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1. What does it cost to start a PEO?

• Infrastructure Costs: The PEO business can be very cash intensive. Why? It isn’t like selling a product from inventory or being a reselling agent. By the time you get your first client, you need to be ready for the complexity for which you now have liability. If you decide to be a true PEO, a typical start-up can require initial capital outlay exceeding $500,000 prior to producing a cash flow break even.

• Each State has its own requirements, and you need to make sure you do your due diligence and satisfy all regulatory agencies in your state.

3. What kind of liquid and working capital do I need to have?

• Let’s pick a state like Texas. If you are a new company or renewing your license, you must have audited financials showing positive working capital on that date or not more than 15 months prior to registration. In Texas, if you are under 250 employees, you must have $50,000 in Working Capital.

• You'll need to also consider insurance and limits.

• If you have a business interested in your services that is in another state, you can't just sign them up. Every state has its own set of rules, guidelines, licensing and registration requirements. You must not only show how you operate there, but how you provide workers' comp and who’s employer number it is reported under. Also look into whether a brick and mortar is required to operate a business in that state.

5. How do I establish a Group Health Plan for my PEO? Or should I consider Client Sponsored Plans?

• When you are a startup PEO with no employees, most likely you will need to start by administering client sponsored plans. Then, once you become big enough, you can weigh the advantages and disadvantages between PEO group plan and client sponsored.

• What are the pros and cons to both? There are certainly pros and cons to both sides, compliance, administration, liability, reporting etc. You might think, "Maybe I can offer a large group health plan and make a “spread” or mark-up on premiums." No, you can't, by the way, that is illegal! An employer can‘t make money off it's employees as an employer.

• If you have a group plan, you must segment your dollars from your operating dollars. Offering a group plan this day and age can provide a significant advantage to small businesses that are struggling with premiums.

6. How do I decide what technology platform to use?

• There are many applications developed for the PEO industry. You need to look at different applications and/or go with advice from companies that have already done the trial and error. No reason to reinvent the wheel! It's important to make sure that your technology is integrated and all applications talk with each other. This streamlines your process and keeps your overhead down. Remember, software may cost more than you originally budgeted.

• Is using quick books or a payroll service just as efficient? When deciding on your service offering, the most important thing is client efficiency. If you use multiple platforms and services, you cannot be nearly as efficient as you need to be.

7. How do I determine the cost of delivering services?

• Most people think you would just divide total selling with general and administrative expenses by the number of worksite employees … Seems simple? But is that really your true cost? Have you considered other cost categories like Financial Risk, Management of Risk, Human Resource Risk, Benefits, etc.…

8. How do I determine what to charge a client?

• As I stated earlier, one of the most critical factors in operating a PEO is efficiency. Being a PEO typically means you operate with low margins, which means you need a high volume of business. You must be very efficient in how you collect cash as well as well as how you reconcile and account for your cash. I have seen several PEOs fail for this primary reason. 

Does it all seem a bit daunting? Know that there are a lot of resources out there to help you. To learn more about how to start a PEO, click the button below and download our eBook. 

After reading this article, if you find yourself scratching your head, wanting to find more answers, trying to figure out next steps, call IntegreatHR at 855-231-2888 and find out how our one day workshop can give you a head start on getting your PEO to Market Faster. 

Brent King, Director of Business Development, IntegreatHR Technologies

Brent has two decades of experience helping companies take care of their people. He brings extensive knowledge of HR and technology solutions to IntegreatHR.