needed before opening. These could include a business license, seller’s permit, and Employer Identification Number (EIN).
Step 4: Set Up Operations
Running a recruiting agency involves a lot of moving parts, so it’s time to focus on the next stage, which is setting up operations.
One of the first decisions you need to make when setting up the operations for your recruiting agency is whether you need a physical office space or if a virtual office is sufficient. A physical office can enhance credibility and facilitate face-to-face meetings, but it also means higher overhead costs. On the other hand, a virtual office reduces costs and offers flexibility. You can work from anywhere, and your team can work remotely. Evaluate the pros and cons of both options and make a decision based on your target market, specific needs, and budget.
With the location out of the way, the next aspect is setting up operational processes. There are a number of tasks to juggle in this business, from tracking candidates to posting job vacancies, invoicing clients, generating reports, and more. This is where leveraging technology, particularly an Applicant Tracking System (ATS), becomes invaluable. An ATS is designed to automate and streamline many of the repetitive tasks associated with recruitment. It can help you manage resumes, track applicants through different stages of the recruitment process, and schedule interviews. This not only saves manual time but also reduces the risk of losing potential clients due to operational inefficiencies.
Step 5: Prepare to Launch!
Now that you’ve registered your business, selected a location, and established operations, there are still a few tasks left to consider as you work towards launching your recruiting agency. These steps will vary based on individual needs and situations, but here are some components left that can help ensure the smooth running of your business.
Business insurance: Obtaining the right insurance is essential for protecting your business. This includes errors and omissions insurance, which covers legal costs and damages if you’re sued for a mistake or oversight in your services, and workers’ compensation insurance, which is necessary if you have employees.
Develop relationships: Building strong relationships with HR professionals, hiring managers, and candidates is key. These connections form the backbone of your business, providing a steady stream of opportunities and potential placements.
Create a website: Your website is often the first point of contact with potential clients and candidates. It should be professional, easy to navigate, and clearly convey the services you offer and the value you provide.
Market services: Utilize online platforms, job boards, and networking events to market your services. These channels are vital for reaching a wider audience, attracting new clients, and finding candidates for your job listings.
Setting up bookkeeping: Establish a system for handling daily transactions, taxes, and financial statements. This could involve hiring a bookkeeper or using accounting software.
Opening a business bank account: A separate bank account for your business keeps your personal and business finances distinct and makes bookkeeping easier.
Joining industry associations: Becoming a member of industry associations like the American Staffing Association (ASA) or the National Association of Personnel Services (NAPS) is beneficial. These associations offer networking opportunities, professional development, and access to industry resources and trends.
Preparing for the grand opening: Plan a grand opening event to announce your agency’s launch. This could be a physical event, an online launch, or a promotional campaign. It’s a great way to generate buzz and begin building your client base.
Common Questions When Starting A Recruiting Agency
How much does it cost to start a recruiting agency?
Because a recruiting agency can be run virtually, it has a lower cost than other types of businesses. An estimation of the upfront expenses can range between $1,500 to $10,000 for the initial setup. Here is an overview of common initial costs:
Physical office space: If you opt for a physical office, there will be costs such as rent and utility deposits and furnishing the office that could range from $2,000 up to $20,000 or more, depending on your location and the size of the office
Office set up: Depending on your needs, buying office equipment and supplies, such as computers, desks, and stationery, could cost around $500 to $1,000 to start with.
Software and technology: Investing in recruiting software can streamline your operations and improve efficiency. The cost of such software can range from $100 to $500 per month.
Marketing: Initial marketing costs can include expenses for creating a website, designing a logo, and promoting your agency through digital marketing or traditional advertising methods. These costs can range from $500 to $5,000
Business registration: On average, expect to spend around $100 to $500.
How profitable is a recruiting agency?
Generally, a recruiting agency earns revenue primarily through placement fees, which are charged to client companies when a candidate is successfully placed in a job. These fees typically range from 15% to 25% of the candidate’s first-year salary.
For instance, if a recruiting agency places a candidate in a position with an annual salary of $60,000 and charges a 20% placement fee, the agency would earn $12,000 from that placement.
Let’s assume a modestly successful agency makes 30 placements a year, with an average salary of $60,000 and a 20% fee. This would result in annual revenue of $360,000 (30 placements x $12,000 per placement).
However, this revenue isn’t pure profit. The agency must cover its operating expenses, which include office rent (if applicable), salaries for any staff, marketing costs, insurance, and other administrative expenses. Based on industry benchmarks and assuming a lean operation, these expenses could amount to about 50-60% of the revenue.
For our example, if we take 55% as an average for operating expenses, the agency would have expenses of around $198,000 (55% of $360,000).
Subtracting these expenses from the revenue gives us a potential profit. In this case, the profit would be $162,000 ($360,000 revenue – $198,000 expenses)
What skills are needed to run a recruiting agency?
Although a specific degree is not required to run a recruiting agency, having some industry-specific skills helps your business be successful and earn profitable income.
Negotiation: Negotiation skills help you establish agreements with clients to find quality talent while also earning a profit. In addition, negotiation is valuable in closing the deal between the client and the talent.
For instance, you will likely handle the offer package and negotiate compensation with the employee. Negotiating with your talent and your client will help you translate potential hires into confirmed hires.
Interpersonal skills: Interpersonal skills are the ability to communicate with others effectively. This skill is helpful for a recruiting agency because you need to determine when a candidate is lying about their experience or embellishing their abilities. In addition, your agency’s success depends on a good reputation. So, if a new hire turns out to be less than qualified for the position, it can negatively affect your agency.
Schedule management: A large portion of the business will be conducting interviews and screens for potential hires, meaning you will be handling multiple individuals’ schedules. So, schedule management skills are essential to your success as you will need to arrange interviews and screens to get your talent in front of your client.
Understanding of roles and qualifications: Because your clients trust your agency to do the heavy lifting when screening potential employees, it is essential that your agency has a firm understanding of the role and what qualifications are important. In many ways, your agency will become an expert on many roles, making it easier to screen and rule out applicants.