Today I was minding my own business while reading tax news when I came upon an article about the average cost of a tax return, which with no schedules, was $114. That amount increased to $169.34 (no idea who is charging the pennies) if the return was prepared by a CPA. It got me to thinking, why does a client pay one accountant more than another?
Let me shed some light on this. For 19 years, I was a partner in a partnership that charged at the lower end of the scale for both accounting work and tax returns. However, they were primarily concerned with compliance. Time was spent filing payroll taxes, sales taxes and tax returns, and not really giving tax advice unless asked. Each year, I would practically kill myself preparing about 700 corporate and personal tax returns. I would work on Easter if it fell during tax season, worked late nights, and probably put in about 100 hours a week.
Four years ago, I went out on my own. In the beginning, I found myself replicating the same mistakes that the partnership made. I would lower my prices and undercut my competition. The problem was that in all my years of experience, I was extremely apt at giving tax advice. I was particularly savvy with saving the client money. When I left the partnership, about 65 percent of the clients came with me.
One day I had an epiphany. I could continue to kill myself and make a certain amount of money, or I could raise my prices considerably, do fewer accounts and make the same amount of money. Why weren’t clients paying me what I was worth? So, I began raising prices and I lost about half my clients. However, I replaced that half through referrals in a relatively short period of time. Those replacement clients were bigger clients too. I could charge them more and they wouldn’t blink. I felt very blessed.
That first tax season, we actually made more than the partnership did, even though I did fewer returns. In addition, these clients were paying me monthly for the accounting work and quarterly tax analyses that I did for them. And it was about triple what the partnership was charging. I had even figured out a way to never have the discussion with a client about fees.
When my assistant was making an appointment with a new client, she would always ask for the last three years’ tax returns, for both business and personal. She asked the client to send them before the appointment. I would look over the tax returns and then meet with the client. I would discuss any issues that I found on the tax returns and talk about a tax strategy. If the client asked me what my fees were, I would tell them that I would send them a 25-page proposal, where I would analyze the past returns, explain their tax situation, give them my tax strategy, and then attach a proposal with my fees at the end of the document. It was ingenious.
At the partnership, if a client got an IRS notice, the partnership would answer them for free, regardless of who was at fault for the notice. I began charging for these notices. Anytime that I had to get a POA, I would charge a fee. Different letters had different prices. Also, with every tax return I prepared, I had the client sign an 8821, so that I would get a copy of every notice. When the notices came, I examined them, contacted the client, let them know what the issue was, and how much it would cost to fix it. I had a mortgage, a wife and two children at home to feed. Why should I not get paid for doing work?
Now, as for my client acquisition costs, well, they were through the roof, but it wasn’t real money that I was spending, it was just the time that I spent examining the returns, meeting with the client, devising a strategy and doing the proposal. Total time was about five hours, give or take an hour. My wife and partner (she wasn’t licensed and didn’t do the accounting or tax work), would edit my proposals, and yell at me once again that I needed a template, because she was fixing the same margin and spacing errors. I told her, and it’s true, that each client is different. I am not giving blanket advice. It is catered to the client so I can’t have a template.
What I have found is that each client loves the special attention. They are willing to pay me a lot more for it. There are very few times that I run into a client who gets sticker shock. When I do, I don’t negotiate with them. My fee is my fee, and I earn it. The client either accepts that or they don’t.
In four years, we have completely replaced and doubled the clients that we initially lost in the beginning. I can remember how my wife and I would argue in the beginning. She would worry that I was ruining the company. Today, she sees what I was trying to do. I still work 100 plus hours per week January through June, but the money we take in is triple what we used to make.
My advice to anyone in practice for themselves is to be willing to put in extra time and do extra things for your clients. Then you can charge them more. Raise your rates. You are going to lose some clients, but do you really want to be the bargain shopper’s accountant, haggling over a couple of hundreds of dollars? Not me. I can vividly remember when I was at the partnership, if someone complained about the already low fee, we were instructed to lower the fees even more. We were given a 20 percent leeway. In my four years doing things my way, I have had some complaints, but I always point to the detailed engagement letter they sign that gives them a range of what I am going to charge.
In short, if you have been in practice for 23 years as I have, you have picked up some tricks that will save your clients money. In my proposals, I tell the client how much money they will save if they implement my strategy. I put that in there, so they can say to themselves, ‘Well he charges this, but I am saving that.’ If my fee is more than I am saving the client in taxes, I let the client know and refer them to another accountant.
Don’t be afraid to lose clients. It will happen when you raise fees. Stand firm. It’s not easy, and there will be times when you will ask yourself if you did the right thing. But just think, what are you worth? Do you have any idea how much I miss because I am working? It seems like I blinked and my oldest son graduated high school, and my youngest is a sophomore in high school learning to drive. I miss Saturday mornings, where I would hear my wife and both children in bed in my room, giggling and telling jokes. I get jealous sometimes, but my clients are paying me a lot of money to save them money.
It's not for everyone, but it works for me.