When is the right time to start a business

Feb 3, 2021 | Executive Comment

In 2020 approximately five thousand recruitment firms were formed; however, the sad truth is that by 2022 as many as 80% of those will no longer be trading. Setting up a new venture can be a great opportunity, but the difference between success and failure can come down to the smallest things. For example, a banking recruiter who set up in the summer of 2020 would have struggled to succeed, given the market conditions that unfolded. Whilst few people could have forecasted that, there are a lot of things one can do to ensure one’s business is set up to succeed from the outset. Things to consider include the following.

Business Objectives

What is your vision for your business? Is your intention to have a lifestyle business for you personally or is your ambition to grow something bigger? Whatever you decide, it is critical you think this through at the beginning, as the choice you make will determine several of your subsequent decisions. If you are effectively happy as a sole practitioner, you may not need an office; for example, a home office may suffice. Similarly, you only need to worry about securing terms with the clients you personally plan to service, meaning you can operate more aggressively when headhunting. In essence, clarity over your objectives will enable you to have a consistent strategy which will guide subsequent decisions; without that you can easily waste time and resources on areas you don’t need to. As part of this factor in your restrictive covenants and don’t accidentally breach them: your former employers will likely notice and act accordingly.

Incorporation Structure

Whilst the majority of new businesses that form will be limited companies, that is not the only incorporation structure. Once again, it comes down to how you perceive what it is that you will be doing. For example, if you plan on operating a boutique firm providing expert consulting with retained fees, ask yourself which business model do you have most in common with? Why is it that nearly all law & business consulting firms typically are partnerships? What are the differences and could being an LLP be a better model? For example, now that the Government has changed the tax on dividends on limited companies, it could even be more tax efficient to be an LLP.

Capital Account

One of the biggest challenges when setting up your own business is the immediate income drop. Have you planned for no business income for six months? Whilst that is a pretty negative outlook, anything is possible and if your business is relying on generating fees in Q2, factor in the fact that a lot of organisations have payment terms of more than 60 days, and you may have notice periods that need to be served, with invoicing only possible once they are over. A boutique contingent business could easily have a situation where the core requirements would be one placement per quarter, where the fee would be £20k+; but at that level, with three months’ notice, it may not be paid until month seven. Cash-flow is the oil that drives your business. Whilst you can control your costs, to start with you can’t predict your income, so make sure you have a sensible buffer when getting started.

Team Composition

If your new venture involves working with other people from the outset, make sure your areas of expertise don’t overlap too much. The most successful start-up recruitment firm I have seen (which has consistently been on the Recruiter’s Hot 100 list, placing second one year) started with one person in Germany and the other in the UK. They had overlapping clients but operated their markets independently under a common brand. Now, fifteen years on, they have offices in 15 countries and more than 100 consultants. All that from just two people. Make sure all directors have billing responsibilities and you may even consider a US law firm technique known as ‘eat what you kill’. Costs are shared equally, but income is based on individual billings. If a business partner doesn’t perform, whilst that will be a stresser in itself, it need not create personal financial concerns for you. Finally, avoid junior staff in year one, the support they will need will be crippling on your time.

Market Conditions

Keep on top of market trends. Studies have shown that whilst incumbent businesses will be dislodged with difficulty from core markets, well implemented innovation will disrupt the existing order and create a new paradigm. As an example, consider the mobile phone industry: Nokia and Blackberry between them had a monopoly on phones, to the point where all business users would use Blackberry, while Nokia dominated the personal-use market. Apple introduced the iPhone, with its big screen, apps and stylish design: the incumbents were displaced and Apple became the number one provider of phones and the most profitable company to boot.

Applying this metaphor to recruitment, if you can identify a niche that is emerging and no one else has spotted, you can invest your time in cultivating relationships with people working in the space so they consider you to be the foremost consultant on their career opportunities. Then, as the market grows, clients will naturally start working with you, as your network gives them access to what they need, where you don’t have to compromise on terms.

Therefore, to maximise your chance of success, map out your target market to understand what the new emerging niches are. For example, if you are a banking recruiter, given the way that FCPA enforcement led to a surge in hiring for compliance, could MiFID II have a similar impact on regulatory? If you are in technology, what are the new languages or skills which are going to be in demand in the coming year? If you can only afford to service ten clients, why not identify which are the fastest growing and focus on those? As they grow you can grow with them.

Put simply, at best, being small gives you the freedom to be nimble and focus on where the market is going, as opposed to what is there already. Doing that gives you the opportunity to capture an emerging market and monetise it accordingly.

Over the last ten years Vacancysoft has worked with recruitment firms of all sizes to help them map out market activity in order to identify growth areas and changes in demand. For more information about how we can help, please contact us.

CEO

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