Contract staffing, also known as temporary or contingent staffing, refers to the practice of placing employees for a limited period of time to meet short-term business needs. Contract staffing has become increasingly popular among businesses of all sizes, as it offers a wide range of benefits, including flexibility, cost-effectiveness, and access to specialized skills. However, many recruitment agencies still shy away from offering contract staffing services for a variety of reasons. Sadly this makes the exit strategy for recruitment firm owners very difficult. The good news is that offering contract staffing services can drastically increase the likelihood of a successful exit for firm owners.
In this blog post, we will explore the benefits of offering contract staffing and how recurring revenue from contract staffing can help a business owner sell their company for a higher dollar amount.
Why most Recruitment Firms Don’t Offer Contract Staffing
Many direct hire and executive recruitment firms avoid contract staffing due to three main concerns.
- Infrastructure: many recruitment firms just don’t have the infrastructure necessary to offer contract staffing services. These things include insurance policies, back office software, payroll expertise, employee benefits, and more. Building these functions themselves can be daunting, and many choose just to focus on direct hire because it’s “easier”.
- Lower Ticket Sales: Direct hire recruiters are used to large deal sizes. Many can generate $10,000 to $40,000 placement fees for just one placement. That compared to an hourly markup for staffing a temporary employee can seem like a waste of time. However, many don’t realize the long term benefits of offering contracting, and how that can supplement direct hire fees with temp-to-perm conversion fees.
- Time: Recruiters want to spend all of their time recruiting or selling to new clients. The time necessary to support contract staffing can seem daunting. Things like gathering time sheets, onboarding, and ongoing maintenance pull that time away from direct hire recruiters. Some choose to solve this problem by using an Employer of Record (EOR), which allows them to outsource all of those things, and provide the infrastructure.
Why most Recruitment Firms SHOULD Offer Contract Staffing
Even with the above three concerns, there are even more compelling reasons to offer contract staffing. We go over the top three reasons below.
- Recurring revenue: Recruitment firms, especially smaller ones, are only worth as much as their last placements. Future placements are not guaranteed, so if you are not making placements, you are not making money. This business model is highly susceptible to down turns in the economy. When hiring goes down, so does business. The good news is that contract placements make money every single hour that contractors work. So, during down economies, contract placements already on assignment provide much needed revenue consistency. And guess what, investors want consistency. So if you are looking to sell your business, recurring revenue is the ticket!
- The ability to say “Yes”: Many clients look to recruitment firms in their time of need. However, they have constraints and changing needs. So if they come to you with an opportunity for contract staffing, your ability to say “Yes” will determine how much they rely on you, and come to you in the future. Not to mention turning down revenue never feels good.
- Increase your closing percentage: In our experience we have found that direct hire recruiters that offer contract staffing can increase their closing percentage by 10%. This is due to the fact that temp-to-perm arrangements allow recruiters to place candidates that would have otherwise not been selected. This offering enables recruiters to tell clients, “try this person out for a while and see if they are a fit”, with little to no risk. Typically the recruiter will see the client convert that employee to full time at some point, and they will be rewarded with a conversion fee. That fee would not have been possible without contract staffing or temp-to-perm services.
Recurring Revenue from Contract Staffing
The most important of the above benefits is recurring revenue. Recurring revenue refers to the portion of a company’s revenue that is predictable and consistent, such as monthly or annual subscription fees.
With contract staffing, businesses can generate recurring revenue by charging a markup on the hourly rate paid to contract workers. For example, if a contract worker is paid $20 per hour, a staffing agency may charge the client $30 per hour, generating a $10 markup. Over time, this markup can add up to a significant amount of recurring revenue for the business owner.
Recurring Revenue Demands a Higher Valuation
Recurring revenue from contract staffing can help a business owner sell their company for a higher dollar amount in several ways. First, recurring revenue demonstrates that a business has a stable and predictable revenue stream, which can be attractive to potential buyers. Second, recurring revenue can increase the overall value of a business, as it provides a more accurate picture of future earnings potential.
Finally, recurring revenue from contract staffing can make a business more attractive to strategic buyers, such as other staffing agencies or larger companies looking to expand their workforce. These buyers may be willing to pay a premium for a business with a proven track record of generating recurring revenue. This is not true of direct hire firms, which many believe are essentially not able to be sold at all, especially if the lead recruiter or founder is retiring after the sale.
In conclusion, offering contract staffing can provide recurring revenue and can also help a business owner sell their company for a higher dollar amount, by demonstrating a stable and predictable revenue stream and increasing the overall value of the business. If you are concerned about how to get started, learn more about how using an EOR like FoxHire can instantly enable you to start offering contract staffing today.