Thinking of giving away shares as a new recruitment company? At what cost?
Recently many of the new start-ups we speak to have compared TBOS to some other outsourcing companies. This is mainly because like us, these companies offer back-office, funding and accounts services to the recruitment industry, the difference lies with their additional services. These include anything from website design, logo design, job board access, databases right throught to laptops and monthly salaries.
However with that said, the major catch on these additional services is that in order to reap these benefits, the directors must surrender a (usually very high) percentage of their profits and shareholding on their business – for a number of years.
THINK TWICE BEFORE GIVING AWAY SHARES AS A NEW RECRUITMENT COMPANY
A potentially naive recruiter, who is great at billing but hasn’t run a company before and therefore isn’t completely clued in on aspects such as shareholding, may be tempted to accept these kind of short-term benefits, without fully understanding the long-term impact that this will have on their new business.
When considering whether or not to use one of these solutions, you should be considering the following:
YOU’RE BASICALLY STILL WORKING FOR SOMEONE ELSE
When a recruiter decides to start their own agency, they are likely hoping to build something for themselves instead of working for someone else. However, if you have to pay a percentage of your profits to another party then this is effectively the same practice. There may also be additional contractual requirements which may restrict your spending, the salary you can take or the dividends you can distribute. All of these factors could mean you are effectively still working for an employer as you cannot make the business decisions as and when you wish without third party involvement.
CAN IT BE DONE A MORE COST-EFFECTIVE WAY?
When starting your own agency, you have to source the equipment and services you require depending on your industry and potential agency size. Many suppliers to the recruitment industry often have start-up packages for agencies of 1-2 users for databases and CRM systems or providing 3-4 page websites for a reduced cost. If you are to weigh these start-up costs against losing 30% of your profits and shareholding, in the long term the offer can look very expensive.
WHAT ARE THE CONDITIONS OF THE SHAREHOLDING?
Whenever a company issues shares to another party they should always sign a shareholder’s agreement which details what rights those shareholders have. This may be about decision making for the company, dividends allowable, how the shares can be sold and what happens if the company sells. When signing these agreements, it is important to understand what is at stake both in the short term and the long term. This agreement may give restrictions about company suppliers and funding, the amount of staff the company can employ, the director’s salaries and the risks the company can take. This agreement will also detail how long the investment will be distributed, the sign up period and the exit strategy from the services offered.
MOST IMPORTANTLY, HOW MUCH WILL YOU LOSE IN THE FUTURE FOR SHORT-TERM GAINS?
Any person providing investment and having shareholding will want to secure the best possible return and will ensure there is a gain, even if this is in many years to come. Although, initially the investor may want to ‘stay out of the business’, at some stage they are hoping that the company grows to the level where they can make a large gain. This could be when the company sells or if the other shareholders want to buy the shares back. If the initial investment is providing a laptop and a few start-up services but the buy-out is in the hundreds of thousands of pounds, it should be common sense not to sell shares for these small start up costs. We have seen in a few cases recently where directors have signed up for these types of solutions and then be made to pay large sums of money to buy out the providers shareholding in their company.
TBOS CAN HELP – WITHOUT TAKING A SHARE IN YOUR NEW RECRUITMENT BUSINESS
TBOS has helped set up many recruitment agencies over the years and in all cases we have never become directors or shareholders of our clients’ businesses. With over 10 years’ in the recruitment industry, TBOS prides itself on its ability to provide back office, funding and accountancy solutions without the need to dilute our offering with third-party services, with the hope to entice new recruitment directors. However, should an agency require services such as insurance, contracts, CRM systems, job boards and web design then TBOS has a panel of reputable suppliers who we can recommend.
TBOS continues to help and advise new clients who are considering external investment to ensure they fully understand the potential risks of having additional shareholders in their business.
If you would like some advice and support on starting your own recruitment business, you can call our team today on 0345 504 6333, we’d love to hear from you.