As with any business, starting a recruitment business requires detailed planning from the very beginning. This will help you get off to a smooth start and should increase your chances of successfully growing the business, attracting investment if required and, ultimately, achieving an exit.
When going into business with others, a key part of the planning process is trying to anticipate any difficult situations which might arise in the future and which could impede or undermine the business, for example, what to do in the event of a funding shortfall, ownership of candidate/client lists, how key decisions are made, or the terms upon which any stakeholder can exit the business.
So, here are some things to bear in mind when starting a new recruitment business:
1. Corporate Structure
Should the business be a partnership, LLP or private limited company? To some extent this depends on your plans for growth, for example, if you are looking to attract private equity/venture capital investment you might use a limited company, being the typical vehicle for such outside investment. If the key stakeholders are involved in day-to-day management and you would like the tax efficiency and flexibility of different profit shares, you might consider establishing your business as an LLP.
Your corporate structure will not only affect how your business is operated but also how it is funded taxed and, ultimately, sold. There are various tax reliefs – EIS, SEIS, Entrepreneur’s Relief – which could be applicable. You also need to think about your personal tax position (eg are you planning on distributing any profits or reinvesting them into the business?), so it is crucial that you take tax advice up front before committing to any structure.
2. Business Plan
Before commencing business, you should put down on paper a formal plan for the business – this should include a budget, sources of funding and your plan for the next few years. Ideally you should work out where the expenditure will fall and the likely costs vs projected income. It should be an annual plan, approved by the stakeholders and adopted at the beginning of each financial year.
The Plan should be sufficiently detailed that, if you ever find yourself in dispute with your co-owners over any major decisions, the business will have an agreed track to follow while you seek to resolve your differences – otherwise, there is a risk that the business will grind to a halt until you are able to find a way forward.
Ultimately, your business is more likely to be successful if all of the stakeholders are aligned on the vision and strategy for the future.
3. Protecting your Business
As your business grows, it is important that you protect its value. In a recruitment business, your contacts – clients, candidates, suppliers, etc – and your website and literature are of major importance. Key considerations include:
- Registration under, and compliance with, data protection legislation to ensure that your client and candidate database is a saleable asset
- Restrictions on shareholders/members/employees preventing them from competing with, or poaching clients and/or staff from, your business – these should be contained in a shareholders’ or members’ agreement (see below)
- Ensuring that any intellectual property your business creates (such as websites, company / trading name or databases etc.) is adequately protected.
4. Put an Agreement in Place
However you set up the business, it is crucial that you put in place a binding agreement between the stakeholders (eg shareholders’ agreement for companies, members’ agreement for an LLP or even a simple partnership agreement if you go into partnership with others).
The purpose of the agreement is to address both the management and operation of the business and also to pre-empt some of the situations or pitfalls which may arise during the life of the business.
Your agreement would typically cover:
- How decisions are made in respect of the business – will a simple majority vote suffice or are there some decisions which should require a higher threshold? To avoid any uncertainty, you should list those things which require specific consent (and on some of the very big decisions, you may decide that there should be unanimity)
- The agreement should refer to the Business Plan (and potentially attach it) – to short-cut the decision-making process, you might decide that if a particular action is provided for in the Business Plan, it doesn’t require specific approval from the stakeholders again
- Funding commitments and future funding – will shareholders be required to put more money in or will you seek bank/third party finance?
- A commitment to set aside an agreed pot of equity/profit share to incentivise employees/management
- What happens if a shareholder / member wishes to leave the business? If you want any exiting stakeholder to offer his/her share to all remaining stakeholders first, you need to provide for this. A majority stakeholder may also want to be able to “drag” the minorities to sell the whole business to a third party; similarly, minority stakeholders may want the right to “tag” along with the sale if a majority owner is looking to sell his/her stake and require any buyer to buy them out too
- What happens if there is a breakdown in the decision-making process and/or the relationship between the stakeholders? You should consider an appropriate dispute resolution procedure, which might involve some form of buy-out arrangement or the involvement of an independent third-party to resolve the deadlock. There should be a clear roadmap to navigate and resolve any differences as quickly and as amicably as possible, allowing you to focus on growing a successful business
- Investment / exit strategy – is there a plan to sell/list the business at some point in the future?
Putting together a meaningful agreement can take quite a bit of time, but the process should flush out the main issues which could affect the business and give everyone an opportunity to air any concerns and agree on a strategy. Once the agreement has been signed, you should only really need to consult it if things don’t go as planned, but hopefully you can just put it in a drawer and get on with running and growing your business.