Building a Tax Practice, Thoughts Please...

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#1
MWEA  
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315
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8-Feb-2018 7:37pm
Location:
Minnesota
I'm still newer to the tax and accounting field. I've grown organically to $150,000 in revenue the past four years, so far it's just myself and an admin. I feel that I'm at capacity at the moment with trying to do things alone. I'm debating on buying a small practice in the $100,000 to $150,000 range. That would give me the volume to hire an EA/CPA full-time. My biggest struggle is where do I go from here.

I'm trying to figure out pricing and profitability metrics to see what's reasonable. As I run numbers, I would want at least a 35% profit margin after paying staff/overhead. If I had a CPA/EA for $85,000 per year, part-time tax season help for $15,000, and office overhead of $20,000, that would be $120,000. My current admin would answer phones, ect. At a 35% margin, that would be $185,000 in revenue. Here are some of my questions for you vets:

1.) Is there a revenue target you aim for per full time staff member you hire? I realize the practice's target market and billing levels would influence how much revenue capacity a new professional could take on.

2.) Is a 35% profit margin reasonable on a block of business that wouldn't have my direct involvement? Is that too high, too low?

My overall goal is to get a team in place for the operations end of the tax/accounting business and focus on bringing in new clients, working with key accounts to retain/grow, and growing the wealth management end of my business. I welcome your candid thoughts. I want to be intelligent on how I go forward.
 

#2
Posts:
2887
Joined:
21-May-2018 7:50am
Location:
Northern MI and Coastal SC
I believe your 35% profit margin is too low for a company of your estimated size. It should be in the 45-55% range. How experienced of a CPA/EA are you looking to hire with compensation of $85k? Seems high for a firm of that size.

Example, prior firm had two CPAs, one accountant, one bookkeeper. Revenue was approximately $400k/year on average with consistent 50% net profit. Sometimes it was higher, but never lower. Lean and efficient operations? Yes.

I would not expect an admin person to actually generate income. Their function is to reduce the burden of those that can increase billings, thereby increasing net income.
 

#3
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1174
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21-Apr-2014 7:09pm
Location:
NC
MWEA wrote:I'm still newer to the tax and accounting field. I've grown organically to $150,000 in revenue the past four years, so far it's just myself and an admin. I feel that I'm at capacity at the moment with trying to do things alone. I'm debating on buying a small practice in the $100,000 to $150,000 range. That would give me the volume to hire an EA/CPA full-time. My biggest struggle is where do I go from here.

I'm trying to figure out pricing and profitability metrics to see what's reasonable. As I run numbers, I would want at least a 35% profit margin after paying staff/overhead. If I had a CPA/EA for $85,000 per year, part-time tax season help for $15,000, and office overhead of $20,000, that would be $120,000. My current admin would answer phones, ect. At a 35% margin, that would be $185,000 in revenue. Here are some of my questions for you vets:

1.) Is there a revenue target you aim for per full time staff member you hire? I realize the practice's target market and billing levels would influence how much revenue capacity a new professional could take on.

2.) Is a 35% profit margin reasonable on a block of business that wouldn't have my direct involvement? Is that too high, too low?

My overall goal is to get a team in place for the operations end of the tax/accounting business and focus on bringing in new clients, working with key accounts to retain/grow, and growing the wealth management end of my business. I welcome your candid thoughts. I want to be intelligent on how I go forward.
I would say that you and a GOOD assistant could easily do 250K, netting you say 125 to 140 K. depends on OH, benefits etc. My assistant is an EA, we bill out in excess of 400K in tax revenue and we work very little overtime.
 

#4
Posts:
400
Joined:
19-Nov-2014 5:47pm
Location:
USA
Rule of thumb is about 50% for a small practice.

If you are looking to purchase a practice, have the seller finance it, and spread out the payments over 4 or 5 years.

You may consider hiring a staff accountant and have them do some of the admin tasks when it is not tax season. I typically keep one full time staff accountant on for about $50k/year. I hire a temporary admin full time for tax season who is paid $20/hr. I also have a part time CPA to help out who I pay about $55/hr. The part time CPA help is expensive, but is worth it.
 

#5
MWEA  
Posts:
315
Joined:
8-Feb-2018 7:37pm
Location:
Minnesota
I appreciate all the responses. It’s given me a lot to think about on how to take the next step. I’m also realizing that I need to shed many of the basic returns that are priced too low to make the numbers work going forward.
 

#6
smtcpa  
Posts:
515
Joined:
28-Jul-2014 5:16am
Location:
Richmond, VA
I'd say 35% is reasonable. The other higher numbers are fine for a practice with one owner, although if you have great billing rates and processes, you could get at 50%. I do think $150 is too low for just yourself and an admin. I'm running about $250,000 and I have some room to do more in the off-season.

I'd be more worried about buying a practice that is more than you can handle yourself and then not finding a CPA/EA to do the work. It's a tough job market out there for employers. If it were me, I'd rather buy just enough that I could do it if I had to, but find someone even if you were breakeven for the first year, and then acquire another practice or grow organically.
 

#7
Posts:
2887
Joined:
21-May-2018 7:50am
Location:
Northern MI and Coastal SC
If you acquire a practice, I would write the agreement such that the prior owner has to stay on for at least 6 months to help facilitate a smooth transition. Clients become weary of a new owner, rightfully so, but knowing the former owner stays involved for a period of time while they get to know the new owner encourages client retention. I agree with owner financing over 3-5 years--they need to keep some sort of interest in client retention, otherwise they will not give a rats ass if they are paid in a lump sum.

I talked to a CPA last year about potentially buying his practice. His price was entirely too high, was not willing to self-finance and wanted a lump sum payment, would not budge on price. While he has staff, he was not willing to stay on board, at all, and it would have overloaded me in every aspect. Do not be afraid to walk away from a potential acquisition. The CPA I referenced still has not sold despite several larger firms here that are always very eager to acquire everything they can.

I'm in same boat. I want to be more aggressive in achieving my growth objectives, but am also willing to wait for the right acquisition opportunity. There is one opportunity in the works, but I would like to find a small firm to acquire before that. In meantime, I am focusing on organic growth and being an ever-present face in the community. My organic growth this year alone had me struggling to stay on top of everything, so I am glad I did not make a mistake in acquiring a company last year.
 

#8
Posts:
728
Joined:
28-May-2014 12:04pm
Location:
Arkansas
MWEA wrote:I appreciate all the responses. It’s given me a lot to think about on how to take the next step. I’m also realizing that I need to shed many of the basic returns that are priced too low to make the numbers work going forward.


Amen. I need to do the same. I purchased a lot of mine so it’s been hard to let go.
 


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