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How to Start a Background Check Business
These days, nearly every US company performs a background check on every serious candidate for every job opening they have. That’s a lot of background checks! And this doesn’t include other types of background checks, such as to verify employment or for prospective romantic partners.
This is why the background checks industry has been growing steadily for years, and why that growth is expected to continue in the years ahead. Now’s a great time to start your background check business, help ensure greater security and grab your share of a growing market. You can run it from home on your time, yet still generate a steady income.
Of course, to succeed you’ll need a bit of business savvy. Lucky for you, this step-by-step guide lays out all you need to know to develop and launch your business and start checking your way to success.
Time to build
Step 1: Decide if the Business Is Right for You
Pros and cons
Although a background check business is easy to set up and run, it won’t be for everyone. Before starting a new business you want to be sure that the day-to-day work and the industry suit your circumstances.
To help you do that, we’ve put together a list of pros and cons for starting a background check business:
- Steady demand — employers need to check backgrounds
- Flexibility — work from home, choose your hours
- Low startup costs — just need some equipment and knowledge
- Limited revenue potential
- Repetitive work, can be tedious
- Competition is on the rise
In 2021, the background screening industry was worth $2.8 billion, following years of steady growth due to increased demand from several sources.https://www.ibisworld.com/industry-statistics/market-size/background-check-services-united-states/
Even with all the recent technological advancements, nearly all employers (96%) hire outside firms to do background checks on potential employees. The industry is also witnessing increasing demand for background checks for other purposes, such as for a new tenant or a nanny hire.
As a result, the industry expects dramatic growth in the years ahead. The global background screening industry, for instance, is projected to double to nearly $10 billion by 2028.https://www.alliedmarketresearch.com/employment-screening-services-market
How much does it cost to start a background check business?
The cost of setting up a background check business varies depending on the model you choose. A home-based business can be launched for as little as $2,000, while launching with an office will require about $12,000.
In both cases, the majority of the start-up funding will be used to buy equipment, including office furniture and specialist computer software. Marketing, including a website, will also make up a sizable proportion of the initial budget, as will general business costs such as insurance, and licensing and permits.
How much can you earn from a background check business?
The industry’s revenue per business and revenue per employee benchmarks are as follows:
- Revenue per Business: $1,104,972
- Revenue per Employee: $111,701
- Employees per Business: 10
Given these figures, we can forecast the revenue potential of your background check business as follows.
In the first year or two, a solopreneur working from home should aim for 50% of the industry’s per employee benchmark, which would give you about $55,000 in annual revenue. As a home-based business, your operating expenses should remain low, enabling you to achieve an 80% profit margin. In this scenario, your profit is about $45,000 per year.
As you build a reputation, you will want to move the business to an office and hire full-time workers, reducing your margin to 35%. But with 10 employees, you could expect to achieve 75% of the industry’s per employee benchmark, giving you annual revenue of nearly $840,000 and nearly $295,000 in profit.
What barriers to entry are there?
While the barriers to entry for a background check business are low, there are some.
The services offered by your background check business will be industry standards, leaving no room for innovation or creativity. This makes it practically impossible to differentiate yourself from the competitors.
It also means there is no real cost to the customer to switch from one business to another when requiring background check services, making it more difficult to build up a loyal customer base.
Step 2: Hone Your Idea
Why? Identify an opportunity
Traditionally, background check businesses have been local in their geographical reach, catering to a local community. As the world moves increasingly online, those geographical borders are being broken down, offering a wider market to entrepreneurs who can find an untapped niche or differentiate their offering in some way.
But whether your offering is online or local, market research is still an important step in setting up your new background check business. Research background check firms in your area to examine their services, price points, and customer reviews. You’re looking for a market gap to fill. For instance, maybe the local market is missing a background check company that also offers real-time criminal monitoring.
You might consider targeting a niche market by specializing in a certain aspect of your industry, or you could offer additional services like a psychological screening. This could jumpstart your word-of-mouth marketing and attract clients right away.
What? Determine your products or services
Background checks are conducted for a wide range of reasons nowadays, although employment checks are still the most common. To run a background check, you’ll search for potential criminal records and credit history, as well as verifying professional licenses, certifications, academic education and the work history of candidates.
You could also offer a childcare background check, a tenant background check, a franchise background check or a romantic partner background check. You could also offer a social media screening to your background checks for an added fee.
How much should you charge for the background check service?
The price of a background check service varies depending on the check performed and the steps required, but for a relatively thorough, national-level background check you should be able to charge $100. You could also offer more local, state-focused background checks for a lower price, maybe $40.
Once you know your costs, you can use this Step By Step profit margin calculator to determine your mark-up and final price points. Remember, the prices you use at launch should be subject to change if warranted by the market.
Who? Identify your target market
Your target market will be all variety of businesses, big and small and everything in between. You can find them on LinkedIn, Google and Yelp, and you should look for companies that hire frequently.
Where? Choose your business premises
In the early stages, you might want to work from home to keep costs low. But as your business grows, you’ll likely need to hire workers for various roles and may need to rent out an office. Find commercial space to rent in your area on sites such as Craigslist, Crexi, and Instant Offices.
When choosing a commercial space, you may want to follow these rules of thumb:
- Central location accessible via public transport
- Ventilated and spacious, with good natural light
- Flexible lease that can be extended as your business grows
- Ready-to-use space with no major renovations or repairs needed
Step 3: Brainstorm a Business Name
Your business name is your business identity, so choose one that encapsulates your objectives, services, and mission in just a few words. You probably want a name that’s short and easy to remember, since much of your business, and your initial business in particular, will come from word-of-mouth referrals.
Here are some ideas for brainstorming your business name:
- Short, unique, and catchy names tend to stand out
- Names that are easy to say and spell tend to do better
- Name should be relevant to your product or service offerings
- Ask around — family, friends, colleagues, social media — for suggestions
- Including keywords, such as “background check” or “security screening”, boosts SEO
- Name should allow for expansion, for ex: “Jim’s Bakery” over “Jim’s Cookies”
- Avoid location-based names that might hinder future expansion
- Use online tools like the Step by Step Business Name Generator. Just type in a few keywords and hit “generate” and you’ll have dozens of suggestions at your fingertips.
Once you’ve got a list of potential names, visit the website of the US Patent and Trademark Office to make sure they are available for registration and check the availability of related domain names using our Domain Name Search tool. Using “.com” or “.org” sharply increases credibility, so it’s best to focus on these.
Finally, make your choice among the names that pass this screening and go ahead with domain registration and social media account creation. Your business name is one of the key differentiators that sets your business apart. Once you pick your company name, and start with the branding, it is hard to change the business name. Therefore, it’s important to carefully consider your choice before you start a business entity.
Step 4: Create a Business Plan
Every business needs a plan. This will function as a guidebook to take your startup through the launch process and maintain focus on your key goals. A business plan also enables potential partners and investors to better understand your company and its vision:
- Executive Summary: Brief overview of the entire business plan; should be written after the plan is complete.
- Business Overview: Overview of the company, vision, mission, ownership, and corporate goals.
- Product and Services: Describe your offerings in detail.
- Market Analysis: Assess market trends such as variations in demand and prospects for growth, and do a SWOT analysis.
- Competitive Analysis: Analyze main competitors, assessing their strengths and weaknesses, and create a list of the advantages of your services.
- Sales and Marketing: Examine your companies’ unique selling propositions (USPs) and develop sales, marketing, and promotional strategies.
- Management Team: Overview of management team, detailing their roles and professional background, along with a corporate hierarchy.
- Operations Plan: Your company’s operational plan includes procurement, office location, key assets and equipment, and other logistical details.
- Financial Plan: Three years of financial planning, including startup costs, break-even analysis, profit and loss estimates, cash flow, and balance sheet.
- Appendix: Include any additional financial or business-related documents.
If you’ve never created a business plan, it can be an intimidating task. You might consider hiring a business plan specialist at Fiverr to create a top-notch business plan for you.
Step 5: Register Your Business
Registering your business is an absolutely crucial step — it’s the prerequisite to paying taxes, raising capital, opening a bank account, and other guideposts on the road to getting a business up and running.
Plus, registration is exciting because it makes the entire process official. Once it’s complete, you’ll have your own business!
Choose where to register your company
Your business location is important because it can affect taxes, legal requirements, and revenue. Most people will register their business in the state where they live, but if you are planning to expand, you might consider looking elsewhere, as some states could offer real advantages when it comes to background checks.
If you’re willing to move, you could really maximize your business! Keep in mind, it’s relatively easy to transfer your business to another state.
Choose your business structure
Business entities come in several varieties, each with its pros and cons. The legal structure you choose for your background check business will shape your taxes, personal liability, and business registration requirements, so choose wisely.
Here are the main options:
- Sole Proprietorship – The most common structure for small businesses makes no legal distinction between company and owner. All income goes to the owner, who’s also liable for any debts, losses, or liabilities incurred by the business. The owner pays taxes on business income on his or her personal tax return.
- General Partnership – Similar to a sole proprietorship, but for two or more people. Again, owners keep the profits and are liable for losses. The partners pay taxes on their share of business income on their personal tax returns.
- Limited Liability Company (LLC) – Combines the characteristics of corporations with those of sole proprietorships or partnerships. Again, the owners are not personally liable for debts.
- C Corp – Under this structure, the business is a distinct legal entity and the owner or owners are not personally liable for its debts. Owners take profits through shareholder dividends, rather than directly. The corporation pays taxes, and owners pay taxes on their dividends, which is sometimes referred to as double taxation.
- S Corp – An S-Corporation refers to the tax classification of the business but is not a business entity. An S-Corp can be either a corporation or an LLC, which just need to elect to be an S-Corp for tax status. In an S-Corp, income is passed through directly to shareholders, who pay taxes on their share of business income on their personal tax returns.
We recommend that new business owners choose LLC as it offers liability protection and pass-through taxation while being simpler to form than a corporation. You can form an LLC in as little as five minutes using ZenBusiness’s online LLC formation service. They will check that your business name is available before filing, submit your articles of organization, and answer any questions you might have.
Step 6: Register for Taxes
The final step before you’re able to pay taxes is getting an Employer Identification Number, or EIN. You can file for your EIN online or by mail or fax: visit the IRS website to learn more. Keep in mind, if you’ve chosen to be a sole proprietorship you can simply use your social security number as your EIN.
Once you have your EIN, you’ll need to choose your tax year. Financially speaking, your business will operate in a calendar year (January–December) or a fiscal year, a 12-month period that can start in any month. This will determine your tax cycle, while your business structure will determine which taxes you’ll pay.
The IRS website also offers a tax-payers checklist, and taxes can be filed online. It is important to consult an accountant or other professional to help you with your taxes to ensure you are completing them correctly.
Step 7: Fund Your Business
Securing financing is your next step and there are plenty of ways to raise capital:
- Bank loans: This is the most common method but getting approved requires a rock-solid business plan and strong credit history.
- SBA-guaranteed loans: The Small Business Administration can act as guarantor, helping gain that elusive bank approval via an SBA-guaranteed loan.
- Government grants: A handful of financial assistance programs help fund entrepreneurs. Visit Grants.gov to learn which might work for you.
- Venture capital: Venture capital investors take an ownership stake in exchange for funds, so keep in mind that you’d be sacrificing some control over your business. This is generally only available for businesses with high growth potential.
- Angel investors: Reach out to your entire network in search of people interested in investing in early-stage startups in exchange for a stake. Established angel investors are always looking for good opportunities.
- Friends and Family: Reach out to friends and family to provide a business loan or investment in your concept. It’s a good idea to have legal advice when doing so because SEC regulations apply.
- Crowdfunding: Websites like Kickstarter and Indiegogo offer an increasingly popular low-risk option, in which donors fund your vision. Entrepreneurial crowdfunding sites like Fundable and WeFunder enable multiple investors to fund your business.
- Personal: Self-fund your business via your savings or the sale of property or other assets.
Bank and SBA loans are probably the best option, other than friends and family, for funding a background check business.
Step 8: Apply for Licenses/Permits
Starting any business requires obtaining licenses and permits from local, state, and federal governments. While there is no requirement for a professional license or permit to run a background screening business, you may want to consider getting accredited by the Professional Background Screening Association.
Federal regulations, licenses, and permits associated with starting your business include doing business as (DBA), health licenses and permits from the Occupational Safety and Health Administration (OSHA), trademarks, copyrights, patents, and other intellectual properties, as well as industry-specific licenses and permits.
You may also need state-level and local county or city-based licenses and permits. The license requirements and how to obtain them vary, so check the websites of your state, city, and county governments or contact the appropriate person to learn more.
You could also check this SBA guide for your state’s requirements, but we recommend using MyCorporation’s Business License Compliance Package. They will research the exact forms you need for your business and state and provide them to ensure you’re fully compliant.
This is not a step to be taken lightly, as failing to comply with legal requirements can result in hefty penalties. If you feel overwhelmed by this step or don’t know how to begin, it might be a good idea to hire a professional to help you check all the legal boxes.
Step 9: Open a Business Bank Account
Before you start making money, you’ll need a place to keep it, and that requires opening a bank account.
Keeping your business finances separate from your personal account makes it easy to file taxes and track your company’s income, so it’s worth doing even if you’re running your background check business as a sole proprietorship. Opening a business bank account is quite simple, and similar to opening a personal one. Most major banks offer accounts tailored for businesses — just inquire at your preferred bank to learn about their rates and features.
Banks vary in terms of offerings, so it’s a good idea to examine your options and select the best plan for you. Once you choose your bank, bring in your EIN (or Social Security Number if you decide on a sole proprietorship), articles of incorporation, and other legal documents and open your new account.
Step 10: Get Business Insurance
Business insurance is an area that often gets overlooked yet it can be vital to your success as an entrepreneur. Insurance protects you from unexpected events that can have a devastating impact on your business.
Here are some types of insurance to consider:
- General liability: The most comprehensive type of insurance, acting as a catch-all for many business elements that require coverage. If you get just one kind of insurance, this is it. It even protects against bodily injury and property damage.
- Business Property: Provides coverage for your equipment and supplies.
- Equipment Breakdown Insurance: Covers the cost of replacing or repairing equipment that has broken due to mechanical issues.
- Worker’s compensation: Provides compensation to employees injured on the job.
- Property: Covers your physical space, whether it is a cart, storefront, or office.
- Commercial auto: Protection for your company-owned vehicle.
- Professional liability: Protects against claims from a client who says they suffered a loss due to an error or omission in your work.
- Business owner’s policy (BOP): This is an insurance plan that acts as an all-in-one insurance policy, a combination of the above insurance types.
Step 11: Prepare to Launch
As opening day nears, prepare for launch by reviewing and improving some key elements of your business.
Develop your website
Website development is crucial because your site is your online presence and needs to convince prospective clients of your expertise and professionalism. They are unlikely to find your website, however, unless you follow Search Engine Optimization (SEO) practices. These are steps that help pages rank higher in the results of top search engines like Google.
You can create your own website using services like WordPress, Wix, or Squarespace. This route is very affordable, but figuring out how to build a website can be time-consuming. If you lack tech-savvy, you can hire a web designer or developer to create a custom website for your business.
Essential software and tools
Being an entrepreneur often means wearing many hats, from marketing to sales to accounting, which can be overwhelming. Fortunately, many websites and digital tools are available to help simplify many business tasks.
Some of your business will come from online visitors, but you should still invest in digital marketing! Getting the word out is especially important for new businesses, as it’ll boost customer and brand awareness.
Once your website is up and running, link it to your social media accounts and vice versa. Social media is a great tool for promoting your business because you can create engaging posts that advertise your products:
- Facebook: Great platform for paid advertising, allows you to target specific demographics, like men under age 50 in the Cleveland area.
- Instagram: Same benefits as Facebook but with different target audiences.
- Website: SEO will help your website appear closer to the top in relevant search results, a crucial element for increasing sales.
- Google and Yelp: For businesses that rely on local clientele, getting listed on Yelp and Google My Business can be crucial to generating awareness and customers.
Focus on USPs
Unique selling propositions, or USPs, are the characteristics of a product or service that sets it apart from the competition. Customers today are inundated with buying options, so you’ll have a real advantage if they are able to quickly grasp how your background checks meet their needs or wishes. It’s wise to do all you can to ensure your USPs stand out on your website and in your marketing and promotional materials, stimulating buyer desire.
Global pizza chain Domino’s is renowned for its USP: “Hot pizza in 30 minutes or less, guaranteed.” Signature USPs for your background check business could be:
- The fastest, most reliable background checks in town
- Every kind of background check you could ever imagine, at great rates
- From background check to onboarding, we do it all!
Take advantage of your website, social media presence and real-life activities to increase awareness of your offerings and build your brand. Some suggestions include:
- Flyering – Distribute flyers in your neighborhood and at industry events
- Sponsor events – You can pay to be a sponsor at events that are relevant to your target market
- Post a video – Post a video about your screening services. Use humor and maybe it will go viral!
- Limited edition – Offer a one-time version of your ___.
- Email marketing/newsletter – Send regular emails to customers and prospects. Make them personal.
- Paid ads on social media – Choose sites that will reach your target market and do targeted ads.
- Pay–per-click marketing – Use Google AdWords to perform better in searches. Research your keywords first.
- Do a webinar – Share your background screening expertise online with a video seminar
- Testimonials – Share customer testimonials about how your security screenings helped them
You may not like to network or use personal connections for business gain. But your personal and professional networks likely offer considerable untapped business potential. Maybe that Facebook friend you met in college is now running a background check business, or a LinkedIn contact of yours is connected to dozens of potential clients. Maybe your cousin or neighbor has been working in security for years and can offer invaluable insight and industry connections.
The possibilities are endless, so it’s a good idea to review your personal and professional networks and reach out to those with possible links to or interest in background screening. You’ll probably generate new customers or find companies with which you could establish a partnership. Online businesses might also consider affiliate marketing as a way to build relationships with potential partners and boost business.
- Popular web-based accounting programs for smaller businesses include Quickbooks, Freshbooks, and Xero.
- If you’re unfamiliar with basic accounting, you may want to hire a professional, especially as you begin. The consequences for filing incorrect tax documents can be harsh, so accuracy is crucial.
Step 12: Build Your Team
You may not need to hire any employees if you are starting out as a solopreneur, but as your business grows, you will need to recruit employees for various roles. Potential hires for a background check business include:
- Background Check Specialists
- Marketing Lead
- Sales Executives
- General Manager
At some point, you may need to hire all of these positions or simply a few, depending on the size and needs of your business. You might also hire multiple workers for a single role or a single worker for multiple roles, again depending on need.
Free-of-charge methods to recruit employees include posting ads on popular platforms such as LinkedIn, Facebook, or Jobs.com. You might also consider a premium recruitment option, such as advertising on Indeed, Glassdoor, or ZipRecruiter. Further, if you have the resources, you could consider hiring a recruitment agency to help you find talent.
Step 13: Start Making Money!
Congratulations! You’ve done your entrepreneurial homework, now it’s time to get out there, launch your new business and start building your background check empire.
Background Check Business FAQs
The start-up costs of a background check business are quite low. You don’t need an office, expensive equipment or employees to begin with. As a result, you can get a background check business up and running for as little as $2,000.
The background check business can be highly profitable. You don’t need to purchase raw material or incur other costs to provide the service. As a result, the gross margin is 100%. The overhead expenses can be controlled, including rent and employee wages. A medium sized business can expect to make 25%-35% in net margin while the net margin of a home-based business could be as high as 80%.
Businesses look for a number of background checks to make sure they are hiring a clean candidate. According to a research report from HireRight, about 84% of organizations conduct criminal or other public record checks, followed by previous employment and reference checks (73%) and identity verification (66%)1https://www.lucidchart.com/blog/navigating-the-employee-background-check-process.
Of course, you can check your own background without paying any fee to the background check company. However, it will be time consuming and you may get it wrong in the end. You will also have to verify the criminal records manually state-by-state and county-by-county which can be tiresome and frustrating. The background check companies charge less than $100 and save you from a lot of hectic work.