Reality Check: Yes, making money *is* hard…

Every once in a while, we all need a reality check.

This morning, I awoke to the following email from a reader:

I have concern with your program. It appears that I have to send several mailing to a lot of people to get one order. What is the average cost to obtain one order, because making money is never easy.

No, making money is NOT easy. That’s why half of all small businesses fail within the first five years. It’s also the reason why the majority of tax professionals never make more than just a middle class income.

Growing a business requires investing either time, money, or both.

In tax preparation, if you’re not willing to spend the equivalent of a client’s entire first year tax prep fee to acquire the client, you’re never going to grow very fast. This is a pretty well established industry statistic: The value of a tax prep client is 1x annual client spend. This can be seen not only in the sale value of a tax prep office, but also the franchise data for the big three tax store franchisees.

Last year, after moving to a brand new city and hanging out my tax prep shingle for the first time, I spent an average of $85 to bring in each new tax prep client, with an average 3.5x ROI. My average would have been a LOT higher if I had actually spent my entire marketing budget and continued the seasonal slog, but I effectively shut down April 4.

I know that somewhere somebody just said, “Hogwash! I grow my business every year from referrals only!”

That’s awesome, but it’s not free. Building a referral-heavy professional services practice requires a tremendous amount of time. Time spent networking, attending events (which usually have at least a small monetary cost), talking to people, engaging on social media, etc. Since your time is worth money, this activity is NOT free.

Next time you think your referrals are free, add up the time you spent nurturing your clients to produce referrals, and the time committing to nurturing referrals into clients. Then multiply that time by your hourly rate. How much does it cost you to generate a referral client now?

Now, the reader that emailed me was talking about tax resolution. I’ve covered the cost of client acquisition on this blog extensively in the past, including here and here. Those posts are several years old, but the math still holds.

In tax resolution, you should be prepared to invest between $75 and $1,500 in order to acquire a client. When somebody is going to pay you an average fee of $3,500 to $5,000, why the hell would you NOT be willing to invest this kind of money to grow your practice? If you’re not willing to do that, then you simply won’t be competitive in this particular service offering, and you’re better off not making it a cornerstone of your tax firm.

To answer the inevitable question, the high end of that $75-$1500 range comes from paying sales commissions to “closers” (typically 20%-30%). While the solicitation of IRS representation services by an unlicensed person is a violation of Treasury regulations, it’s sadly not enforced (RPO and CID have bigger fish to fry). Thus, this is how the big, boiler room tax resolution companies operate, and this is literally what they pay to acquire a client.

The complete opposite end of the spectrum is based on a purely online marketing system. In between you have direct mail and alternate telemarketing strategies.

When I first sauntered off into private practice, I had zero clients and not a whole lot of money. That first week in November 2010 was rough. I immediately set aside what little money I did have (well under $10,000, which also had to cover my living expenses) to pay for Google Adwords ads and direct mail sequences to tax liens, and I also spent the vast majority of each day on the phone, doing my own telemarketing. At $175/hr, I was the most expensive telemarketer I could hire, but without the capital, I had to do it myself. It took several weeks to get that first client in the door, and it was only a $450 “quick fix” situation, but I took it anyway because I wanted to churn that cash right back into marketing.

I did this for several months, until about mid-January 2011 when I had enough cash flow to stop doing my own telemarketing and could switch to more time efficient (but capital-intensive) marketing tactics. This is simply how you grow a business without investor or debt financing.

By August 2011, I was at $35,000 per month in revenue with a few staff members and I was working from Japan.

Everybody obviously wants to jump to the “$35k per month from Japan” part, without doing the work to get there. Sorry folks, but it just doesn’t work that way. I can help you drastically shortcut the process with a tax resolution business model and systems, but YOU still have to do the work and, yes, invest some money.

H&R Block says that it will cost, at the low end, $31,505 to open a new franchise location — before the first tax prep client ever walks in the door. For tax resolution, if you have a mere few thousand dollars and a telephone, you can get started on the path to a very successful lifestyle business. If you don’t have the money to start a business, then you shouldn’t be starting a business — you should be looking for a JOB. Never forget that when I went bankrupt in the real estate crash, lost everything, and was literally homeless, I went out and got a $9/hr job at Jackson Hewitt, and continued moonlighting there in the evenings even after I got the $10/hr job as an admin assistant at a small tax resolution firm.

This is the harsh reality of growing a business of any sort, and I never sugar coat that fact. Any “guru” that DOES sugar coat this fact is a huckster, and you should run away quickly. If this isn’t something that you can swallow, then you simply need to accept the fact that your business will either grow incredibly slowly, or actually shrink if you don’t even do enough marketing to maintain relationships with existing clients.

And if none of this resonates…at all…in any way…then you should be an employee, not an owner.