Hanging out your shingle, part 1

So, you're thinking about starting your own firm using your CFE credential to work as an independent consultant, expert witness, fraud examiner or licensed private investigator. However, you're not even sure of the questions to ask. We want to help. 

In part one of this two-part series, we'll cover the best reasons for starting your own firm and the necessary planning to ensure you'll succeed. In part two, we'll cover more specifics including selecting your legal form of business organization, marketing considerations, service lines and specific policies to consider on the path to launching your firm as a success.

"Those who believe they can do something and those who believe they can't are both right." — Henry Ford

If you want to be an entrepreneur you have to believe in yourself, your skills, knowledge and abilities, and you must be willing to market yourself and your firm in a competitive environment.

The reasons that determine your choice to go out on your own will greatly affect your business' chance of success. No guarantees, of course, but if you're motivated, disciplined and a self-starter — with solid experience and a good reputation among your peers and clients — you'll have an excellent chance at success.

Here are a few of the best reasons to take the plunge into the entrepreneurial world: 

• You want to move on to the next logical step in your career.  
• You're managing a thriving internal practice within a firm, such as litigation support, but it's beginning to have some legal conflicts of interest with the full-service firm. For example, firm partners frequently have to choose between taking a fraud examination case and keeping an audit client because of independence rules. 
• You've outgrown your role as an employee at the firm, and you want to expand your market footprint.   

However, if you want to be your own boss because you're tired of your manager nagging you about billable hours, you want the freedom to take lots of long vacations, you don't like your current firm, and you're tired of having to sell services and participate in firm marketing, you may find that being out on your own adds to the pressure, rather than reducing your stress.

As a business owner, you're responsible for all the marketing, sales and administration in your firm in addition to performing all the billable work; there's a direct one-to-one relationship between the billable hours you work and your compensation.

In our firm, we find that we work many more hours in private practice than we did at our former jobs, but the work is more satisfying and enjoyable. If you're going out on your own because you can't find a job, be aware that with your own firm, you'll have to land jobs (clients) over and over again throughout the entire life of your business.

Be brutally honest with yourself about the reasons for hanging out your shingle. It's not enough to be an expert in your field; you also have to be an excellent business manager to succeed.

BEFORE YOU EMBARK

"Would you tell me, please, which way I ought to go from here?"
"That depends a good deal on where you want to get to," said the Cat.
"I don't much care where —" said Alice.
"Then it doesn't matter which way you go," said the Cat.
" — so long as I get SOMEWHERE," Alice added as an explanation.
"Oh, you're sure to do that," said the Cat, "if you only walk long enough."
— Lewis Carroll, "Alice in Wonderland"

Before you leave your current job, you have many decisions to make, including the manner in which you'll leave, if you're affected by a non-compete agreement, how you'll support yourself as your firm gains traction and profitability, your legal form of business organization and other details, including insurance plans, retirement and other financial considerations.

Plan your business start-up with care; don't just "walk far enough" that you get "somewhere." Intentionally plan your start and where you want to be in a year; visualize where you'll be in five years.

While you're still employed, research local small business and individual health insurance options. Speak with a variety of sources beginning with your employer's benefits manager.

Health, disability, vision and dental insurance may be expensive or difficult to obtain depending on your health, age and where you live. You can use COBRA as a temporary transition to other insurance. Joining your spouse or domestic partner's employment insurance policy could save money, but this might only be allowed during open enrollment. Discuss differing tax implications of policies with your CPA.

If possible, it's best to graciously leave your firm with relationships and reputation intact so your former bosses will want to refer clients to you or subcontract with you. Think about how you want to interact with your current employer in the marketplace and community. Even if you've been laid off or terminated, it may be possible to have a good business relationship with your former employer if you take the high road.

You may wish to consult with an attorney to review the non-compete agreement you might have signed with your current firm. The specific language in your agreements might limit you.

You should have enough money in savings to cover one year of business expenses and three months of business and personal expenses even if your spouse or partner is employed because he or she could lose that job. It could take time to gain traction in the market, and business will cycle up and down throughout the year. Delay your business startup until you have that savings cushion.

If you've been eying that new vehicle or home or you've been considering refinancing your old home, get all that business done before you leave your job. Banks and mortgage companies usually want two years of filed tax returns from your new business before they'll consider the income as part of your loan application.

THE BUSINESS PLAN

You must ask, "What do we mean by great results?" Your goals don't have to be quantifiable, but they do have to be describable.
— Jim Collins¹

Write a business plan. Yes, it's that simple. It doesn't have to be perfect with 100 pages of detail nor set in a format that banks need for lending. However, your plan does need to contain sufficient, realistic detail that shows you know what you're doing and that demonstrates your business can be viable.

You should have sufficient descriptions of the type of work you'll do and what work you'll decide to exclude, as well as your billable rates. Once your business plan is written, revise it, refresh it and revisit it — at least annually — and work on it until you have five-year goals outlined in your plan.

"If you don't have a written plan, you don't have a plan."    
— Sam Allred, Upstream Academy²

Here are some suggestions of things to include in your written business plan:

Service lines
Claim your marketplace niche and geographic footprint by describing your unique strengths, training, passion, qualifications and experience. Trying to be everything to everybody is a sure plan to fail; if everything is important, then nothing is. Don't include a niche offering if you hate the work even if you're qualified, and you see a strong market. You'll be miserable, your clients will be unhappy, and your business won't succeed. Do what you love, and success will follow.

Desired clients
Who will be your clients? How will they find you, and how will they be referred to you? What's your ideal referral source? State what you do and don't want. If you don't want deadbeat, slow-paying clients, then you do want clients who see the value in your services, who pay promptly and will refer others to you.
The definition of your desired clients should include industries, geographic areas, types and sizes of cases and how many cases you want each year. The more specific your written plan, the greater the likelihood that you'll achieve your goals.

Budget
Include your projected revenue and your budgeted expenses. These budgets won't be exact, but there's value in determining if your expected annual revenue is sufficient to cover your personal and business expenses. Set billable rates appropriate for your region and experience. Ask your trusted referral sources what your competitors are charging.

Marketing
Include in your marketing plan how you'll reach out to potential clients, and the design of your logo, letterhead, business cards, website, mailings, holiday cards, etc. Your marketing plan should reflect your personality and your personal style. You're the brand, so be sure you're comfortable selling yourself with the materials you develop. You'll adjust your marketing plan when you find the tools that work the best.

Employees
Hiring employees is a huge commitment. You have to pay them before you pay yourself. Employees mean additional administrative tasks, including payroll, tax calculations and withholding, workers' compensation insurance and additional office policies.

Consider if it's cost effective for you to do the filing and administrative work or if you can afford to bring someone in to do that. If you spend all your time doing your administrative tasks, marketing and bookkeeping, will you have sufficient time to generate billable hours to produce revenue? You might wish to consider using independent contractors instead of employees if they truly meet the IRS definition.

Infrastructure
Where will you work? What are your office space needs? Separate what you want from what you need. Begin with the bare minimum.

Decide if you want to work at home or rent office space. Working in a home office involves a special kind of self-discipline. Make sure you have a separate room (with a door) that you can dedicate to your business.

Do you need rented space that will impress clients, or can you go to their offices or rent conference room space as needed?

What equipment will you need? Are you going to create a paperless system? You'll need to consider your options for computers, servers, phones, cell phones, Internet service providers, email servers, filing space, copiers, printers and security systems.

Compile a list of what you'd want if you had sufficient resources, and another list of your bare minimum needs, and then decide what's in your budget. Many new businesses start off in a financial hole because of high rent, luxurious infrastructure and expensive overhead costs, and they can never turn a profit.

Time keeping/bookkeeping
You'll need to consider how to track your time, create invoices and conduct your bookkeeping. Specialized software gives you more control, but it can be expensive and can involve a long learning curve. We use Clio, a cloud application for timekeeping and invoices, and QuickBooks for accounting.

Cloud software applications will keep upfront costs down. If you use cloud apps (for any part of your business) ensure you know the vendor's confidentiality and backup policies and if you'll still own your data. Your firm's client confidentiality is only as good as your vendor's policies and its security.

Business management skills are vitally important to the success of your firm. Seriously consider getting additional training in your deficient areas, or hire expert help. You could upgrade your skills at your community college or through classes offered by a local small business association.

DON'T BE PART OF THE FAIL RATE

Of the 30 percent of small businesses that fail within the first year, the most commonly cited reasons for failure include starting the business for the wrong reasons, lack of planning and poor management practices. Take your time in planning before you start your business, be intentional in making decisions before you leave your job and start your business with a strong plan.

In part 2: Specific aspects of entrepreneurship, including forms of business organization, insurance, tax considerations and retirement savings.

Janet M. McHard, CFE, CPA, CFFA, is founding partner of McHard Accounting Consulting LLC and an ACFE faculty member.

Beth A. Mohr, CFE, PI, is managing partner of McHard Accounting Consulting LLC.

¹Jim Collins. "Good to great: Why some companies make the leap — and others don't." (HarperBusiness, 2001) Referenced in an interview with Collins, "The Good to Great Pastor," Leadership, spring 2006.
²Sam Allred often says this during his seminar messages.   

[Some links may no longer be available. —Ed.]

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