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Public accounting is too hard a job not to be an owner

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#1
Wiles  
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Over in PFZ, this was posted as part of a recent discussion:
I've always thought public accounting was too hard a job not to be in ownership...

As an owner, myself, I read this and immediately said, "Yup, tru dat!". I could not imagine working this hard and making a half or a third of what I am currently making.

I was reflecting on this statement this morning while I was cooking some breakfast potatoes. Certainly, this can't be 100% true. But even if it is 30%+ true, this is not a good thing for our profession.

Of course, being an employee does come with a bit less stress & responsibility. But is it worth a 50% or higher discount than their boss is making? Is it worth not finding something else to do with potentially higher pay and less demands?

I would like to hear the thoughts of others, especially those that are employees. Is this true? Why is this true? Is this a problem that needs to be fixed? How do we fix it?
 

#2
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I'll admit, this statement is the one that stuck with the HR director when I shared that in my exit interview. You are not alone to feel both ways about it. I'm struggling mightily with it now that I'm "on the dark side" :).

I think this dynamic means that we need to understand there are three different profiles of folks who work in our profession:
1) Those who are driven with the goal of being an owner and carrying the burden of all that comes along with that
2) Those who are driven, but don't have what it takes to be in the ownership role
3) Those who enjoy the nature of public accounting work and are happy to forego the benefits to not carry the burdens of ownership

The first group is the "traditional" profile, in my opinion. At some point, you either have a place for them in ownership or you are leading them on or letting them continue to believe, erroneously, that there is a spot.
The second group are excellent and productive employees, but, as employees, we have to understand they are transitory in nature. There is a fine line to walk in continuing to invest in them to develop them to be more productive and taking the "easy way" out and not investing in them because of the transitory dynamic and creating a self-fulfilling prophecy. That is, you'll push these people out of your employ because your payoff period is understandably shorter, which leads you to no longer continue to develop them.
The third group is the other half of the "traditional" profile. Every firm of any size needs a number in this group for consistency, but, in my experience, these aren't generally your superstar performers.

Just my $0.02, but really interested in other's perspectives. Thanks for asking the question!
~Captcook
 

#3
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or you are leading them on or letting them continue to believe, erroneously, that there is a spot.

I'm in the transitional phase of discovering this was the case for the last 8-9ish years - and well on the way to building my own solo practice. I could not agree more with the statement. This industry makes no sense unless you are in an equity position.
You can find much more lucrative, and less stressful work, elsewhere in accounting.
From my experience, being an employee gets you 30-50% for the effort you put in, while ownership should get you 60-80%.
-
Judging by the W2s I see for people in the CFP industry, if I had to do it all over again I would have went that route.
 

#4
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I had an answer typed out, but it was rambly and not that great. The Captain has summed it up nicely. My only quibble would be with the second category. Some of them are good employees, others are too sure they have a better way.
 

#5
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Yes. Capt did provide great info. And he was the author of that comment over on the PFZ.

Before employers jump into this conversation, I would like to hear more from the employees on this board.
 

#6
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ReckedCPAEA wrote:Judging by the W2s I see for people in the CFP industry, if I had to do it all over again I would have went that route.


You always have to consider your sample, though. The many folks in this field who are struggling, aren't reaching out to you for professional advice.

If I wanted to maximize effort to dollars, I might have gone into insurance. Damn sure it wouldn't be as fulfilling, though.
~Captcook
 

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I'm not too far removed from being an employee, but I've posted in the past hinting toward this topic, so I hope it's still okay to reply. Great responses so far.

I don't remember who said it here, but what has stuck with me is the realization of how our profession is truly an apprentice-journeyman-master model. When we start out, we have to learn and generally need clients provided to us, but as we grow and become more experienced, we need less and less training and we can start acquiring clients as we advance into the journeyman/woman/person and to the master levels.

Our profession has our basic third/third/third model of firm profitability, but it's always created these problems, at least on a theoretical level. Removing overhead, the fruit of the work of our firm is split 50/50 employee/firm. As an apprentice it completely makes sense to receive only a portion of what we do (and to be honest a first year earning a 50% share might even be too high). As we advance up it doesn't scale well as the highly experienced non-partners top out too low in compensation compared to their true value to the firm. Making partner jumps you from earning 50% of your effort to 100% or more (due to your share of the 50% firm portion of the other employees). As long as we've had this model, it's never made sense for a master to stay in a non-equity position, although in the past it was always mitigated by ethical business practices and short timeframes to becoming partner.

Of course, our business world has become a lot less ethical, and all employees should be more cynical and less trusting of employer promises than they should have been before. Our own profession has overall become a lot less ethical toward its employees, so it's not undeserved. Honestly, I don't see this changing on a massive level until there is a major change in attitudes, and that the partner level accepts lower compensation in exchange for a more stable workforce.
 

#8
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2) Those who are driven, but don't have what it takes to be in the ownership role

Can we explore this group? Give some examples of what it means to not 'have what it takes', while at the same time being driven.
 

#9
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Wiles wrote:
2) Those who are driven, but don't have what it takes to be in the ownership role

Can we explore this group? Give some examples of what it means to not 'have what it takes', while at the same time being driven.


I would use my assistant as an example. An EA who wants to leave me in 2-3 years and open her own shop. She is very good technically. We underestimate the skill of dealing with clients emotions. Being a good tax technician is only half the battle. The richest CPA's I know are not the most technically adept. BUT, they are adept enough.

I have been amazed at the number of second opinions I have given in the last 2-3 years where the CPA/EA charged $350 to $450 for a 1040 and the client has a schedule C, D or E. The fortitude to charge $600 to $900 for a 1040 is a start. I tell clients that my rate is $300 an hour, do you really want me to rush through your return in an hour?
 

#10
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Someone charging $300/hr for a 1040 return is not a guarantee that it is any better or accurate than a $350 return. What is true is the fellow charging and getting 300/hr is a better marketer than the other fellow!
 

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ATSMAN wrote:Someone charging $300/hr for a 1040 return is not a guarantee that it is any better or accurate than a $350 return.


Not a guarantee, sure. But what is certain is that the guy or gal charging $300/hr thinks his or her time is more valuable, maybe for good reason.

I had a post in the PFZ about a prospect who approached me. Rental real estate and financial accounts in both the USA and the prospect's country of birth.

Prior preparer charged $200. No FBARs, 8938s, potential 8858s were filed for all years I examined. I would have charged somewhere around $1,500-2,000 most likely, although we didn't get to that stage...I passed on an engagement, choice was easy...
 

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Wiles wrote:
2) Those who are driven, but don't have what it takes to be in the ownership role

Can we explore this group? Give some examples of what it means to not 'have what it takes', while at the same time being driven.


I agree with Southpark.
"What it takes to be in the ownership role..." are the intangible skills any good business owner needs, which have little to do with technical ability in any particular area and have more to do with being comfortable with risk, building/managing a team, and selling (among others). It isn't that these folks won't make more money on their own, but they have a slimmer margin of error in those other roles than some of us do. They, intentionally, want to be narrowly focused. They are driven in that area and want to maintain that narrow role.

By "driven", I mean these are people that approach projects with enthusiasm. They seek out the preparation necessary and do the work to apply that preparation in valuable ways to a client. What I've seen hold people back is usually risk-aversion.
~Captcook
 

#13
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Thanks. I had interpreted "driven" more widely. Someone that has embraced what we do as a profession and not just a job. (They invest in themselves through education and obtain their CPA or EA; they read trade journals and do research on their own time; they look for opportunities to network in a way that fits their style; etc.)

It would seem somebody like this has 50% of what it takes. Throw in the willingness to accept the role and responsibility required to be an owner - extra hours, unpaid time, personal sacrifices, business risk - and they are now at 100% of what it takes.

Sure! They may struggle in one or more of the other various areas - technical, people skills, productivity, business-minded. But you do not need to be the whole package to succeed as an owner in this profession. None of us are the whole package.
 

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Wiles wrote:Thanks. I had interpreted "driven" more widely. Someone that has embraced what we do as a profession and not just a job. They invest in themselves through education and obtain their CPA or EA. They read trade journals and do research on their own time. Etc...

It would seem somebody like this has 50% of what it takes. Throw in the desire to accept the commitments required to be an owner - hard work, long hours, sacrifices, risks - and they are now at 100% of what it takes.


In my mind what one needs as far as "drive" is a true personal understanding of what one wants in life and the willingness to work toward it. Obviously to be a partner at a larger firm you probably need to be driven in the manner you describe, but for smaller firms (especially for sole owner firms) one can be successful at meeting their personal goals in different ways. There are people on this board who are successful in their own terms, because part of their success is contingent on having six months off a year.

CaptCook wrote:What I've seen hold people back is usually risk-aversion.


That sounds about right. It's really hard for a person to give up the security of what they have (especially in what we do because we're risking an upper-middle class pay and benefits package) for the unknown. To me, it's ironic that it tends to be riskier overall to avoid risk than to stay put.
 

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Wiles wrote:
2) Those who are driven, but don't have what it takes to be in the ownership role

Can we explore this group? Give some examples of what it means to not 'have what it takes', while at the same time being driven.


There are some great employees who have social anxiety. Those individuals generally do not make great owners.

It takes nerves of steal (pun from a previous post's misspelling intended) to make it as an owner, especially if you have employees.

Another issue that I've had with "decent" employees is that they do not take that extra level of foresight and responsibility. For example, if a client starts a new business, they would neglect to say, "if you start making a profit, you are going to owe tax, please let us know so we can make estimated tax vouchers for you". Then, when the client would be upset with a large unexpected balance (or interest penalty), the employee would be like a deer in the headlights, only to suffer the same failure with the next client.

I have trouble getting my employees to property disclaim Hawaii's weird sales tax. It's caused me harm on many occasion. Even though I tell them and they look back at me like I worry too much.

These employees just don't have what it takes to drive their own pirate ship, IMO.

On a different subject, just like in securities, it is the risk for which you are getting paid.
 

#16
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With respect to Estimated Taxes, I tell all my self-employed clients one simple thing. If you forget everything else just remember you are BOTH an owner and employee of the business at the same time. Both of you have to pay taxes as you earn JUST LIKE when you were flipping burgers as a kid and they took taxes out of your paycheck and you did not like it. Just remember that and call me, how much and were to deposit. If you can do just that you will be in good shape come April.
 

#17
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I would love to find someone competent on the compliance end with at least a few years experience and credentials (CPA or EA), but someone that could grow into managing the two other staff/operations over time.

My initial thought was around 70-ish plus benefits to start, then grow it as they take more responsibility/business grows to a six figure position. I would have no interest in sharing equity, but wouldn’t have a problem bonusing based on profitability.

If I’m reading this thread correctly, this will be a tough profile to find without pressure to give up equity in the future?
 

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Any good candidate like you are describing would already be employed and well compensated. You need to offer something above and beyond what they can get somewhere else, or why would they work for you?
Why would they essentially run your shop so you keep the full book of business and the lions share of the money. Where is the upside for them in the long run?
If you find someone with enough drive to manage and run the shop, it's only a matter of time until they figure out it would be more profitable to run their own shop. What would keep them around after 5 years when they could jump ship for a better offer? Get them on the equity drip, golden handcuffs and a guaranteed buyout.

You are describing my situation except I did it for a lot less than 70, because I thought I was earning in equity.

Check Robert half salary guide as a starting point. Or just throw up a listing this summer and see what resumes and salary requirements you get. Probably lots of people sick of the extended tax season that would be willing to consider a change of pace.
 

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MWEA wrote:I would love to find someone competent on the compliance end with at least a few years experience and credentials (CPA or EA), but someone that could grow into managing the two other staff/operations over time.

My initial thought was around 70-ish plus benefits to start, then grow it as they take more responsibility/business grows to a six figure position. I would have no interest in sharing equity, but wouldn’t have a problem bonusing based on profitability.

If I’m reading this thread correctly, this will be a tough profile to find without pressure to give up equity in the future?


Why would I work for you for $70,000 all year and face all of these tasks when I can file 150 tax returns from my laptop from home (1.5 months of work), make the same amount, and take 10.5 months off?

(I'm reading this and my tone sounds awful, but I don't mean it to sound that way)
 

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Looks like great minds are thinking alike :)

MWEA wrote:If I’m reading this thread correctly, this will be a tough profile to find without pressure to give up equity in the future?


It's not impossible to find this person -- after all, people of all stripes exist -- but it's ultimately a fragile setup. What do you have keeping this person in your firm when they have disagreement about your management of the firm or their role in it? What happens when their bonus or their raise is lower than expected one year? What happens when one of this person's friends, or their romantic partner, plants the bug in their ear that they're being screwed?

Put yourself in your theoretical employee's shoes: You were hired at a senior accountant level and you've grown into the actual operations management of the firm. It's reasonable to expect that you are advancing on a partner track. The only part of the partner job description that isn't part of the described role is bringing in clients. But even without it, it's not out of the realm of imagination for a two partner firm to have one rainmaker and one to head the shop, and you're stuck in a position where actually making partner, and being compensated as one, is off the table. Why should you stay?
 

#21
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It's no wonder this profession is riddled with so many solo practitioners. This is the easiest way to earn an appropriate pay for what we do. I used to think it was because we were all control freaks and could not submit to the compromises necessary in a larger organization. Larger organizations come with employees, employees come with potential/real turnover. Your biggest risk is the employee turnover and I am not sure pay can mitigate that risk, at least in the long-term. How do you build your house on sand?

CaptCook,
Can you explain why you did not go out on your own a few years ago?
And now, today, why did you choose this new partner track instead of going off on your own?
 

#22
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Wiles wrote:It's no wonder this profession is riddled with so many solo practitioners. This is the easiest way to earn an appropriate pay for what we do. I used to think it was because we were all control freaks and could not submit to the compromises necessary in a larger organization. Larger organizations come with employees, employees come with potential/real turnover. Your biggest risk is the employee turnover and I am not sure pay can mitigate that risk, at least in the long-term. How do you build your house on sand?


To be honest, I still think the control aspect is at least partly at play. The founder of my former firm still hasn't been able to sell off his share because of control issues. I was the 5th person to leave not having bought him out as had been expected...

My gut is that that the future of our profession is to be bifurcated like the law profession is (in fairness, the control freak aspect has a huge impact in the law profession). The largest firms will continue to grow by swallowing the mid-sized firms. The small firms of 1-to-3 partners will face great difficulty in growing past that point because the steps necessary to retain the talent would dilute their ownership and/or their pay. The only reason I don't have more confidence in this prediction is that I believe that there is a strong place in the market for the mid-sized firms, and where there's a will there has to be a way.
 

#23
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Wiles wrote:Can you explain why you did not go out on your own a few years ago?


Two simple dynamics...fear and, to a lesser extent, understanding my upside was greater than I could reach on my own.

Wiles wrote:And now, today, why did you choose this new partner track instead of going off on your own?


I've overcome my fear and I've come to understand my upside is really not that much different on either track. The other dynamic is that my wife's business has grown to a point of being very sustainable and our children are all school-aged. As a couple, we agreed that there wasn't enough room in our family to be supported by two small businesses. My role was consisted of managing a team and navigating a number of personnel issues. I'll be MUCH more involved in personnel my new role, of course, and I'm looking forward to that, to some extent. I'm not solely on my own here and never intend to. I enjoy being a part of a team and feel I'm reasonably skilled and building and developing one.

Wiles wrote:It's no wonder this profession is riddled with so many solo practitioners. This is the easiest way to earn an appropriate pay for what we do. I used to think it was because we were all control freaks and could not submit to the compromises necessary in a larger organization. Larger organizations come with employees, employees come with potential/real turnover. Your biggest risk is the employee turnover and I am not sure pay can mitigate that risk, at least in the long-term. How do you build your house on sand?

I'm a reasonably social person. One of my biggest fears of truly being on my own was the lack of social connection. I found an opportunity that I feel overcomes/mitigates those dynamics.
~Captcook
 

#24
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missingdonut wrote:Looks like great minds are thinking alike :)

MWEA wrote:If I’m reading this thread correctly, this will be a tough profile to find without pressure to give up equity in the future?


It's not impossible to find this person -- after all, people of all stripes exist -- but it's ultimately a fragile setup. What do you have keeping this person in your firm when they have disagreement about your management of the firm or their role in it? What happens when their bonus or their raise is lower than expected one year? What happens when one of this person's friends, or their romantic partner, plants the bug in their ear that they're being screwed?

Put yourself in your theoretical employee's shoes: You were hired at a senior accountant level and you've grown into the actual operations management of the firm. It's reasonable to expect that you are advancing on a partner track. The only part of the partner job description that isn't part of the described role is bringing in clients. But even without it, it's not out of the realm of imagination for a two partner firm to have one rainmaker and one to head the shop, and you're stuck in a position where actually making partner, and being compensated as one, is off the table. Why should you stay?


All good points. It helps to get perspective. I've never worked in an accounting firm and honestly, I have no idea what kind of compensation set-ups are typical other than watching Indeed for job postings to see what is out there. It might be a bad sign, but most of the positions listed that match what I'm after have been sitting out there for months.
 

#25
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I've seen several attempts at establishing a new Public Accounting firm - by what I thought were
polished, highly competent, attractive, well-spoken CPAs go bust-and face the ignominy of
a public sale of their office furniture and equipment.
One was in Lancaster, Pa - I pick-up some bargains, and witnessed and hear the sad story of failure.
Their demise was taking on - too soon - too much personal and business overhead.
When starting a new shop - don't make the mistake of thinking that new clients will suddenly - just flood in.
Good paying clients come to you slowly - keep your expenses down until you are "Established".
 

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You can make a very good living be an employee as well. Sure the work is not easy and you have to log the hours. But I have a friend who has been at a Big 4 for 30 years. They are not a partner but make in the $250k range. Lot of solo guys are not making that kind of dough
 

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BerkshireCPA wrote:You can make a very good living be an employee as well. Sure the work is not easy and you have to log the hours. But I have a friend who has been at a Big 4 for 30 years. They are not a partner but make in the $250k range. Lot of solo guys are not making that kind of dough


I don't think anyone here is disputing that you can't make a fine living as an employee at a public accounting firm. I certainly never thought I wasn't compensated well. I'd be curious about your friend, though. I'd be willing to bet that had they put in the same effort working for themselves or as an owner elsewhere, they'd have a meaningful premium over their salary.
~Captcook
 

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BerkshireCPA wrote:You can make a very good living be an employee as well. Sure the work is not easy and you have to log the hours. But I have a friend who has been at a Big 4 for 30 years. They are not a partner but make in the $250k range. Lot of solo guys are not making that kind of dough


That is a very good point , the title director didn't exist when I was at PW. It was up or out. I sometimes google the names of my co-workers and am blown away by what some have done. Went on to become CEO's of Fortune 500, Hedge Funds, the Global chairman of PWC started with me in the 80's.

The real test is a rank and file CPA who wasn't fortunate enough to start in big 4. They will rarely make 250K if not a partner somewhere. Most regional firms, multi office, the partners are making 300-500K. I know a few. BUT I wouldn't trade places with them for a million years. It is hard work.

I think the one error young solo's make is we tend to not bill enough and justify a lower income. I always said if I don't make what a director makes, it is a failure. So, in the above scenario, setting 250K as a minimum net income was my goal.
 

#29
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BerkshireCPA wrote:You can make a very good living be an employee as well. Sure the work is not easy and you have to log the hours. But I have a friend who has been at a Big 4 for 30 years. They are not a partner but make in the $250k range. Lot of solo guys are not making that kind of dough


For sure. There is a huge difference between the small firms represented on this forum and the larger ones, and a lot of what has been said in this thread doesn't apply to the larger firms. A person at a small firm in a director-level role making $120k can take a risk to hang their own shingle because the upside is high and the former firm's clients might follow creating a built-in client base to start. A director at a large firm making $200k+ has a higher downside to leaving, and the clients might be less willing to follow.

novacpa wrote:Their demise was taking on - too soon - too much personal and business overhead.


+1. Personal overhead of the owner is probably the most insidious expense small businesses of all stripes face.
 

#30
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3/4ths of my great grandparents, both grandparents, father and myself were / are all self employed. I think the idea of being self employed is that you are essentially 100% commission based on your paycheck. That scares the crap out of most people (especially spouses).

My brother isn't self employed because the idea of selling / going out and getting clients scares him to death.
My brother in law isn't self employed because he'd be financially broke if each paycheck wasn't deposited every 2 weeks and for the same amount.
My father-in-law still doesn't really understand that I'm self employed because he can't imagine it.
I've been on Reddit where people think all small business owners are greedy jerks.
 

#31
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LOL scares the crap out of the spouse. That’s true because people erroneously think that a corporate job is more secure than self employment. Nothing could be further from the truth. Just ask someone 50+ who is looking for a job.
 

#32
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As a self employed individual, you have far more responsibility (good and bad) and the risks can be far higher. Spoke with a guy yesterday who's boss had to return from vacation a few days early because clients were having a meltdown - employees don't do that. My partner had prostate cancer and after this surgery (in the 90's) came in 2 days later - employees don't do that. My cousin had cancer and lost almost all her clients when she couldn't come to work for 3 months - employees don't have that risk. My mom died on a Friday and we had the funeral on Tuesday - I was in the office on Monday because work had to be done whereas my wife got 3 days off for the funeral. My niece received 6 weeks maternity leave - self employed folks don't get any.

Being self employed, the wife (she was between jobs) and I took a month off - went and lived in Berlin Germany and did all my work remotely. Clients didn't have a clue. VOIP and email is a huge game changer. Employees can't do that.
 

#33
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missingdonut wrote:...
Our profession has our basic third/third/third model of firm profitability, but it's always created these problems, at least on a theoretical level. Removing overhead, the fruit of the work of our firm is split 50/50 employee/firm. As an apprentice it completely makes sense to receive only a portion of what we do (and to be honest a first year earning a 50% share might even be too high). As we advance up it doesn't scale well as the highly experienced non-partners top out too low in compensation compared to their true value to the firm.
....

I have been thinking about this last sentence. I think I agree that the folks in this category who either choose to not become partner or, for whatever reason, are not fit to be partner are being under-compensated under the third/third/third model.

At our firm, we set billing rates at approx. 4x hourly pay. Lower level staff will be higher than 4x, maybe at 4.2x. And high level staff will be lower than 4x, maybe at 3.8x.

Factoring in non-billable time and realization write-offs we expect them to produce billings of approx. 2.5x-3x pay. We then give them productivity bonuses that get their pay to approx. 40% of billings.

This seems appropriate for somebody producing $125K to make $50K. But if you double that, paying somebody $100K on $250K of billings, it seems a little low.
 

#34
novacpa  
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My first job in Public Accounting was at age 23 at a large regional CPA firm (15 CPAs support staff 40)
in South Central Pennsylvania, stayed for 3-years got my "experience requirement" and passed the exam (5-parts) the next year. I found a retiring public accountant - bought his book of business and was solo for 5-years. I bought a 3-story brown stone on "lawyers row" was surrounded by attorneys who fed me work, night and day. I added a CPA from Coopers and Lybrand (before they were the C in PWC) and we merger that Practice into larger regional firm in Maryland who had
16-Offices 60-CPAs and 200 support staff, I was 1 of 5 Tax Partners, we did $40-50-million annually.
Both firm's problem was not making enough money, it was binding the younger partners to agree to very lucrative
buyouts of the older partners. Each retiring partner wanted a $3/4/5-million retirement payout, with a big down
payment. I jumped to the front of the line at age 40 fearing the firm would collapse under the weight.
I was delighted to exit and not stay another 30-years slaving to payoff the long dead senior partners who were
but a faint memory.
 

#35
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NC
novacpa wrote:My first job in Public Accounting was at age 23 at a large regional CPA firm (15 CPAs support staff 40)
in South Central Pennsylvania, stayed for 3-years got my "experience requirement" and passed the exam (5-parts) the next year. I found a retiring public accountant - bought his book of business and was solo for 5-years. I bought a 3-story brown stone on "lawyers row" was surrounded by attorneys who fed me work, night and day. I added a CPA from Coopers and Lybrand (before they were the C in PWC) and we merger that Practice into larger regional firm in Maryland who had
16-Offices 60-CPAs and 200 support staff, I was 1 of 5 Tax Partners, we did $40-50-million annually.
Both firm's problem was not making enough money, it was binding the younger partners to agree to very lucrative
buyouts of the older partners. Each retiring partner wanted a $3/4/5-million retirement payout, with a big down
payment. I jumped to the front of the line at age 40 fearing the firm would collapse under the weight.
I was delighted to exit and not stay another 30-years slaving to payoff the long dead senior partners who were
but a faint memory.


That's a great story. Over the years I have been approached by a few firms believing they were either 1) Doing me a favor as they believed I could make more with them in a merger, or 2) They were looking for a younger CPA to buy in but it was really someone to buy them out as they retired.

In both cases I saw through the smoke screen as I did NOT want the experience you just described. In both cases I was pretty shocked that the compensation they offered me based on my book was below my current income level by a significant amount.
 

#36
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CP Hay wrote:LOL scares the crap out of the spouse. That’s true because people erroneously think that a corporate job is more secure than self employment. Nothing could be further from the truth. Just ask someone 50+ who is looking for a job.


+1. If you're an accountant 45 or older in industry, you have a huge target on you. Thankfully age is not seen nearly as negatively in public, though.

novacpa wrote:I was delighted to exit and not stay another 30-years slaving to payoff the long dead senior partners who were but a faint memory.


Thanks for telling that story, and I'm glad you got out of that one!

Wiles wrote:I have been thinking about this last sentence. I think I agree that the folks in this category who either choose to not become partner or, for whatever reason, are not fit to be partner are being under-compensated under the third/third/third model. (...)

This seems appropriate for somebody producing $125K to make $50K. But if you double that, paying somebody $100K on $250K of billings, it seems a little low.


I should put this together with my previous posts on the topic into a larger overall theory and self-publish this as a book :lol:

To start at first principles, everyone within a company has their own contributions to its success, plus the company as a whole has a contribution, and the overarching goal is that the sum of its parts together is greater than when separate. For an accounting firm, most workers do the actual accounting work, many of us bring in additional clients and maintain the relationships, some of us handle administrative and managerial tasks, and so forth. The firm as an entity supplies capital and entity-wide goodwill. And the fruits of all this need to be split up in a reasonable manner.

The entity-wide goodwill of the largest firms is enormous. So, the entity goodwill plus the capital requirements of such a large firm means that a large payment to the firm for its contribution isn't entirely unreasonable. This massive firm contribution is my guess on why the bigger firms have been able to lengthen the paths to partner and create these non-partner careers: it allows the firms to continue to capture the excess of a high level worker's billings over their pay, and to split that among fewer persons than it would have been split between in the past, but they're able to convince people that it's in their best interest for them. And, in fairness, the firms might not be wrong on that.

Where this falls apart for the small practice is that entity goodwill is much, much lower. Nobody comes to Donut CPA because of the Donut CPA brand; clients come because of the personal goodwill, contacts, and reputation of the Donut. And I think it's pretty similar for most of us on this board, that most or all of the goodwill in our firms is owned personally. Because the entity goodwill of small firms is so minimal, it doesn't seem reasonable to suggest that supplying the capital requirements of our small firms are truly worth a third of firm revenues.

When you look at a new staffer that we might hire, the staff is contributing only their time and willingness to learn. Their work needs constant review and they need mentoring, and they need someone to bring in the work. It's possible (even probable) that a new staffer who produces $125k is overpaid earning $50k. But as they advance, they no longer need as much review, they need less mentoring, and in particular if they're bringing in work on their own through their own developed personal goodwill, and then you can start to see how they might be getting the short end of the stick. It seems likely that they are, or at the very least they might feel that they are.
 

#37
Wiles  
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Location:
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Good post missingdonut! If we go with that theory, how would we go about quantifying this in order to calculate the salary for a high earner?

missingdonut wrote:Because the entity goodwill of small firms is so minimal, it doesn't seem reasonable to suggest that supplying the capital requirements of our small firms are truly worth a third of firm revenues.

What is the entity/owner goodwill of a small firm? Would we use 1x annual revenue? Then how do we charge this against the high earner? Does the owner get a dividend for their equity?

What else gets charged against the high earner?
* Certainly direct expenses and a share of overhead
* But what about a share of the profits to be sent upstream to the owner/managers?

I have never been involved in a profit-only partner situation. But I would assume this is how they would go about setting the calculation.
 

#38
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Well, I'm mostly talking abstractly here, because I'm trying to figure out the value of each person's contribution. In the real world a firm generally pays employees an amount lower than their true value to the firm and retains the surplus as profit. That surplus, or at least the perception of the amount of the surplus, is the bone of contention that underlies this whole conversation.

My theory requires a determination of attributable revenues to each employee. In a firm where the billable hour is king, it's easier to determine what everyone does from the timesheet, and making some rough assumptions on the managerial/admin work. It would definitely be harder to determine the split if a firm does fixed fee engagements. After determining revenue split, I agree that you would charge direct expenses and overhead costs against that figure.

Goodwill is harder to determine. For a solo practice, there is basically no firm goodwill. The firm I left had one CPA partner and ~10 other employees, and after seven years as an employee and being in charge of a lot of engagements my personal goodwill share was probably in the range of 30-40% of those engagements. That number was proven by the number of clients who left as a result of my leaving. The personal goodwill of the owner of that firm is probably at least 80% for the client work he does.

Since the firm is contributing the firm goodwill plus invested equity, the amounts sent upstream to the firm would be based on that. A payment based on a rate of return for the equity portion, plus a payment based on a rate of return for the firm's portion of the goodwill. H&R Block's franchise model says 30% of revenues belong to the mothership, so in a small firm I might say that 25% return on goodwill is appropriate. For argument's sake, we'll use 1x revenues as the goodwill figure as you mentioned. So if an employee's share of goodwill is 40% personal, then 60% of it is firm, so 60% of 25% of 1x revenues -- or 15% of the employee's revenues -- is attributable to the firm for goodwill. Add the payment for the use of equity and you've come up with an amount for the person's contributions.
 


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