Recruitment Insights

Thinking of starting a recruitment business?

Rod Hore
June 2, 2020
APOS blog cashflow

The recent changes in the recruitment industry will inevitably result in a lot of people assessing their current situation, or their situation will unfortunately be decided for them. If you fall into either of these categories and are thinking of starting your own business, you should be seeking advice from people that can steer you in the right direction from the outset.

What to consider when starting a recruitment business

We had a candid chat with someone that has been a trusted adviser for recruiters through their journeys in the best and the most challenging of times. Here’s what Rod Hore from HHMC has to say about what to consider if you are looking to start a recruitment business.

What are the key financing decisions when you are starting-up a recruitment business?

History shows that many of the great companies were formed in times of economic stress, and we are certainly in that position now. It does take courage to start a new business and sometimes the circumstances are right no matter the conditions.

Many start-ups make a “no finance” decision and therefore undertake initial activities based on that lack of finance. For example, the founders may not pay themselves in the initial period and may only seek perm placement activities to be cash-flow positive.

While this is a valid approach to being profitable from day one, it should be matched with a disciplined and speedy transition towards the longer-term goals of the business. Few companies set out to only have a perm revenue stream, especially in today’s market.

There are alternatives available, including capital from the founders, seed capital from private investors or, of course, invoice funding for activities that reduce cash flow such as the placement of contractors.

While interest rates are low borrowing money  is a more valid option than normal.

How do your financing decisions differ as the business matures?

I like to think of start-ups as having a strategy and “mode” for year 1, year 2, year 3 and then ongoing. After 3 years the company is going to succeed or not and the harsh reality of owning and operating a business will be obvious. Also, the numbers are likely to be bigger, so decisions that are financial or involve risk are appropriately treated differently.

After three years the shareholders should be focussed on increasing their wealth incrementally and protecting what they have earned. That means that balance sheet issues such as working capital financing should be structured differently to what might be suitable in the initial years.

It is time to separate personal assets from business risk as much as is possible. Any initial financing structure that has personal assets linked, or personal director guarantees, should wherever possible be undone.

How important is it to get the business structure right and how should you approach this?

It is an expensive and time-consuming process to undo a business structure that is not suitable to the long-term requirements of the business. The wrong business structure, or a structure that does not give flexibility for all potential future options, can reduce strategic opportunities, and can destroy business sale opportunities.

A business structure needs to:

  • maximise the protection of the shareholders (usually the shares are not in the shareholders name)
  • allow for all possible shareholder options into the future, including a change to the founders’ shareholdings, an option of new minority shareholders (such as staff), and the possibility of new external shareholders, and
  • stand alone, be clean and understandable by a potential acquirer

What’s your advice for shareholders that are weighing-up whether to use their personal assets to help finance their business?

In the initial phases of setting up a business having funding provided by the founders is a valid option. But after that there should ideally be a separation of personal assets and business assets.

The most complicated decision for a shareholder is when there is significant self-funded working capital remaining in the business. What to do with that working capital is a personal decision of the shareholders.

Some are comfortable with a “lazy” balance sheet where invoices are self-funded and there is excess cash remaining in the business. Others will have wealth creation activities inside or outside the business and will draw down those reserves, using invoice financing to support the working capital requirements.

How do shareholders and directors stay in control of their personal risk and brand reputation?

This is a good question and not one that is considered by many shareholders and directors.

Sticking to the funding theme of this conversation, the two key requirements to control risk and brand reputation are:

  • Have appropriately sophisticated budget models and cash flow forecasting, with external review, so there are never any surprises
  • Be ruthless about compliance of all aspects of your business. The public discussion on “wage theft” should be a suitable incentive for improved compliance in every corner of the business across front office, middle office, and back office.

What are the signs that you should review your current financial funding arrangement?

The first indication is time. If your funding arrangement hasn’t been reviewed for say two years, then changes in invoice funding are likely to have occurred. Participants, fees, structures, and technology are changing rapidly.

There are also a whole range of events that can indicate it is time to review funding arrangements, including a change of shareholder, growth, winning (or losing) a large client, and starting a new strategic initiative.

When is the right or wrong time to sell your recruitment business?

For most businesses, the right time to sell should be almost all the time.

For the best outcome, the business should be in a positive, stable position and able to show its strength to a potential acquirer. That is difficult to do in the middle of this pandemic.

Usually our advice is that when there are circumstances that impact the business sustainability, or the Directors’ ability to present a stable picture of the future, then don’t present the business for sale. These might include changes of shareholding, funding issues, leadership team issues, compliance issues, and client issues.

Right now, as we have this discussion, circumstances are different. Some business owners will, on deep reflection of their personal and business circumstances, need to make the decision to dispose of their business because the alternatives are poor and holding the business can be the worst possible decision.

Rod Hore
Rod Hore

Rod is a 35-year veteran of Australian and international IT and corporate advisory organisations. His executive-level credentials traverse many segments of the staffing and recruitment industry and include corporate advisory assignments, mergers and acquisitions mandates, and C-level advisory to multinational and other public and private organizations.

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