Ed and Diane built and built and built their tax practice until they had more than 2500 tax return clients every year. Talking to them in late May, I learned they were exhausted and ready to get out of the business.
Why were they exhausted and why did they want to sell their firm? Because they could no longer live the feast-and-famine roller coaster life caused by their decision to provide tax preparation services to the exclusion of nearly everything else.
Their average revenue per tax return was $302.00. That’s $755,000 annual revenue. For four months each year they worked 70 hour weeks.
Is That Revenue Something to Rave About?
EBITDA (earnings before interest, taxes, depreciation, and amortization) is $364,708 or 48.3%.
From one point of view, it’s pretty great. Many industries and firms never approach that rate of EBITDA.
However, the EBITDA does not tell the whole story.
They have created a ceiling on their revenue.
They are so entrenched in the tax preparation business that they can’t expand beyond it. So, while their revenue and profit from this work is substantial, they are underutilized the rest of the year. They have created a revenue ceiling for themselves, even though they have skills and expertise that could break through that ceiling.
What’s worse is that the firm has little value to a prospective buyer. Why?
- Assets are underutilized for more than half the year
- Clientele sees the firm only as tax return preparers
- All relationships are with the owners, not the firm.
- Brand is about low price, not value
- Client data is collected but not used.
How to Break the Revenue Ceiling and Increase Firm Value to a Buyer
Ed and Diane were curious when I observed that they’d created this revenue ceiling. What did I mean, and was it possible—and worth it—to break it?
I first needed agreement from them that they’d commit to 9 months during which we’d work on breaking through the ceiling. If they still wanted to sell after that, I would connect them to a valuation expert and a professional who could help them sell. They agreed.
The Nine-Month Plan
Ed and Diane have given me permission to share at a high level the 9-month plan we’re working through now.
- Understand their clientele. We decided to sort their clientele three ways:
- By longevity—Under 2 years; 2-5 years; 6 years and longer
- By complexity—which tax return forms did they require
- By return type—personal only or personal and business
- Sort the clientele into groups by similarities
- Longevity plus complexity plus personal and business
- Longevity plus complexity plus personal only
- Complexity plus personal and business
- Identify the new revenue opportunities offered by each group
- What advisory services would deliver value to each group?
- What is the profitability of these advisory services?
- What additional resources will be needed to market and sell these advisory services to the groups most likely to be interested?
- Decide what to stop doing
- They are going to stop doing one-off returns.
- They are going to stop marketing as the low-price preparer.
- They are going to stop relying on a one-to-one personal relationship with every client.
As Ed and Diane came to understand, there were opportunities that had been hiding in plain sight. Their extreme focus on tax preparation, their exhaustion after each tax season, and their uncertainty about how to do things differently blinded them to those hidden opportunities. Now that we’ve brought them into the open, Diane and Ed are more excited about their business prospects than they’ve been in a long time.
As we work through the plan, the benefits are becoming clear:
- They will move to cut their clientele down by one third this year.
- They will prioritize clients who want advisory services.
- They will offer three levels of advisory services, each one paid for with a monthly fee.
- They will include tax preparation in their advisory packages.
- They expect to work only 55 hours per week during tax season.
They project an increase of $250,000 in the first twelve months after this plan is fully implemented. The profit on this revenue should be about 70%.
Specific But Not Unique
Diane and Ed’s story is specific to them and also representative of the hundreds of privately owned services firms we at Trivers Consulting Group work with to increase revenue and profit. Habits, practices, and indecision cause inertia and lead to underutilization of resources and assets.
If there’s a possibility that opportunities are hiding in your company, and you’re curious how to bring them into the open, give me a call or text CURIOUS to 703-801-0345.