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

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#21
Wiles  
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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
MWEA  
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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
novacpa  
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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".
 

#26
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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
 

#27
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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
 

#28
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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
Beagle  
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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
CP Hay  
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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
Wiles  
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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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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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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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