by Roger Russell
The typical independent tax practitioner makes more than half of her revenue from tax services, according to a best practices survey of over 1,200 professionals.
The survey found that the average independent tax practitioner has been certified as a CPA or enrolled agent for 16 years, started their current business 15 years ago, and makes 54 percent of their revenue from tax services.
A key best practice discovered by the survey is that independent tax professionals need to continue growing their core tax businesses, according to Charles Roame, managing principal of Tiburon, Calif.-based Tiburon Strategic Advisors, which conducted the survey.
“This is not intuitive to all, as some argue that, since their financial planning businesses are doing so well, they will abandon or sell off their tax businesses,” he said. “But our survey data show that the largest tax professionals with booming financial planning businesses also have thriving tax businesses.”
Specifically, the average tax professional generates $132,000 of tax service revenues, increasing to $767,000 with size. Furthermore, while the average tax professional completes 573 tax returns, the number increases with firm size to 2,522 for the largest firms.
A little more than half of the survey participants completed the section regarding profitability. Among these, average revenues were $242,000, showing the large number of sole practitioners in the market, according to Roame.
When tax professionals are segmented into five revenue ranges, the median revenues were just under $200,000. In other words, the typical independent tax professional is a small businessperson with revenues near $200,000.
For those who completed the survey, the average staff consists of 1.3 partners, 0.7 CPA/ EA licensed staff, 0.8 non-licensed bookkeepers, 0.8 administrative support, and 1.0 seasonal help. The 2.4-to-1 ratio by which employees outnumber partners does not provide much leverage for building a small business, according to Jeff Gyomber, research manager and consultant at Tiburon.
However, he said, a careful analysis of the business economics nevertheless suggests that the average independent tax professional is a profitable small business. The average tax pro who responded:
- Serves 558 tax clients;
- Serves 118 financial planning clients;
- Generates $242,000 in revenue;
- Has $122,000 in expenses; and,
- Earns $120,000 in pre-tax profits.
The survey also found that tax professionals in the largest revenue segment serve more high-net-worth and institutional clients. About 54 percent of the clients of the largest tax professionals have incomes above $100,000, compared to just 30 percent of the clients of the smallest tax professionals.About half of all independent tax professionals make referrals to other financial professionals, with estate attorneys being the most likely beneficiaries. Among tax professionals who make such referrals, on average, they send three per year to estate attorneys. Other leading recipients include business attorneys, mortgage bankers, and property and casualty insurance agents.
A graying group?
The average independent tax professional is 48 years old, and most — 60 percent — intend to retire in the next 15 years. More than half of them intend to sell their businesses upon their retirement, with selling to a competitor being the most popular planned exit strategy.
One response to the survey stated, “I think tax professionals are aging rapidly. I go to conferences and everyone I see is over 50. The younger people are getting more into auditing than tax preparation.”
Future concerns play only a small factor in most professionals’ thinking. Their most important goals have to do with growing and retaining clients. Increasing income, increasing revenue and retaining clients each received about 9 percent of the responses when the tax pros were asked about their most important goal.
They also say that they don’t perceive many threats to their businesses. Their biggest concern, at 6.5 percent, is in recruiting qualified employees.
“Contrary to many conference presentations, there is really no one tax pro model for success,” said Gyomber. “We found that the biggest factor in increasing business is referrals — both active and passive. What we suggest is that they systematize this.”
“For example,” he continued, “they can develop a client appreciation survey and send it to their existing customers. At the bottom of the survey, they might ask the client if they or a friend might be interested in an additional service that the tax professional performs. Or they can send the survey as a precursor to a face-to-face meeting, so the client comes in with some referrals in mind.”
“Another possibility is to hold a client appreciation event, and tell the clients to bring their friends,” he added. “The point is to get them to think creatively about increasing their referrals, and to create a way to do this.”
The survey, now in its third year, was compiled from responses at www.taxprobestpractices.com, a Web site sponsored by Tiburon, the National Society of Enrolled Agents, the Business Technology Alliance and HD Vest.
“It’s premature to say that we’ve found any sizeable trend,” said Tiburon’s Gyomber. “The majority of the responses came from smaller-end practitioners. As we continue doing the survey, we hope to get ones with larger practices involved.”
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