How to Start a Recruiting Agency
Starting a recruiting agency takes dedicated work but can be done for a relatively low cost, making it a great business opportunity. A recruiting agency’s purpose is to work with businesses, filling their open, full-time positions.
Hiring employees takes time and money, which many businesses don’t have a lot of. So, recruiting agencies take on this task and fill an important need for other companies.
A recruiting agency’s sole goal is to find quality employees (the talent) for full-time jobs at other companies (the client). Recruiting agencies take on the responsibility of hiring talent, freeing time and money for their clients to focus on other tasks.
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—think commission. The contingency fee is a percentage markup of the employee’s salary, usually between 15% and 25%.
In 2022, recruiting and employment agencies earned $28.5 billion in the U.S., up 2.2% compared to the previous year. In fact, the recruitment industry has grown consistently between 2017 – 2022 by an average of approximately 5.3% each year.
The number of recruiting and employment businesses in the U.S. has remained steady between 2012 – 2022 with minimal growth or decline. As of 2022, there were 11,527 employment and recruiting businesses in the U.S., and in 2012, there were 11,300.
In this industry, there are a few trends to pay attention to because they may affect your agency’s growth over the next few years.
Low barrier to entry. A low barrier to entry means that starting a recruiting agency has minimal hurdles. For example, no degree or significant investment of money is required to start a recruiting agency. However, a low barrier to entry can mean increased competition by other recruiting agencies.
Unemployment rates. An increase in unemployment rates indicates that businesses have fewer job openings. As a result, agencies have fewer openings to fill. On the flip side, as unemployment rates decrease, there is a higher demand for employees, and agencies will see an increase in demand for their services.
Technology. Technology advancement is a two-sided coin. On the one hand, technology improvements, such as screening performed by AI, help expedite the hiring process, and agencies can screen applicants faster and more efficiently. On the other hand, however, as hiring software improves, clients may bring some of the hiring processes back in-house, decreasing the need for agencies.
The target market for recruiting agencies includes businesses that will become the agency’s clients and the talent the client will hire.
Businesses. The market for businesses includes companies of all sizes. Any business can hire a recruiting agency to help them find quality employees to fill open roles. However, the more lucrative and ongoing contracts tend to be with large businesses or corporations that hire frequently or have several positions to fill.
Workers. Your target market to find quality candidates includes workers with skills and background experience for the roles you are looking to fill. The market is more clearly defined when your agency specializes in a type of role. For example, your agency may hire specifically for tech or the medical field. In this case, your market includes workers only with a background in that specific niche.
Starting a recruiting agency isn’t an easy process, but the rewards of offering top-notch talent to employers and helping individuals find rewarding careers can be worth it.
We have a checklist with some of the more important items to help make the journey as stress-free as possible.
Step 1: Write a Business Plan
A business plan should be the first step when starting a recruiting agency because it helps to lay out your goals and methods, a timeline of when things need to be done, analyze competitors and form a strategy on how your company will be different, create financial forecasts, and more.
Related: How to write a business plan
Step 2: Name the Business
Coming up with a name for a new recruiting agency can be challenging but there are some creative ways to tackle this step.
To start, begin by researching the field or industry you are planning to specialize in and look for terms, phrases, or even associated buzzwords that might help get the creative juices flowing. Brainstorming is also useful as you may come up with ideas as unexpected combinations of words that still capture the essence of professional talent agencies.
You also want to make sure the name is not too clever and is clear and easy to understand, since this is how potential clients or job seekers will most likely remember you. Also, having a domain name that exactly matches your business name is optimal, but these can be hard to find.
Finally, it’s important to make sure that your final choice isn’t already taken by someone else so you don’t have to worry about trademark issues down the line, potentially resulting in having to rename the business.
Related: Tips on naming a business
Step 3: Form a Business Entity
A business entity (also referred to as a business structure) refers to how a business is legally organized to operate. There are four primary business structures to choose from, which include the sole proprietorship, partnership, corporation, and Limited Liability Company (LLC). Each type of entity has its own pros and cons, such as liability exposure, costs, and administrative requirements.
When deciding on which business entity is best for a recruiting agency, it normally comes down to the sole proprietorship and Limited Liability Company.
A partnership opens the owners up to unnecessary personal liability because if a partner does something to get the business sued, or runs off with cash from the business, the other partners are personally liable to repay.
The corporation can be a good choice to minimize liability risk because it separates the business assets from the owner’s assets. If the corporation is sued or certain business debts can’t be paid back, the owners aren’t personally responsible to repay them. The downside to the corporation is that it is more complicated than all the other entities and requires more administration than the LLC. If you plan on raising a lot of investment though, the corporation is usually the better choice.
That leaves the sole proprietorship and LLC.
The sole proprietorship is the least expensive and easiest entity to start which is appealing. The downside is that the owner is personally liable should anything happen to the business, which is an important consideration. The LLC offers the ability to operate as a sole proprietorship with the liability protection of a corporation. Depending on the state, the cost to form an LLC runs from $40 – $500, which is pretty inexpensive for protecting the owners from business-related lawsuits and certain debts.
Related: Guide to forming your LLC
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.
Some popular LLC formation services include:
IncFile - $0 plus state fees & free registered agent for 1 year!
ZenBusiness - Best for beginners. $0 plus state fees & free registered agent for 1 year!
Northwest - Best privacy protection. $39 plus state fees & free registered agent for 1 year!
Step 4: Select Your Location
Choosing a location to run a staffing agency is an important step when launching the business. While there are many agency owners that operate entirely online from their home, the challenge is being able to get clients to trust your new company over an established agency with offices. The cost advantage of working from home is obvious, as only a good internet connection and a quiet spot for phone calls is needed, but an in-between option would be utilizing shared office space so you have the advantage of a legitimate location without the overhead.
If a dedicated office space is in your plans, you may want to look at your target customer before signing a lease. For example, if you plan to focus on engineering placement, locating close to major engineering employers or a university with a highly regarded engineering program could help with the perception of your business.
Related: Choosing a business location
Step 5: Apply for Business Licenses and Permits
Starting a recruiting agency comes with being aware of several regulations and obtaining a variety of licenses.
Depending on your state of residence, you will likely be required to obtain licensing that is specific to a recruiting or staffing agency. There may be multiple licenses and these may be referred to as an Employment Agency License, Talent Agency License, Employee Leasing Company Registration, and more.
Step 6: Find Financing
Coming up with a good business idea and having the skills to run it are one thing, but getting the funding to start a recruiting agency is another. Fortunately, the cost to start a new recruiting agency is relatively low; however, funding to start a business can be difficult. Banks are typically going to want the borrower to have good credit and be able to invest 15-25% of their money towards the total start-up costs.
Step 7: Open a Business Bank Account
Keeping your small business and personal finances in separate bank accounts is important to track the income and expenses of your business and identify trends.
Many banks offer free business checking accounts, so be sure to find a cost-effective option for your business.
Step 8: Get your Marketing Plan in Place
Establishing a successful recruiting agency requires effective marketing to not only reach the right candidates but to also find the employers that need your services.
To get started, consider investing in your online presence by being active on social media platforms like Facebook, Twitter, and LinkedIn, a website outlining the expertise of your team and recommendations from happy clients, and even possibly creating blog posts or videos that answer common questions related to job-seeking to connect with potential applicants. You can also use email campaigns to inform potential applicants of open positions, as well as create partnerships with related businesses or influencers to expand your outreach efforts.
Additionally, it’s wise to network with other recruiters and industry professionals as much as possible in order to establish your business in the industry and build trust with potential clients.
Step 9: Get Business Insurance
Recruiting agencies need to make sure they are safeguarded against potential liabilities, and an important line of defense is having the right insurance in place.
A few important types of policies include general liability insurance as well as professional liability insurance, also known as Errors and Omissions (E&O) coverage.
General liability protects a company in the event of any bodily injury or property damage caused by their business operations while E&O provides additional protection against third-party claims such as breach of duties, negligence or misrepresentation.
Step 10: Hire Employees
A recruiting agency needs a variety of employees to complete its day-to-day operations.
Some of these could include:
– Recruitment specialists who interview, screen, and select candidates for job roles. – Business development or marketing staff to promote the agency’s services.
– Office staff to answer phones, schedule interviews, and organize paperwork.
Related: Hiring your first employee
Step 11: Research Tools
A recruiting agency can be operated without tools, but that means doing many tasks manually. This can work fine for a small agency, however reducing the need to hire staff or have more time to focus on the bigger picture items in the business can more than makeup for the cost.
One common tool for recruiting agency is an Applicant Tracking System (ATS), which automates posting to job boards, contacting potential candidates, scheduling interviews, resume screening, and more.
Another common tool includes some type of accounting software to invoice clients and track business expenses.
How much does it cost to start a recruiting agency?
Starting a recruiting agency has a lower cost than other types of businesses. As a small business with no employees, you can start this business for less than $5,000. In addition, with the rise of remote workers, recruiting agencies can accomplish many tasks remotely, cutting start-up costs.
Here is an overview of common initial costs:
Business formation costs. Some of your first costs will include purchasing a business license, any necessary permits, and insurance. Individual states regulate business licenses and permits. So, for a breakdown of these costs, check out your state’s website for small businesses. In most scenarios, the price remains below $1,000.
Business insurance is essential to protect your business from financial burdens resulting from losses and liabilities. Insurance rates vary based on coverage amounts and risk, so contact an insurance company or an insurance agent for a quote.
Location costs. If your business operates remotely, you won’t have location costs. However, if you have a brick-and-mortar location, such as office space, you need to account for rent. Many leases require the first and last month’s rent with a security deposit.
Generally, rent costs range between $15 – $45 per square foot per year. And locations in metropolitan or high-traffic areas tend to cost more. So, for example, if your office space rents for $20 per square foot and is 1,000 square feet, your annual rent is $20,000.
Employee wages. Employee wages are another cost to account for if you hire help at the start. For example, office assistants earn about $16 per hour, recruiting agents earn about $15 per hour, and accountants earn about $27 per hour.
Software. Recruiting software helps track a hire all the way from the initial job posting to onboarding. Software systems are great because they are a centralized place to keep track of contracts, income, expenses, and hires. Most software systems operate on membership, and starting costs are typically around $100 per month.
Equipment. Some of the essential pieces of equipment you will need are computers and phones. Mid-range computers and phones start at around $500 apiece.
How profitable is a recruiting agency?
Recruiting agencies make money from successful hires. In many contracts, payment is based on a contingency plan, meaning the recruiting agency only makes money if its talent is hired. The fee is a markup of the employee’s annual salary—typically 15% – 25%.
In the U.S., the median annual income is around $69,000. So, based on this average, your recruiting agency earns $10,350 per successful hire at a 15% markup. Comparatively, you earn $17,250 at a 25% markup.
Therefore, with one successful hire per month at the median U.S. income and a 15% markup, the recruiting agency earns $124,200 annually.
Are there grants to start a recruiting agency?
It’s extremely rare to find a grant to start a recruiting agency. If you search for business grants, you will come across a lot of scams and misinformation. Occasionally an organization will offer grants to start a business, however, be skeptical and don’t provide any sensitive personal information or pay money to get more information.
Legitimate federal grants can be found at Grants.gov, and you can check on your state’s economic development office to see if they have any grants available.
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.
Recruiting agencies are fantastic businesses for sales-driven individuals who are good at processing lots of data to find a perfect fit. Also, it certainly helps that the costs to start a recruiting agency are low, making it easy to begin making money.