Start Your Own Firm

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PRACTICE DEVELOPMENT

Start Your Own FirmTen tips for the entrepreneur in you.

BY ROBERT B. SCOTT, JR.MAY 2000

EXECUTIVE SUMMARY

IF YOU PLAN TO START YOUR OWN FIRM, it is imperative that you take steps ahead of time to ensure you start off on theright foot.WORK FOR A SMALL PRACTICE BEFORE you leave a large firm. Learn the profession, sharpen your skills, and learn how tosell services to clients. If you can’t sell 1,000 hours with an established practice behind you, you probably can’t do so on your own.START SMALL. MANAGE YOUR FIRM'S GROWTH; don’t be a slave to it. And be true to yourself—if you can be yourself anddevelop your practice in your own unique way, your chances soar. Clients want a professional relationship with the real you.CHOOSE THE SPECIALTIES YOU WANT to pursue first, then see whether a market for them exists in your region.SUBCONTRACTING AND JOINT VENTURE arrangements with a competent, professional network of CPAs can help you inmyriad ways.HIRE EMPLOYEES AS SOON AS YOU CAN to help you with low-value functions. This will give you more time to review,manage and market your practice.DECIDE WHICH CLIENTS ARE KEEPERS and drop the rest.CONVEY TO YOUR CLIENTS that you sincerely want to understand their businesses and help them meet their goals.

ROBERT B. SCOTT, Jr., CPA, is a professor of management at the Gabelli School of Business at Roger Williams University inBristol, Rhode Island. He is a longtime practice strategy and growth consultant to CPA firms around the country. His e-mail addressis [email protected] .

re you tired of working for someone who can’t operate a pencil sharpener let alone run a CPA firm? You want to be your ownboss and do it right? It’s tempting, but hanging out that shingle takes preparation as well as moxie.

There are thousands of CPAs whose entrepreneurial spirit compels them to put professional experience on the line and open apractice of their own. They come from all corners of the profession—the Big Five, regional or small accounting firms, government,academia and business and industry. Most are seasoned enough to know that starting any business is risky.

The financial aspects of starting a practice are important, but so are several intangibles. Evaluate your market savvy, networks andservice niches as carefully as you would a business plan and budget. They cannot substitute for technical skill, integrity, tenacity or hard work, but attention to these areas can help you avoid common start-up mistakes, develop business skills and improve your chances for success.

If you are planning to establish your own CPA firm, take the following steps ahead of time to ensure that you start off on the right foot.

1. WORK IN A SMALL PRACTICE FIRST

A small practice is not a miniature large practice. Most of the thousands of CPAs who leave large accounting firms every year to starttheir own practices are ill-equipped to manage a small firm. CPAs who work for large firms may get little experience working closelywith small business clients. And small firms do not have in-house industry specialists or research departments to help check thework.

Pay your dues. Take a job with a small firm. Learn that side of the profession, sharpen your skills, and carry your weight in the smallpractice environment. Satisfy clients and develop new business for your employer. In a few years you’ll have a better idea of what ittakes to start your own firm. Public accounting can be a tough business, so don’t be surprised if you change your mind along theway. A lot of good people have.

Your Own Firm http://www.journalofaccountancy.com/Issues/2000/May/StartYourOwnFi.

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2. SELL 1,000 HOURS OF NEW BUSINESS BEFORE YOU LEAVE

The key survival skill in public practice is selling professional services face-to-face, a facet of public accounting many CPAs in largefirms and in private industry never experience. Until you have sold services successfully, chances are you don’t know how, won’t beable to learn or won’t like it.

Learn to sell while you are drawing a paycheck. One thousand hours of annual billable time can barely support you, a small office, apart-time secretary and an intern to help during tax season. If you can’t sell 1,000 hours with the resources and reputation of anestablished firm behind you, you probably will fail to do so on your own.

3. START SMALL

A friend of mine has a placard in his office that reads: Happiness is positive cash flow. If more money comes in than goes out, your firm can survive.

Resist the temptation to rent expensive office space and fill it with pricey furniture. Your first-year, out-of-pocket overhead should beas close to zero as your ingenuity can make it. Be creative. Work out of your home; barter a few hours of service every week for space in another practitioner’s office; set up an office in one of your clients’ buildings in a quid pro quo for work.

Don’t mistake image for reputation. Reputation based on competence and integrity is important to current and prospective clients;image and style are much less so. In fact, many successful practices have grown from humble beginnings. Low overhead permits afledgling practice to survive long enough to attract a clientele—and it can be a key to success. Clients want a prudent professional tohandle their affairs, and they will understand the need to start small.

4. GROW SLOWLY

Rapid growth can destroy a new practice. The wisest way to grow a professional practice is to control it rather than be a slave to it. Asole practitioner starting out enjoys no economies of scale and relatively few technical resources. Experience, skill, wisdom,character and personality are your primary resources. They are formidable—but only when properly applied.

Choose clients for whom you can become a special resource. Most CPA firms will prepare financials and tax returns, perform anaudit of a small or midsize company and explain the importance of a budget. Your special mix of skills and style must add value toyour clients’ businesses.

Most important, supply your clients with the level of service they want from a more personal business relationship. Differentiateyourself from the fast-growing firms that lose clients because of frequent staff turnover and high fees. Good practice development isthe art of adding quality, one client at a time.

5. SELL YOURSELF FIRST

If clients believe in you, they will believe in the value of your services and the wisdom of your advice, and competitors will be lesslikely to steal them away.

Clients will not believe in you unless you are sincere and you can convey your sincerity to them. They want a professionalrelationship with the real you. Trying to be someone you are not, or making your firm out to be something it is not, can sabotage your efforts.

The happiest, most successful practitioners I have met are people whose personal values serve as a professional compass. Theunhappiest, least successful CPAs I know are people who bury their true character and personality behind a faade. Being yourself and developing your practice in your own unique way can increase your chance of long-term success.

6. SPECIALIZE

Most practitioners will tell you they don’t do write-up work. Everyone wants to provide high-level accounting, tax and consulting—theyconsider write-up undignified.

One of my favorite personalities in the profession is known as the “write-up king.” He believes that essential, everyday services canbe profitable if they are performed efficiently. To start his firm he purchased computers, hired a few accounting students andconcentrated on compilations. He earns several hundred thousand dollars a year, runs his own business and pays cash for hisCadillacs.

CPAs today specialize in business plans, assurance services and financing. Some work only with insurance agencies, small creditunions, doctors, dentists, restaurants, commercial fishermen and farmers. Some provide financial planning or limited client servicesonly, while others just review CPA practices.

Decide first the areas you would like to pursue, then see whether a market for them exists in your region. If you specialize, you maybe able to lure more prospective clients to your door.

7. LEARN FROM PEERS


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Consider practicing in association with other local CPA firms. Meet the practitioners and professionals in your area to develop anetwork of referral sources. Don’t miss your state CPA society’s local chapter meetings, and attend other community assembliessuch as Lion’s Club meetings to see how you can set up a variety of subcontracting and joint venture arrangements. That way youcan create a business contact with a competent, professional team of CPAs who can help in a wide variety of circumstances.

Another great advantage to working in association with other firms is that it adds referral sources to your network. You will benefitfrom the mutual trust and respect you gain from your association of firms. If you have chosen a specialty, you can ally with CPA firmsthat offer specialty services different from yours and thus provide your clients with a one-stop-shopping network.

8. ADD STAFF EARLY

As soon as you can, hire administrative staff to perform day-to-day recordkeeping and office management activities. Some jobs areclerical in nature and do not warrant a professional’s fee. The practitioner typically performs functions worth $100 to $1,000 per hour.Give yourself more time to review, manage and market your practice.

Management consultants remind managing partners that when they’re working, they’re not selling; and when they’re selling, they’renot working. You must find time for both. If you spend your time on basic administrative work, you’ll never build a high-profit practice.

9. FINE-TUNE YOUR PRACTICE

According to Pareto’s law, a small percentage of items or services can account for most of the value of an entity. This principle, alsoknown as the 20/80 rule, has been used for decades by industrial engineers and management analysts. Apply this rule to your clientsto determine which you should keep and which you should drop.

After you have been practicing for about a year, you will start to see that relatively few clients generate most of your revenue.

Conversely, a small percentage of your clients take up most of your staff’s time.Keep score by setting up a client-by-client contribution margin. Take a client’s total fees and subtract the direct-service costs, suchas staff time. A client who generates revenue that is 1 1/2 times what it costs to service the engagement, especially a large client,may be worth keeping and developing. If you continue to be unable to recover1 1/2 times costs, you should consider ending therelationship. Many accountants work too hard for far less compensation than they deserve because they keep clients who simplyaren’t worth it.

10. GIVE CLIENTS TLC

Clients will be loyal to you if you prove you sincerely want to understand their businesses and help them meet their goals. SomeCPAs who want only to be seen as professional may be so restrained that they come across as cold, clinical or uninterested. Breakout of the mold and loosen up with your clients.

The most spectacular successes I know of have been firms started by CPAs who developed close relationships with their clients, towhom they often were business advisers as well as friends. As their clients became more successful, so did they.

If you are incapable of such relationships, you’re less likely to succeed in a solo practice. You have to have an inherent love for your job to achieve success. When you do, caring for your clients is second nature.

WINNING PERSONALITY

It may surprise you that so much of my advice centers on personality and building relationships. Don’t let it. World-class companiesare run by world-class personalities. The successful businesspeople covered in Fortune and Forbes, such as GE’s Jack Welch andHewlett-Packard’s Carly Fiorina, have achieved success in part because they have personality, charisma and a natural ability towork well with others.

To build your own practice, you must have similar leadership qualities. After all, public practice is a service profession. You have tohave the technical skills to be the best in your niche or specialty, but first you have to get clients in the door—and for the start-up thatmeans a lot of personal marketing. Don’t be intimidated. The chances are good that if you are driven to own your own firm, you willlove working with clients, too. That’s good, because relationship building is what it’s all about.

CASE STUDYSweat Equity for Success

In 1991, on his 33rd birthday, Ralph Evangelista started his own practice. He had worked for eight years for two separate localCPA firms in New Jersey, and he felt ready to develop his own successful practice. He was driven to be his own boss and to starthis own firm, though he understood starting a company could be very risky.

He and his wife Marylee, a full-time CPA at another local firm, agreed that—because they had not yet started a family—it was anideal time to give independence a try.

In the beginning, Evangelista worked from home—at his kitchen table to be precise. He was confident his firm would grow because


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his public accounting experience had given him extensive one-on-one contact with clients. He was extremely good at networking,developing referrals and building strong business relationships.

His very first clients included a liquor store, construction company, gift shop, chiropractor and an attorney. Some of these clientshad come with him when he left his full-time job. He began to generate income and decided to move the practice out of the houseto give it a more professional appearance. To save money, Evangelista struck a deal with another local CPA who wanted to sharesome office space.

Evangelista’s firm grossed $40,000 the first year. Half of the revenue came from new clients and half from smaller per diemassignments from his wife’s firm. It was a hard year, and he was tired, frustrated and disappointed. To add salt to the wound, one

client complained he charged too much for his services.

As with most small firms, Evangelista experienced some busy periods and some frustratingly slow periods. To see just how well hewas doing, he began to aggregate his income over a rolling 12-month period. He determined that his firm was actually growing at arate of 25% to 40%. This provided him with an important infusion of energy and confidence. His clients were staying with him, andhe realized that although his new firm would not enjoy overnight success it would be successful. He settled in for the long haul.

By the end of 1993 his annual revenue was approximately $60,000. He was engaging more clients and reducing his per diemwork. He was even starting to build a litigation support services niche. Nonetheless, the biggest challenge of starting a newpractice remained—Evangelista needed to expand his client base, and he was willing to work hard to do it. He participated ininvestment and insurance firm seminars. He organized seminars with other professionals. He advertised in newspapers and theYellow Pages. He even printed ads for his firm on the back of supermarket cash register tapes.

Evangelista hired an experienced CPA to help him during the 1993 tax season. He also hired an experienced administrativeassistant full-time. By the end of the year, he relocated to a small but upscale office where he shared a receptionist andconference room with a well-established law firm.

Over the next four years, Evangelista developed relationships with attorneys in the neighboring firm and elsewhere who began torefer clients to him. He found other new engagements through his satisfied clients’ word-of-mouth marketing. His revenues tripledfrom 1993 levels and he needed a new office to accommodate his firm’s new growth.

In September 1997 the firm moved into its first completely independent office. Clients and office neighbors were invited to awell-attended open house that gave Evangelista the opportunity to show off his success.

Evangelista’s firm now enjoys a comfortable six-figure revenue that has been increasing 25% annually. In 1999 Evangelista hiredhis first full-time entry-level staff professional and reorganized the administrative side of the business.

Evangelista’s journey from the kitchen table to successful practice has been a long one, but it is far from over. He continues to dealwith many of the challenges he experienced when he started out: adding staff and clientele while maintaining quality; remaining

both competitive and profitable; and retaining his best clients. He is a happy man, doing exactly what he has always wanted todo—successfully.

—Robert B. Scott, Jr.

Copyright © 2010 American Institute of Certified Public Accountants. All rights reserved.


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