503 How This $1.7M Tax Firm Built Their Network

Today, an accounting firm that's honestly crushing it, that's built a firm around kind of a cool little corner of serving real estate folks. We'll talk about how they got into this, but also what's next for this firm because they're bumping up against some very real seasonal constraints. They're mainly a tax firm. Going to be a lot of relatable pains here, I think, for firms both big and small. Let me show you the story of this firm specifically and how to overcome some of the challenges they're facing right now. Let's get into it. Foreign. Today, we're roasting a firm. So the process here is firms anonymously submit information to me about their firm via the form that you'll actually find down in the show notes. And then we just, we riff on it, see the cool stuff that they're doing, share some ideas for how, how to improve and overcome those blockers. But also, let's not forget, man, being an accounting firm owner, pretty rad. Like, we should be proud of what we're doing here, even though everybody's got stuff that stinks. Right? Right. But through the process of having these conversations and actually being able to put your advisor hat on and see other people's firms, you can be like, yeah, no, they should totally do that. And in the process, our own framework for how we make decisions in our firm, I actually think it gets a little better. So it's a fun opportunity to kind of like play coach. Now, this firm been around the block. This person's been the owner for 20 years. Primarily a tax firm, and in many ways kind of similar to the tax practice that I had. This year, they'll do 1.7 million. Next year, they're targeting 2. In eight years, they want to get to 10 million. They're in a decent sized market. I don't know if it's Tier 2 or Tier 3, but they have a brick and mortar office that their staff comes and works at. They have some legacy clients that are local, but the very biggest clients have never even set foot in their office. So they've got a bit of a specialization here. They work with real estate groups. They have a number of multifamily real estate operators and fund groups. And they prepare the returns for those investment groups. They said of the roughly 700 business returns we do, we generate about 10,000 K1s to their investors. Yuck. I mean, God bless, but boy, that's a lot of K1s. I just, man, I think of the dumb questions we got from people that we sent K1s to. This has got to be on another level now. They pretty much built the business purely on referrals. They have attorneys that work in the same space that send them a lot of work, as well as cost segregation experts that drive business to them. Additionally, the owner will speak at events and sponsor tables at local real estate events. The goal right now is to grow revenue, but not necessarily client count. They want to go deeper with the client base they have and find a way to do that work more profitably. So their team makeup, right now they got a team of 18 that includes a couple of summer interns. They're doing the internship thing for the first time. They've got four accounting staff, two of which are offshore, nine tax staff, two of which have offshore are offshore, and then three admin teams are team members. That feels, if there's one thing that stands out to me here that feels like a, maybe a small number of admins, I, in my firm, I leaned really, really hard into admins, like folks who are just really good operators and systems people because I found if I didn't have admins then, then I didn't always have someone that work could be delegated to from my professional staff. Because the professional staff, they are constantly getting things thrown at them by clients that are not professional, things that are like extremely tedious and take a bunch of time. And oftentimes they will think the professional staff, they're like, well, this is my job to do. I just, this is a hill that I gotta die on myself. But we're like, if that were coming to us, we'd be like, oh, we need to learn the skill of delegation and know when to hand that off to somebody. Well, I want the same for my, my team members, my professional staff. And so I, in my firm, I always had an abundance of admins. I always wanted a person to understand who did I have permission to hand something down to? And it created this culture of, of support where everybody kind of learned the skill of delegation throughout. I don't know enough about the setup here to know if like everybody's got that path, but something to think about because I think I had a heavier weight of, of admins, but then a lot of those admins eventually became actually bookkeepers and tax pros. That is, that is a really interesting byproduct of aggressively pushing TAs, the skill spectrum that is deskilling as much work as possible, ensuring that your high level people aren't doing low level work. A byproduct of that is it raises up the capabilities of your lower level folks faster and before you know it, you've got admins that are like, can I take a bookkeeping course or could I go do a Jackson Hewitt like 1040 course or something like that. Now pricing, pricing is kind of across the board from 200 bucks for a return to 10 grand. Average billing per client is 1750. Average business returns 1300. Average individual return is 1045. This includes some pretty expensive tax tax planning work. So if they take that out, the average drops to more like 700. Average billing per accounting client is 610. I assume that's 610amonth. Right now they won't bring in a new client for anything less than their average of 1750. We'll talk a little bit more about how they bill when we get to their pain points. They're trying to build the accounting side of the business right now. Right now accounting is 18% of the business, but they want to grow it to 40. So this is a very common trend among, among tax firms right now, doing less transactional once a year tax work and instead just doing the tax work for the CL that they also do bookkeeping work for. So their goal is to get to 60, 40 tax and accounting work rather than what it is right now where only 18% of it is accounting work. Great upside of accounting work, less seasonality recurring revenue. But it's also an entirely different skill set. So they got a note here. They got stuck in the trap of being absolutely trash at bookkeeping and charging basement prices for so long. In my experience, tax practices, this was the case with my tax practice. We have this expectation that like we can do bookkeeping in our sleep because we do clean up books for, for tax work. But man, running an efficient bookkeeping practice is an entirely different challenge than fixing somebody's books to put it into a tax return. They're two very different skills. And the fact that tax pros know their debits and credits doesn't necessarily mean that they know how to like, nail bookkeeping workflows. They're struggling with a bit of this, but let's get into their pains. So their number one, their biggest pain right now is the August to October crunch. Tax firms, most tax firms dealing with some version of this, either the spring is gnarly or extended tax season is, is gnarly or both. So right now they're sitting on a whole bunch of work that still has to go out the door. As of June, they'd completed 45% of their returns that have to be done by October. You can see where that's headed, right? That's going to be a real sweaty late summer. Now, they had worked on breaking up filings basically by quarter so that every client belongs to a quarter and they'll try to get that work done during the quarter. Sounds like that sort of fell apart where they're struggling to get folks out kind of on the timeline that they had planned. So first, number one is this capacity constraint of they're going to have a whole bunch of stuff running up to the extended deadline. How do we have a more calm, more methodical process for getting tax work out throughout the year? Let me, let me run you through their second pane because the solution to both, I would, I believe is the same. The second pain is accounting work is not priced high enough and even the tax work is still kind of priced across the board. So here's how they bill or how they price. They say we bill a flat rate. On the individual side, we have fees tied to forms in the tax software and bill out based on that with adjustments as needed for complexities that may happen. On the business side, we have set fees for our real estate investment groups that are based on Number of K1s and other complexities needed like bookkeeping, cleanup, advisory calls, you know, tax agency notices and follow ups, that sort of thing. On the accounting side, they kind of throw a dart at a dart board and hope that it's profitable, they say. I kid, but that's not far off. All right, if you are a steeped in the lore of the Jason on Firms podcast, you know what I'd say the solution to these first two pains are right. I think fundamentally, if you are billing flat rate for anything, you're just leaving a lot of money on the table. You give a client a single price and that's costing you money on almost every single engagement. Man, we've been talking about this a lot lately, so apologies. I'm going to sound like a broken record, but we are getting close to renewal season and I'm actually very jazzed for the number of firms that are going to be going like approaching renewals in such a more hardcore way than they ever have before and the result being massively more profitable work. I remember what renewals were early days on my firm. It was like just the admin headache that you put off forever. By the end of me running my firm, the renewals were probably the most important thing that I did in my accounting firm all year because they literally dictated the profitability of all the Work that we were going to do the following year. And dialing that in boiled down to how we set up our three tier proposals. So I'm not an advocate of pricing work at a flat rate because the reality is every single client has a different willingness and ability to pay. And oftentimes we do this because we're thinking about the C and D clients that are complaining about, you know, how much we're charging them. And so we're kind of scared to give a price. And so we maybe pull it down a little lower to protect ourselves from them potentially complaining. But what we don't think about are the A clients way up here, they would actually happily pay us more than they pay us today. And that's what the three tier proposals do a good job of, is they let folks pay more, who want to pay more because people will literally choose the more expensive option and not use it simply because they identify as the type of person who ought to be afforded that more expensive option. I like, you don't have to agree with this to be able to profit from it. That's just the world, the way the world works and the way people buy stuff. But as long as we're not giving those different options, we're not capturing those additional profits. And this really is a huge thing for the bottom line of your business because normally on the spectrum of a bronze to silver to gold plan, that gold plan, it's usually 2.2 to 2.5x the base level bronze plan. And if you haven't done three tier proposals before, what I usually recommend people start with is that the norm, what the client is used to is usually going to be the bronz package. And then when you put that three tier option up in front of them, a lot of them are going to be like, I don't want to be on the worst package. And so they are self selecting up into something that will pay you more. And the goal with how we set these up should not be that gold is the most work. Usually gold is a just a more premium service delivery, like first class in the airplane. Maybe there's a little bit more work that goes into it, but that'll be fundamentally more profitable. And so every single client that is then self selecting into more expensive options, those are all more profitable engagements to the tune genuinely of like easily a 20 to 30% boost to the bottom line. Even in a mature firm like this, who's doing 1.7 million a year. I could tell you in my firm, when we were doing three and a half or Four. I took us off of hourly billing for the first time too. Always giving prices up front so that we could enable stuff like three tier proposals. And the profitability of our firm almost doubled like it was night and day. Like we, we turned a bunch of clients away and we were running a more profitable firm with a much more lean client list. And my, my firm at the time, like it was an 80 year old firm and had a whole bunch of legacy st stuff, more legacy stuff than we're talking about here, where it was very obvious that stuff needed to go away and we needed drastic price increases and all that. But if you're running a firm at like a 30% margin and the bronze package is 100 bucks and the silver package is 160 bucks, you are making 30 bucks on that bronze package and 90 bucks on the silver package. That's 3x. Now maybe the silver package is a little bit more work. Let's just say it's 2x is profitable. That's pretty conservative. Now for every one of those silver projects, you can cut two bronze projects. Is that right? Did I do my math right? And the profit ends up being the same. Most of us are closer to a vastly more profitable firm than we realize because we forget and people get like bent out of shape. They're like, well, you don't know this math and you don't have any business running a business. We forget just how price increases go directly to the bottom line. And so if you're running a 30% margin firm and you increase your price 30%, you can get them to pay 30% more. You just doubled your profit, man. I mean, you can do half the work. It solves all the problems of capacity and not being able to hire enough good people and all that stuff. Right? So those first two pains that this, this firm is struggling with. One is the cyclical nature of tax work and being able to get work out in a more controlled flow throughout the year. Second is being able to charge enough for bookkeeping work and then tax work kind of being across the board. I don't really care that the pricing right now is across the board. All I really care is that it goes up. And that's the way your clients think about it too, is they're comparing what they're going to pay to what they paid last year. Now if we can put in front of them some perks that they've never had access to before, then many of them will opt into that more expensive option now. And so they're just, they're paying us more that works more profitable. And then the clients who don't, the bronze clients, they're then the candidates for clients that we let go down the road. But three tier proposals, as far as I'm concerned, like that is the first step to making every single, not every single one, many of these engagements more profitable. I've chatted with a number of firms who did three tier proposals for the first time this year. Every single one of them said they were surprised how many folks upsold like self selected into the more expensive options. That was something that they were like. We knew the folks that were going to pick bronze because they were the ones that always complained, but they were surprised at what a big percentage of folks would happily pay 50 to 100, 150% more than they've ever paid them before, just for access to some perks and a little bit more premium service delivery. This episode is sponsored in part by Ignition. Come, come, come, come, come. Here's the thing. Here's the thing about client billing. You can't bill for the time you spend billing. You can't. You can't. It is pure waste. And we're bad at billing because it's, it's icky. You let things slide. You don't care, get paid. You waste time. Waste time chasing people for money. That's not what I did. I would just, I didn't want to waste time chasing them and so I would just, I just eat it. Don't do that. This is where Ignition comes in. The leading revenue generation platform for accounts and professional services. When I was running my firm, Ignition wiped out our ar, it's true. And significantly reduced the time spent billing clients, saving our partners over a thousand hours in the first year because they didn't have to bill all that stuff manually. Man with the condition. We won more business with impressive online proposals. No more hustling, hustle and PDFs and Word docs. We automatically pulled payment up front or at the end of a job when it was done. No more dialing for dollars. We transitioned our firm to more recurring revenue and better managed scope creep. No more leaving money on the table. Ignition is making thousands of firms more money and genuinely made us more profitable. Check out over 7,000 of the smartest businesses run on ignition@ignitionapp.com. i'll put a link in the show notes. Today's episode is brought to you in part by Team Up. Who helps you hire talented accountants in the Philippines? Did you know you can just hire someone in the Philippines? That's the thing that you can do similar to hiring cross country. Like most of us run distributed teams these days. You can hire somebody that's in the Philippines. Now oftentimes big question if you haven't done this before is security. What about security? To which I'd say what do you do for security for your onshore team? If I hire somebody in North Carolina or for goodness sakes Florida, what do we do for them? Well, probably ought to give them a specific work device, have like on device encryption, the ability to disable the machine remotely. All of those things, important things to do for any hire. Exact same things you do when you hire somebody in the Philippines. Only real difference for US firms is you have 7216 disclosures if you do tax work. Actually if this, this person will do tax work. And for most firms that is, that's two disclosures that you got to put in front of the client. Not a big deal. Team up, they've let loads or they've worked with loads of firms that have navigated all this. Can give you the verbiage recommendations. I did it myself and my firm disclosures and everything wasn't as big of a thing as I built it up to be. And I, I went 4 for 4 on my Philippines hiring and I had never gone 4 for 4 with onshore hiring. Maybe I got lucky. I didn't get lucky. There's like a different attitude towards work with me. Folks in the Philippines, literally three days ago, somebody at an event, we're talking about their team and they're like, man, it's, it's like refreshing. Anyways, if it's something you've ever considered, chat the folks at Team up as I think this person had, they actually hired those folks through Team up as well. It's one of those things that seems more spooky until you actually do it. Learn more about Team Up. Check out the link down in the show notes. Now, how do we use three tier proposals to solve the problem of cyclical tax workflow and a lot of work hitting at the same time? We've talked on the podcast before about how some tax firms are transitioning to fully scheduled work. That is every client is assigned and we tell them this is the week that we're going to do your work or the few weeks we're going to do your work. And so you have to have your info in before that and that is when we will send the work out the door. And the upside of that is you are fully in control of when that work happens throughout the entire year. This is the thing that a lot of firms are doing, it sounds unthinkable to many firms still, but like this CPA firm that does my stuff now, like this is how they manage their entire year. They don't work any overtime the entire year round. And they're a tax shop. So this is for sure a thing that can be done. But an interesting possibility here with three tier proposals is them being able to buy up, to have control over when in the year their work gets done. So two different flavors of that. And we've, we've talked about this on this sort of summer series we're doing about like how to better systematize your firm. These episodes are coming out each Wednesday and then how to sell more premium versions of that work. So two ways we can use three tier proposals to control the bottlenecks in our tax workflow. One, we can let them buy up to a level that lets them pick when their, their work gets done. And so rather than us choosing it for them or us just letting all of our clients pick, we can let the members of the Admirals Club pick, you know, the ones that are like paying for that top tier. And there's got to be some constraints around that. Like you only got so many seats in the Admirals Club, right, Which is what makes it even more juicy for folks to buy up to that and they want to be in it, but by, by opting in for that gold plan or whatever it is, they get to pick when their work gets out or goes out. And obviously in order to deliver on that, we need to be very explicit about, well then you need to have all of your information and by this time and you need to be responsive to questions we have in this window when we're working on your stuff. So this is one way that we can use three tier proposals to kind of control when in the year work gets done. The other way is simply what level they're at, dictating where they are in the queue. So when they bring their stuff in, is it fifo, does it just go to the back of the file cabinet? Is it the last one to be worked on or is there like tiered priority now? This could literally be like basically the Q approach, like, like you do in the old days in the file cabinets and you just have different levels of, of sort of tiered priority or your different like three tier proposal options could just offer more to less control over when in the year that work gets done. I think it probably has to be more granular than like which quarter it goes out. I'd probably lean more towards like what month it goes out. Maybe that helps but it will still live and die by how much are we communicating and over communicating the clients. The importance of here's when you need to have all of your stuff in and here's your reserved block of time for when we will do this work. That's the only time that we can guarantee we will do your work. And so they don't have their stuff in by then they are rolling the dice that you may not be able to get back to it. Now some clients will play by the rules here and the risk is we instead build our system around the clients who won't play by the rules. And this is a great example of letting C and D clients dictate the direction of your firm and what is best and how we build the firm for our A and B clients. Like that's the future firm that we want to be building is the one that our A and B clients want. But oftentimes we, we don't, we hold off because of the complaints or the non compliance of our C and D clients. So I would encourage you, the North Star ought to be how do we build something that's great for our compliant clients who will pay us top dollar. Both of those things, they're compliant and they will pay you top dollar. Really hard thing sometimes is we will have stinker clients that pay us top dollar. You want to find a way to make the progress of your firm grind to a halt. It is letting big money stinker clients wag the tail of a dog. If they're stinker clients or stinker clients, they're keeping you from getting to where you want to get to. Compliant clients. The folks who are in the Venn diagram of like they can follow rules and they're within the type of person that we want to serve in this case, like real estate stuff. Those are the people that we want to design this system for. Right. Okay. Last pain they're suffering with. Man, there's so many like I obviously you know this by now. I geek so hard on three tier proposal stuff and optimizing the best way to get people to say yes. And how do you build scarcity into those renewals? So it's like oh there's only X seats remaining at this level. How do you build urgency where it's like you have to pick something by this date. Like you you have to this is the renewal deadline to then the next year being like well the folks that were gold, they have early access to renewals that's something that we would put in our most premium tier is they have early access to renewals next year. So if there's something special or a limited number of seats, they won't miss out. That's an example of somebody paying for a perk that requires zero extra work from you, but you make more money as a result. This. I mean, there's so many things that go into the buying behaviors of this stuff. In fact, Alex Hormozi right now, he's promoting a new book that he has and this big sort of live event that's coming up. And in their checkout flow for signing up for the event, they have a checkbox that says you want to opt into the VIP experience. It's on one screen and you check that box and it literally does nothing. You go to the next screen and one of the options is to sign up for like the VIP ticket. But they put that checkbox on the previous page because they found when people check a box that's not associated to any price yet, they will say like, yeah, I want the VIP experience. And then when they get to the next page, they're like, oh, I already said I want the VIP experience. So I'm just going to pick this. Like, that impacts, for whatever reason, our monkey brains and the decision that we'll make on the next page. There's so many little examples of this and how we fine tune it. My brothers and sisters in accounting, I can tell you the way that we fine tune this is not sending them a PDF document saying, here is our engagement letter. And the beauty is every little thing we dial in about this hits the bottom line and there is, there is money that we are leaving on the table, like big money, where people will pay more if we present it the right way. And it fundamentally changes the profitability of the entire business. Okay, last pain that they're dealing with, and this is specific to the owner. They enjoy working on the firm, not doing the technical stuff, but they are still the most technically complicate, technically competent tax person in the office. And that prevents them from getting fully out of fulfillment instead just working on the firm. They enjoy selling and talking to clients. At the end of the day, they get energy from interacting with people and they feel drained if they have their head down in an Excel sheet or tax software not talking to anyone. So their goal is to be selling, to be out of the business that is out of getting the work done. Now, this is super, super relatable. You are the most senior, most capable tax person in the firm. And so you don't hire for that capacity in someone else. This is a great example of what we've been talking about on the podcast lately. The notion of simply hiring to grow your business versus hiring to buy back your time. Time we've been talking about, you know, Dan Martell's book, Buy Back youk Time. But the basic concept is we need to first free up our time before we hire to grow the business. But usually we do it the other way around. You hire somebody because we can take in more clients. Now we're at capacity, so we just need more people to do the work. But all that's doing is creating more mouths for you to feed, more people to manage while you're still doing the same job that you've always done, which is probably also growing. And so when we look at all the needs in the business, the last need we often think of is, what's the thing that only I'm capable of doing? And we don't hire for that because we're like, no, that's my job. That's what I can do. That is so relatable. That's how most of us are wired by default. And it's something that you just walk into on accident. I mean, think. Think about this person who's been the owner for 20 years. In 20 years time, surely there were people out there who could have been more expert at tax stuff than this person. But what we do is we see all the other holes in the business and we prioritize those rather than the things that we do, which is another way of saying what these other people are going to do is more important than what I can do. Right? That's not right. No, the. The most important time in the entire business. If anybody's time can be saved in the business, it should be yours. Right? So then why do we hire for ourselves last? It's a really hard thing to do, but something that most of us just naturally stumble into. And so the solution for this, pretty straightforward, right? Not that that person is easy to find. But the reality is, oftentimes getting to the next cooler, bigger opportunity for you can look like hiring a type of person that you've never hired before, somebody that's better than you at something, somebody that's more expensive than anyone else that you've ever hired before. We usually don't solve the problems we're facing right now without doing something fundamentally different than we've been willing to do before. In this case, it is, you know, a willingness to, like, not be the best at that thing anymore, which is like, that's hard to kind of get your head around. Can I hire somebody that's better than me and my own business at this thing in this case? I mean, you just got to remember this person, the owner, they are so much more than a competent technical tax person. Right? And they can see their path forward is not in doing the tax work. So we can hire somebody that's better at this stuff. It may also mean paying this person more than we've ever had to pay somebody before. I don't like that any more than you do. But the flip side of that is now you are on a path to do cooler, bigger, more viable things than you have ever done before. So whose shoes would you rather be in? Would you rather be the high level person coming in that's better than your attacks, or would you rather be you who now has the freedom to go become like the next version of you doing even cooler, even more valuable stuff? I think we would all pick that, right? Good stuff, man. A lot of like things in here that I think many of us struggle with. Thanks for being willing to share it because we all get smarter when we can kind of work through this stuff, see real life situations and think through. Oh yeah, I've kind of got my own version of that too. If you want the chance to be anonymously roasted, check out the link down in the show notes. Little form there to complete. We may do the same with you. Good opportunity to share some ideas and we all get a little bit better at running firms in the process. That's all I got for today, gang. Thanks for being here. I'll catch you in the next one.