How do you go from the once-a-year tax preparation client to the coveted evergreen recurring revenue relationship? How do you deal with clients that typically send you their files at year’s end, speak with you once a year, and that’s the end of it? In other words, how do you transition from the highly commoditized, lower-value, reactive, tax-factory type of engagement to a more proactive relationship?
This is a simple strategy to go upstream this year and convert most, if not all, of your clients to an ongoing monthly engagement. Let’s dive into a real-world scenario on how it works. Take the example of a client, a restaurant, for instance, that is, unfortunately, quite a royal pain in the you-know-what. You know they just want to drop their stack of papers off at year’s end and put all the pressure on you to just get it done.
Let’s say they’re grossing $800K per year. After expenses are paid for salaries, rent and literally everything else on the proverbial menu, the owner makes $200K of that $800K.
Next, they give you their P&L numbers, access to their books, and you file their individual and corporate return. This is pretty much the end of the relationship. You simply collect this data, complete their return and present them with their individual and corporate return. Finally, you tell them, “Thank you very much, it was nice working with you, and talk to you again next year.”
Now if I have the same client that I’m working with, I don’t see that as an authentic relationship. I’d rather them submit their data to me quarterly — maybe even monthly. I want to be able to access their QuickBooks data and, if they don’t have it, they need to get it to me. If I’m managing their books throughout the year, when it comes to November or December, I can advise that owner to defer income, prepay this tax, draw that salary, take this distribution, put that into retirement, complete this Section 179 for equipment and, after all is said and done, I have the ability to typically save a client around 15% of their income from just the planning and advisory alone.
Armed with this new proactive approach, I tell my client, “Listen, we can keep doing it like this, but I’m not adding any value. That’s not how I practice. If you send me your information during the year, I’m going to be able to save you approximately this amount of money, which is significantly less than the fee I’m charging you. But I can’t do it in this format where you dump it on me — if the year is over, I’m useless. This is not how I practice so I’d like you to work with me quarterly and it’s going to save you more money. This will unlock considerably new value for you and the money going into your pocket is going to be much greater this way.”
“So what you’re going to do now is you’re going to pay a monthly fee for me to work with you because it’s easier as a regularly recurring payment that you can easily budget for,” I add. “It’s going to be $400 per month, but I’m expecting to save you around $30K. It might be a bit more, a bit less but far more than my fee. As it is currently I can’t really save you what I’d like to with the way we’re working now. So work with me like this and, if you can’t honestly, I can’t serve you anymore. A more proactive approach will be a win-win for both of us and you’ll have access to me throughout the year to help you uncover even more savings opportunities.”
What will go through their brain at this point is, “Well, OK, I want to save the money. Marc’s not practicing like this anymore. This is the type of accounting firm I want with me anyway.” Now, why wouldn’t they say yes to that?
It’s such a logical thing for you and them, but you have to be able to want it. You have to be able to believe that you’re worth more to them in this capacity. You have to be able to believe you are worth it.
Here’s where the big picture and the compounding effect come in. Let’s say you are selling your practice to me with about 100 once-a-year $1,500 tax return clients. If I’m buying that book of business from you, that’s $150K, I’ll convert that into $450K within a year and then I’ll sell that later for $675K. So the truth is that you have this diamond-in-the-rough piece of business that’s worth so much more for you, and all you need to do is just convert it in a smart way.
You have to first believe that it’s good for you and that it’s good for the client. You have to have the confidence to know that with this new approach you are going to save the client money. Assuming that you also do planning for your business clients, such as advising on deferrals and prepayments, etc., then the conversion to this pricing model is fairly easy to digest.
What about those clients that decline this new way of working with you? You thank them for their business and have the courage to cut them loose. If done properly, the boost in revenue from your new fee structure should more than make up for those “PITA” clients that frankly you’ll be happy to get off your plate. You weed out and cull the less profitable apples, then simply rinse and repeat going forward.
You’re making money during the time that they’re with you, but you’re also increasing the value of the practice. There will be one day down the road that you’ll merge or sell and, when that day comes, your practice will be so much more valuable. It has a compounding effect and positive correlation to the valuation multiple that your firm can eventually sell at.
The clients that you already have this type of relationship with are more than likely the type of clients that you enjoy working with most. Now you can get more of them, work fewer hours, and provide significantly more value. Not a bad way to start the new year.
