Recently many of the new start-up agencies we have spoken to have compared us to some other outsourcing companies who have a somewhat different model to TBOS. Although they offer some similar services to TBOS, such as back office, funding and accountancy support, there are some additional extras that we don’t currently offer. These are services such as website design, logo design, job board access, databases and even laptops and monthly salaries. HOWEVER, the major catch on these offered solutions is that in order to reap the benefits, the directors must surrender a (usually very high) percentage of profits and shareholding for a number of years.
Think twice before giving away shares as a new recruitment company…
A potentially naïve 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 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 and only receiving a small percentage of the profits generated. 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 then in the long term the offer can look very expensive. If you were to bill £100k per annum as an individual then paying £30k of your fees to another party for services that will usually cost between £10-15k then this can seem 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.
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” they are hoping that the company grows to the level where they can make a large gain 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, then it is a very expensive and unnecessary option. There have been a few cases recently where directors who have signed up for these types of solutions have had to pay large sums of money to buy out the providers shareholding of their own company.
TBOS has helped set up many recruitment agencies over the years and in all cases TBOS has never become directors or shareholders of any of the agencies. TBOS has always provided back office, funding and accountancy solutions to these agencies without diluting the solution by providing additional services the agency can choose to get themselves. 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 can provide their services directly to the agency based on their individual needs and budgets. TBOS also provides help and advice to new clients who are considering external investment to ensure they understand the potential and the risks of having additional shareholders.