Don’t Give Away Shares Of Your New Agency
There are many things to consider when starting your own recruitment agency – What should you call it? Who should you bank with? Do you need finance? Who will look after your accounts? The list is endless. Sometimes there can be an attraction to get some external help and advice from an individual or company who has done it before in the hope that the start-up mistakes can be avoided. These companies or individuals can give some great advice, and may even provide some start up capital or services (such as job board access, contract templates, website, etc.), but often there will be a catch – they may want to be a Director or even a shareholder of the new business.
Whilst there may be an initial attraction to accept these offers of help and financial support in exchange for shares, this may not be a good idea in the long run. Any company or individual who wants shares in a new business is often hoping that the company will become profitable over time and the initial outlay of funds or services compared to the later rewards of dividends will outweigh this.
If a shareholder owns 40% of the shares then this person could be entitled to 40% of the company distributable profits each year. This also means that if the company was to be sold, they would also be entitled to 40% of the proceeds from the sale. The last point is that if you wish to buy the shareholder out of their shares, you may have to buy them based on the value of the company at that time, not at the amount they invested at the beginning. An example of this would be that an investor puts in £50k of initial funds into the business to become 50% shareholder of the business; if the company grows to a value of around £500k within 2 years then to buy the investor out, you would need to potentially give them £250k to buy the shares back.
Over the years TBOS has seen many different models proposed by various companies where they provide initial start-up capital, website, job board access, database, back office services, etc. for a percentage of the company, to be a company director and/ or an agreed tie in of 3-6 years. Recruiters will be enticed by the “freebies” being offered and sign up without realising that in 3-6 years’ time they may have to buy the shares back at a much higher amount than the cost of said “freebies”. We have even seen within the legal agreements that because they are a shareholder and director, they can enforce a monthly management charge to the investing company or place salary restrictions on the agency director.
The offering from TBOS is different. TBOS provides help and advice to new start recruitment agencies without becoming Directors or Shareholders of any of the businesses. TBOS can help to arrange invoice finance should it be required for funding contract/temporary placements and recommends reputable suppliers who will not overcharge start up recruitment agencies for their services. By helping the agency to manage their cash-flow on a daily basis and ensuring that debts are chased and paid on-time, it means that the agency doesn’t need that initial cash injection that recruiters may believe they need.
Our advice is that if you do decide to get external investment, try to avoid giving away shares in the business or alternatively have a robust shareholders agreement which details the rights over those shares and when/how they can be purchased back. However, in our experience, often there is very little need for that initial investment as long as the agency can make placements as soon as possible and the directors can manage low outgoings for the first 3-6 months.