Start Your Own Practice

EXECUTIVE SUMMARY

A decade of declining enrollment in college accounting programs during the 1990s combined with passage of the Sarbanes-Oxley Act in 2002 and the new financial reporting and internal control demands on publicly traded companies have created a sellers’ market for CPAs. That makes it a good time to take the plunge and launch a practice. Most start-up activities are the same as for any small business: Research your local market to assess the opportunities, decide which services to offer, choose the legal form your business will take, find and furnish an office, purchase the necessary insurance to protect against unexpected liabilities and attract clients. Regulation has intensified in a number of practice specialties. Depending on the specific services you intend to offer, take extra care to check with state and national rule-making bodies and professional associations such as the state societies and the AICPA to determine which requirements will apply to you or your firm. Accreditation as a CPA is the basic requirement in most states for setting up a practice, but some states and municipalities also require a business license, so check requirements carefully. CPAs who plan a home-based practice should check with the local zoning office to make sure they don’t violate any laws. Deciding the legal form the practice will take—sole proprietorship, partnership, C corporation, S corporation or any type of limited liability entity—has many important consequences. Liability insurance is very important to practitioners who don’t enjoy the protection from creditors that incorporation provides. CPAs need basic technology— a computer, printer, telephone, fax machine, perhaps a copier, and inevitably, good tax software—and an understanding of how programs work and how to integrate them. Randy Myers is a freelance financial writer who lives in Dover, Pa. His e-mail address is randy@randymyers.com .

aunching your own CPA practice is one of the greatest professional challenges you’ll ever undertake—and potentially one of the most rewarding. Fraught with hard work and long hours, it’s nevertheless a chance to build a business, provide real value to clients who depend on you and, ultimately, shape your own destiny. This article explains how to identify opportunities in your local market, attract and retain profitable clients and attend to the myriad details—from furnishing an office to buying insurance—that accompany the launch of any small business.

The opportunity has seldom been better. A decade of declining enrollment in college accounting programs during the 1990s and the new financial reporting and internal control demands the Sarbanes-Oxley Act created for publicly traded companies have left CPAs in a seller’s market. As industry, midtier accounting firms and the Big Four scramble to meet the new mandates, the needs of smaller businesses have, in many cases, taken a backseat—and those clients need help sooner rather than later.

“There’s a lot of low-hanging fruit out there, including good clients some of the bigger firms don’t want,” says CPA Chris Echols of Montgomery, Ala., who purchased a solo practice and relaunched it as Chris Echols & Associates in December 2002. “With the shortage of accountants and the bigger firms gobbling them up at good salaries, you don’t find as many people going out on their own.”

WHY BUCK THE TREND?
CPAs who’ve made the leap to self-employment cite a variety of reasons. For Jonathan Tannenbaum of Levittown, N.Y., it was the culmination of a lifelong dream of running his own business. For Jelena Black of La Palma, Calif., it was a chance to balance her profession and family on her own terms. For Robert Kober of Salisbury, Md., it was a way to inject new vigor into a career that had begun to seem mundane. “It isn’t necessarily easier than working for someone else,” says Echols, “but it is more rewarding. You’re building something—for yourself and for your kids.”

Starting your own CPA practice requires much more than accounting expertise. That’s a surprise to some budding entrepreneurs. “In college I was told that all you had to be was a good technical person and you were set in this field,” says Kober, who swapped his job as corporate controller for a group of nursing homes for his own practice in 1997. “But as an owner, you have to know a lot more than that.”

READY, SET, PLAN
Most of the must-do start-up activities are the same as for any small business. You have to research your local market to assess the opportunities, decide which services to offer, choose the legal form your business will take, find and furnish an office, purchase the necessary insurance to protect against unexpected liabilities and attract clients (see “ Tips From Six Who Made the Leap ”).

In addition, remember that regulation has intensified in a number of practice specialties. Depending on the specific services you intend to offer, take extra care to check with state and national rule-making bodies and professional associations such as the state societies and the AICPA to determine which requirements will apply to you or your firm. For example, some personal financial advisory services require registering with the SEC or state securities departments, while certain attestation services require enrollment in an AICPA-approved peer review program to maintain Institute membership.

Research and planning. Before launching Hall and Co. CPAs in the fall of 2004 Martha Hall created a business plan. By networking with local business owners, bankers and attorneys, she found that practitioners in and around her hometown of Geneva, Ohio, had sewn up most of the local accounting business. But she also discovered that her background—seven years in public accounting and another 15-plus in corporate finance for several Silicon Valley companies—was broader than that of most of her competitors.

She targeted her marketing efforts at larger businesses 45 to 60 miles away in Cleveland and Youngstown, Ohio, and Erie, Pa. Hall differentiated herself by offering not just annual tax and compilation work but also strategic planning services.

“A lot of my practice is centered on helping businesses reorganize and turn themselves around,” she says. “I love doing that.”

To develop a business plan before her launch, Black did some research over the Internet, visiting competitors’ Web sites and actually canvassing their locations by car. She discovered that her local market is home to many manufacturing companies, which have a lot of inventory issues, and a number of start-up companies, which need help incorporating and drawing up business plans. She decided that both groups made excellent target markets for her fledgling firm.

Note that while accreditation as a CPA is the basic requirement for opening a CPA practice in most states, some states and municipalities may require you to purchase a business license before setting up shop. Check with your state society and local government about licensing. Include that in your business plan.

Define your business. Specializing in a specific industry or market segment, while not imperative, can help you attract and retain clients. If, for example, you have expertise in tax planning for high-net-worth individuals, as CPA Stanley Pollock had when he launched his firm in November 2004, it can make sense to build your practice around that offering. “Your market niche will come from your background and experience,” says practice consultant Hugh Duffy, chief marketing officer and co-founder of Build Your Firm Inc. in Madison, Conn. “It could be in terms of the services you offer or the industry sectors you work with. But brands, companies and services that differentiate themselves from their competitors break through the clutter.”

Duffy warns against defining a too-narrow niche when you’re just starting out, however. “You have to try for the best of both worlds,” he says. You have to be a generalist to cover your overhead, put food on the table and position yourself to meet the needs of small businesses. But you also have to think about what niche you eventually want to build up, so you can meet the needs of those clients better than anyone else. “Fortunately, the marketplace is big enough that you can be a generalist or a specialist. You can succeed either way.”

Choose a location. For many CPAs striking out on their own, the answer to where to locate their offices is, at least initially, an easy one: home. “The cost and convenience made it the easiest way to start,” says Tannenbaum, who founded Carson Consultants CPAs PLLC in his Plainview, N.Y., residence in August 2003. He stayed there for 16 months until the birth of his first child squeezed him out of the home office and into commercial space in nearby Levittown.

Most communities permit such home-based practices, although you should check with your local zoning officer to make sure you’re on solid legal ground. From a marketing perspective, practice consultant Frank Salman, CPA, of Victorville, Calif., says there’s a new breed of practice emerging for which a home office is not only sufficient, but readily accepted by the marketplace. “CPAs working out of their homes generally can gross $100,000 a year, plus or minus, and take home $90,000 of that for a 40-hour week,” he says, “and you don’t have any employees or the overhead of an office. It gives you flexibility, freedom and a generally enjoyable lifestyle. And if you lose one client out of 10 because you don’t have an office, that’s alright.”

Of course, it’s not for everyone. Kober rented commercial space from the get-go, convinced that it would better motivate him and also communicate to his clients a sense of longevity and commitment to his business. “I also thought I’d be able to charge more,” he acknowledges. “There’s a different expectation about fees when you’re hiring someone who works at home.”

Duffy agrees. “I believe those with dedicated office space do better, especially in metropolitan areas.” Clients take you more seriously, and the location generates some walk-in business.

Pick a legal structure. Deciding whether to be a sole proprietorship, partnership, C corporation, S corporation or some type of limited liability entity has important tax and legal consequences. In the end, any form will serve you well as long as it dovetails with your goals. Work with an experienced lawyer to decide and draw up the necessary paperwork.

Kober chose the simplicity of a sole proprietorship for his tax and compilation practice, although that necessitated “a lot” of liability insurance since it doesn’t offer the protection from creditors that incorporation provides. Tannenbaum launched his practice as a professional limited liability company because of the flexibility it offered in allocating income and expenses and in admitting new members to the practice. Black set up a limited liability partnership because of its flexibility in making distributions from the business and also to avoid the flat tax rate associated with incorporation. Echols and Hall both opted to be S corporations, which as pass-through tax entities avoid the problem of double taxation that a C corporation might incur on any dividends paid.

Insure thyself. Owning your own business means buying your own insurance—and it can be pricey. Pollock says he went through “insurance shock,” stunned by the cost of providing his own health care coverage on top of professional liability insurance and an umbrella policy. Echols, who pays for health insurance for himself and two employees, says that “outside of payroll, it’s my largest expense.” Even if you’re covered by a working spouse’s insurance plan, your employees are not.

Some practitioners supplement their liability insurance with an errors and omissions policy. Many landlords require liability insurance for the office, and that policy often covers errors and omissions, too. “It’s not an exorbitant amount if you have a $200,000 to $300,000 limit,” Salman says. “And that’s plenty adequate for somebody just starting out.”

You also will need disability insurance to provide income in the event you become ill and business interruption insurance should a disaster prevent you from opening your doors. Kober says he purchased business interruption insurance because his location 30 minutes from the Atlantic Ocean leaves him vulnerable to storms that could put his office out of commission. Because he owns his own office building, he also carries hazard insurance on the property.

Furnish your office. Sure, you’ll need a desk, a comfortable chair, filing cabinets and all the other accoutrements of office life. But more important, you’ll need technology—a computer, printer, telephone, fax machine, a copier and, inevitably, good tax software. “You have to be fluent in using a computer. You have to know how a program works, what programs integrate and how to move from one piece of software to another,” says Kober. The good news is that the cost of technology continues to decline. In fact, your most expensive purchase might not be the hardware you buy but the tax software you choose. From a leading vendor, it easily can cost you $5,000 or more annually. Pay-per-use arrangements can help keep costs under control while you’re building your business.

Finding clients. Developing a roster of clients is the single greatest hurdle facing a young CPA practice. If you can’t attract and retain good clients—who will value your contribution to their business and are willing to pay for it on a timely basis—your fledgling business simply won’t succeed. Yet promised referrals from your friends and family seldom pan out, and trying to find clients by hobnobbing at Chamber of Commerce or Rotary Club meetings can be an extremely time-consuming process.

“If you can’t swim across that river quickly enough to start recouping your overhead and time,” warns Duffy, “you will drain your resources quickly.”

To prevent that from happening, the entrepreneurs interviewed for this article turned to business-to-business marketing techniques such as direct mail, telemarketing and Internet marketing. Hall spends liberally on advertising, while most of her local Ohio competitors do not, she says. In 2005 her marketing budget was about $2,500 a month for telemarketing and another $10,000 for a Web presence and support, print advertising in newspapers and the Yellow Pages and networking. “I added 80 clients, so I plan to triple that this year,” she says (see “Getting Started With Direct Mail and Telemarketing,” page 56). You also can hire outside consultants to do the work for you or learn from consultants such as Duffy and Salman, who charge in the neighborhood of $2,000 to $2,500 for their services.

A third alternative, of course, is to buy an existing practice and its client base, as Echols did. Acquisitions cost money, though, and you should be sure the clients you’re buying—and the services they require—dovetail with your experience and expectations, and that your purchase price, preferably spread out over several years, allows for adjustment if some clients leave.

In addition to hiring Duffy to help her, Black kick-started her new venture by hiring a third-party vendor to conduct a telemarketing campaign in the weeks leading up to tax season. She also drew on the talents of her husband and business partner, marketing executive Shaun Black, to create a sleek Web site and set up a pay-per-click marketing program with Internet search engine operator Google. She paid Google to have her firm’s Web site appear whenever someone searched on terms such as “tax preparation” or “CPA.”

“That definitely catapulted us to where we are today and ended up being relatively inexpensive for the clients we picked up,” she says. Black & Associates LLP got about 50 clients in its first tax season in 2005. After just one month of working from home, Black moved her practice into leased commercial space, then 300 square feet of first-class office space and, finally, in November 2005 into a 1,000-square-foot office.

Marketing can be expensive, of course, but it’s less costly than failure. Duffy says that during their initial year in business, CPAs who work with him typically spend 50% to 70% of their revenue target on marketing. Some make do with far less, though, and in subsequent years, when clients are on the books and making referrals, reduce their marketing budgets dramatically.

Hall invested about $70,000 in her business its first year, including the cost of converting two-thirds of her home into office space for six people. Black spent about $15,000 to launch her business, and she notes that having her husband handle most of the marketing saved “a ton of money.” Those are relatively modest investments for businesses that, with the right marketing, often begin to generate six-figure revenue streams after just one or two years of operation.

If going solo sounds appealing to you, there’s opportunity aplenty, limited only by your drive and imagination. “CPAs clearly can succeed on their own,” says Duffy. “The number of small businesses out there is very large, and many are being underserved. CPAs simply need to learn how to sell their services.”

“I’ve been doing this for 10 years,” Salman agrees, “and in this last year CPAs have been the most successful at establishing practices that I’ve ever seen.”