Going solo: what does it take to start your own firm? Here are some tips for a successful launch.

GOING SOLO

What does it take to start your own firm? Here are some tips for a successful launch.

Many CPAs have considered leaving their employers to create their own practices. Some seek more control over their futures or the chance to balance family and career demands. Others want to satisfy entrepreneurial ambitions or experience greater financial or professional rewards.

Whatever their motivation, those who choose to venture out on their own must not only meet certain financial and professional requirements but also anticipate the effect this step will have on their business and personal lives. Because the competition for clients has grown more intense, new practice managers should engage in careful research and planning before they open their doors.

This article explains how CPAs can capitalize on the opportunities and avoid the pitfalls they're likely to face in new practices. It explains the adjustments, resources and marketing know-how necessary to create a profitable practice.

NEW OPPORTUNITIES AND RISKS

When I started my own practice in the early 1970s, everyone was playing by the same rules, but ethical standards have changed a great deal since then (see HOW ETHICAL STANDARDS HAVE CHANGED). Twenty years ago, a successful practice primarily required timely, competent services at reasonably competitive prices as well as contacts who would use or refer others to those services. Even in the early 1980s CPAs basically were assured success if they managed their practices prudently and offered good service and quality work--despite more refined and sophisticated marketing efforts by some CPAs. By the mid-1980s, however, our profession had begun to feel the effects of unprecedented competition and complexity, including

* Standards overload.

* Proliferation of tax laws.

* Advancements in computers and office automation.

* Increased demands from sophisticated clients for new as well as conventional CPA services.

* Competition from various sources for local CPAs' clients.

* Potential shortages of professional staff.

* Greater needs for practice quality, technical review and backup and assistance.

As a result, the 1990s offer unparalleled opportunities for new practices as well as a greater risk of failure than in the past 10 to 20 years. Are these two statements inconsistent? No, because many potential roadblocks can have positive implications for new local practitioners. For example, some might take advantage of tax law complexity by creating a niche in a specific tax area. Others will capitalize on skills in computers, financial advisory services or capital acquisition.

CRITICAL CONSIDERATIONS

There are many important factors to consider in making the decision to go solo. Some depend on the individual, but the following apply to every starting practitioner:

Financial needs. With the increase in competition, the lag time between starting a practice and procuring sufficient clientele to support it will increase. The need for adequate financing in the 1990s is considerably more important than it was in the last decade.

CPAs must have sufficient capital to cover business and personal expenses until they can earn a profit. As a rule of thumb, a CPA should have between $20,000 and $30,000 in resources--whether in savings, borrowed funds or other assets. Those who start out with less risk failure or, at a minimum, must wait longer before the practice becomes stable and profitable.

Initial costs, including furnishings, equipment, promotion, office lease and moving expenses, range from $5,000 to $15,000. Actual monthly operating costs also differ, but generally range from $1,500 to $3,000 for a sole practitioner. Factors that affect these costs include office location, staff, number of existing clients, type of practice, geographic region and individual needs.

Administrative staff and an office are two of the significant expenses for beginning practitioners. Many CPAs try to start practices in their homes with no support staff, but this option frequently is not cost-effective and practitioners should weigh the pros and cons before choosing it.

CPAs also shouldn't overlook the benefits they are losing when leaving an employer. Health insurance, payroll taxes, continuing professional education, membership dues and other fringe benefits can amount to several thousand dollars each year, which sole practitioners must add to operating costs.

Finally, CPAs should consider the emotional stress and financial sacrifices a new practice can impose on other family members. Those who aren't prepared for the increased demands will have less energy to devote to their businesses.

Hourly requirements. Allocation of time will become a major concern. CPAs who are employees of firms can focus on providing client services or on an assigned task. Administration and other management duties are handled by others.

In contrast, CPAs running their own practices must be able to balance chargeable and nonchargeable time. Working 2,200 to 2,400 hours a year for an employer may have seemed difficult, but sole practitioners must spend 1,000 to 1,400 hours on chargeable time, as well as 200 to 600 hours on practice development, 200 to 300 hours on technical updating and 200 to 400 hours on firm administration and other duties. Obviously, organizational and time management skills are critical for beginning practitioners.

Competition and economic determinants. Local CPAs face competition from many sources, including small and large CPA firms and other professionals. Even in the highly complex tax field, there are enrolled agents, moonlighters and banks, as well as a number of taxpayer assistance programs that offer tax services. Outside the traditional services, CPAs encounter competition from chartered life underwriters, financial planners, management consultants and various computer service providers.

The primary guideline in this area is to know the competition and plan accordingly. Those who have left larger firms must understand their resources have changed but their competition has not.

Obtaining a client base. In the past it was possible to establish a client base and wait for the practice to grow, primarily through satisfied client referrals. In the more competitive 1990s, this may not be the case. It is still important to cultivate existing clients because they will undoubtedly remain the single largest source of new clients. However, they may no longer contribute the 70% to 90% of growth that they have for some practices in the past. CPAs of the future will need to look to other sources to replace clients lost by attrition.

Shifting from employee to owner. There are two primary adjustments to consider when opening one's own business. The first is financial. As discussed, there are significant costs customarily handled by an employer. In addition, some CPAs give up retirement programs when they start their own businesses. Nearly all lose sick pay, paid holidays and vacations.

New practice owners also must make a change in attitude. As entrepreneurs totally responsible for the success and welfare of their firms, CPAs no longer can spend all their leisure time pursuing personal interests. Increased civic, firm and social activities frequently follow founding a practice. CPAs find themselves with new responsibilities that demand longer hours.

Firm owners also begin to realize that nearly everyone they meet should be considered a prospective client or source of clients. The CPA must project an attractive and confident image and pay attention to demeanor, appearance, language, office atmosphere and decor, as well as any other facets of his or her life that reflect on professional stature. Independent CPAs must fill the roles of leader, employer, entrepreneur and sales person.

QUALIFICATIONS FOR SUCCESS

At a minimum, successful practitioners must be technically competent, able to generate business, good with people and confident in their abilities. In today's competitive environment, however, CPAs also need the following qualifications:

Academic and professional experience. Good academic training is essential. A bachelor's degree or even an advanced degree in accounting is only the first step in the education process. Practical experience is critical. I recommend CPAs have a minimum of five years' public accounting experience before starting a practice. No matter what the new firm owner's background is, he or she will need a familiarity with many industries and various types of financial reports, a broad tax background, exposure to different aspects of the CPA-client relationship and personnel management experience. Contacts with accountants, other professionals and community leaders will help, as will experience conducting negotiations for clients--in sales of businesses or with the Internal Revenue Service, for example. Finally, a specialty can be an important advantage.

Well-defined goals and standards. Realistic objectives are an integral part of an efficient practice. When determining their goals, CPAs should consider.

* The type of practice they want and how they want it to grow.

* Their professional and financial expertise and how it will help their practices.

* Minimum standards for the quality of the practice; that is, quality control for various engagements, documentation standards, client investigation procedures, etc.

* The services they are qualified to provide. Since CPAs often must limit the scope of their services, they should develop a network of other practitioners to use as subcontractors or referrals.

* The types of client the practice will serve; this involves identifying clients that could be detrimental to the firm.

* Realistic financial goals.

* A fee structure that is competitive yet offers a fair profit and return on the CPA's investment.

* The time necessary for family and other personal activities.

By carefully outlining goals and standards, CPAs can prepare a business plan that will lay the groundwork for a viable practice.

Good work skills and habits. A CPA's success often is measured by a billing rate, which is based on a number of factors, such as experience, competition and complexity of the service. A sole practitioner must justify his or her billing rate with good work skills and habits. The more talent and time allocable to clients, the greater the chances of success.

Communication skills. CPAs must provide understandable explanations to clients' questions, have sound personal selling skills and write well. While accounting is based on numbers, complex laws, standards, computers and abstract explanations, sole practitioners must be able to speak to clients in language they understand.

MARKETING BASICS

I believe marketing of CPA services will be a critical aspect of practice in the 1990s. It will be as important as technical capability and personnel for, without it, expertise will not be used.

Conventional marketing for CPA firms involves defining a target market, maintaining and attracting clients and turning interested prospects into paying clients. CPAs are not trained in marketing and selling professional services and, for many, this is one of the most difficult tasks in establishing a practice. It often is a new practitioners' greatest concern but it really needn't be, if marketing is approached systematically and thoughtfully.

For most, the first step is to send announcements of the new practice to any potential client or source of clients. Follow-up can take the form of personal contact, including telephone calls, lunches and social and professional activities. Once a marketing base is established, other types of contact include newsletters, seminars, mailing relevant articles or any demonstration of interest in the potential client. CPAs should be sure to review state accounting rules and regulations for any applicable restrictions on solicitation.

Once clients are obtained, serving them with competent, timely service should be paramount. Referrals from satisfied clients or others should be acknowledged to help maintain these vital relationships.

Because of greater specialization, it is logical that the more CPAs one knows, the more likely one is to obtain referrals. Professional activities at the state and national levels can provide contacts and enhance a CPA's professional standing.

Selling techniques. Probably the most fundamental--and difficult--aspect of practice development is personal selling. The keys here are confidence, interest in others and overcoming fear of rejection. CPAs who know their products or services well and are confident of the benefits they can provide should be able to generate work.

Personal selling also involves maintaining a professional image. This is reflected in one's dress, physical presence, speech and expressions, concern for others, reports and correspondence, affiliated professional and administrative staff as well as one's telephone manner.

Another useful sales technique is direct marketing. This includes advertising in newspapers, the Yellow Pages and elsewhere. Direct mail also is effective if the audience is targeted wisely. Writing articles for local publications is another way of communicating with potential clients.

GETTING A HEAD START

I have taught a CPE course on starting a new practice for 14 years. How have aspiring firm owners changed during that time? Today, many already have extensive plans for financing, client procurement and sources of assistance. Some are working to establish a specialty while others have gained broad experience in accounting, auditing and tax combined with knowledge of computers, marketing, small business consulting and different industries. While many seek more relaxed personal lifestyles, they plan to maintain a very professional environment in their new firms.

Finally, I sense more of today's participants are fully aware of the complexity and competition in our profession. They know success is not always assured and failure is a definite possibility if they aren't adequately prepared.

This major step in a professional career isn't for everyone. Entrepreneurs who do dream of independence should fully explore the possibilities, including talking to other CPAs, researching the available information and objectively assessing their potential for success. Those who will succeed in the 1990s will act only after very careful analysis of the many factors involved.

HOW ETHICAL STANDARDS HAVE CHANGED

In the last two decades, there have been a number of changes in ethical standards:

1972: The AICPA entered into a consent decree with the Department of Justice that ended competitive bidding restrictions. 1978: The American Institute of CPAs ethics rule on advertising was revised and the rule restricting offers of employment was dropped. 1979: An AICPA membership vote repealed the prohibition against uninvited solicitation and encroachment by members on other members' practices. 1988: A new Code of Professional Conduct was adopted. 1988: The AICPA agreed to a Federal Trade Commission staff proposal to change Institute rules on commissions and contingent fees, subject to approval by the full FTC.

ALBERT S. WILLIAMS, CPA, Denver, Colorado, limits his practice to consultation and litigation support. A former chairman of the Colorado Society of CPAs management of an accounting practice committee, he is the author of several continuing professional education courses for the Colorado society and the American Institute of CPAs, including one on starting a CPA firm. His book, On Your Own! How to Start Your Own CPA Firm, is to be published this month by the AICPA.