AA 123 | Reasonable Compensation

 

An accurate, reasonable compensation is vital for every closely held business. And RCReports makes Reasonable Compensation calculation effortless. Today, Paul Hamann, the Founder of RC Reports, dives into how accountants leverage their knowledge of reasonable compensation to build a million-dollar advisory firm. He also breaks down some of the biggest mistakes and misconceptions that firm owners make in this space and shares where he sees value in doing compensation planning. With Paul’s expertise and his software, accountants and firm owners are equipped to show their value and prepare their clients for success, eventually seeping into their own success as well. Tune in to this episode and learn more from Paul!

Listen to the podcast here

 

How Accountants Build A Million-Dollar Advisory Firm By Leveraging Reasonable Compensation Knowledge With Paul Hamann

We have a very special guest. Our special guest is an expert on determining reasonable compensation for closely held business owners. He’s educated more than 100,000 financial professionals on this topic and has been published in numerous national and state journals. When he is not in the office, he enjoys spending time with his wife and his chocolate Lab, hiking Colorado Backcountry, and paddling its scenic lakes and rivers.

Before we welcome our special guest to the show, I know that everyone is telling you the best way to increase your firm revenue is to work harder, get as many clients as possible, or discount your fees to get a client in the door so then you can charge them more in the future. To be honest, that only works if you want to increase your firm revenue at a snail’s pace and end up totally burnt out resenting your work. Here at The Abundant Accountant, I teach a far simpler method to firm owners that allows you to charge premium fees, double your firm revenue, get paid first and upfront, and never have accounts receivable, all while reducing your workload and loving the work that you do.

If you want to see how I’ve coached my clients to do this, register for my free masterclass at TheAbundantAccountant.com/Masterclass. It’s an investment of twenty minutes right now to change the financial future of your firm forever. Now, let’s welcome our special guest, Paul, to the show. Welcome Paul to the show.

Thanks for having me, Michelle. I’ve been looking forward to it.

Thank you so much for being here with us on The Abundant Accountant show. Before we dive in, if you could share with everyone who you are and what you do? I’ve already done your intro, but I always think it’s more powerful to come directly from you.

My name is Paul Hamann. I am the Founder of a company called RCReports. Our software will determine reasonable compensation for closely held business owners. We built this product specifically for the accounting industry.

When you’re not working, what do you enjoy doing? I know that you’re not always working 24/7.

I’d like to believe that my mind tends to stay on duty longer than my body does, but I live in Colorado and I do enjoy the high country here. I have a chocolate Lab. He’s in the office with me right now. Typically, if I get some time away, I like to go on a hike with him. I also very much enjoy kayaking and canoeing rivers in Colorado. Sometimes I’ll take Remy, but a lot of times I won’t. Sometimes he wants to go for an impromptu swim, which is great for him but not always great for me.

That’s like a mess having a wet dog shake all over you.

Getting him back in the canoe is always fun too.

It’s like, how do you shoulder press a chocolate Lab into a canoe while swimming? That’s awesome. I know we’re talking about what you do with your Reasonable Comp software and how a firm owner can leverage having access to that, knowing the knowledge, and how they can increase their revenue by doing tax planning, reasonable comp analysis, or different tax planning strategies. I’d love it if you could share what are some of the biggest mistakes that you’ve seen firm owners not do correctly in this space and how what you teach and what you have can solve that for them. Talking about some of the biggest mistakes or misconceptions might be a great way to start.

Probably the biggest mistake accounting firm owners make specifically on the topic of reasonable compensation is simply ignoring it, pretending it’s not there, or glancing over it quickly with their clients. It is a foundational piece and a foundational conversation that they should have with any of their SMBs. Not only from a service standpoint but the doors and opportunities it can open for accountants if they are building a practice beyond the tax prep hamster wheel, it’s been great.

Reasonable Compensation is a foundational conversation firm owners should have with their SMBs. Share on X

We’re not talking about the tax prep hamster wheel. We’re talking about firm owners who want to double revenue, triple revenue, work fewer hours, and have a life again. Instead of being on that hamster wheel and saying every year, “I’d never want to do a tax season like that again.” It would be great to hear if you have a case study and if you can walk us through someone who did ignore the reasonable comp and didn’t think it was a big deal. Also, some of the consequences they had to face, but then how they shifted their firm.

In the year I grew up in, it was all about Acme, so we’ll do Acme accounting. If you overlook reasonable comp and you are working with a number of SMBs, there are a few places that your clients may come back and want to have a conversation with you about why didn’t you. One is compliance, and I’m happy to talk more about that if you want, but that’s more if the IRS comes knocking and now you find yourself in a difficult position to defend a reasonable comp number that doesn’t have any basis in reality.

That falls into the risk bucket. In building a profitable and enjoyable practice where reasonable compensation can come in, my favorite place is when you’re onboarding a new client. Doing a reasonable comp study on them, and then talking with them about their firm opens up so many conversations. First and foremost, one is entity planning. SMBs come to you depending on what their entity structure is. A reasonable comp report will give you the information you need to start having conversations about whether they should become an S corp, whether they’re not ready to become an S corp, or if they are an S corp, maybe they shouldn’t be. That is a foundational piece of having that conversation.

What have you seen some of your firm owner clients who’ve used your software or any tool that they’ve used? What have you seen that someone has been able to enroll a client and start with that piece when onboarding a new client, doing the entity planning, and doing a reasonable comp survey on that client? What have you seen them charge a client for these types of services? What ranges?

There are a few different pricing models I’ve seen be very successful. When onboarding a client, sometimes it’s the wow factor. We did this analysis, and here’s where we see that you can take some positive steps in your company through entity planning and other things. For those engagements, the one-time analysis generally starts at about $1,000, but $2,000 to $2,500 is pretty typical. That would include the reasonable comp report, but it’ll also include an entity analysis and some other advice and analysis along those lines as far as the importing, the onboarding, or even the sales and marketing of that new client.

That’s a great segue into doing more in-depth tax planning and other opportunities be it whatever they can see with that client. Going more on that advisory route versus being stuck on that hamster wheel, how else have you seen firm owners? You said Acme. If you can walk us through that process and if you’ve seen some pretty big mistakes. I know that there are risks associated with it and maybe we can talk about some of those big ones that maybe someone tuning in hasn’t even thought of and said, “This should be a priority in my firm anytime working with a small business client.”

I commonly see two risks. I already mentioned one of them, which is the IRS comes knocking and you don’t have a defensible position for your reasonable comp report. The client’s going to have a very candid conversation with you about, “Why didn’t you talk to me about this?” I have seen business owners throw the accountant under the bus on this when they’re talking with the IRS, “IRS, my accountant never talked to me about this. I didn’t know that this is something I should have done or should have paid more attention to.” Something along those lines. That’s when it comes to risk to the accountant and to the accounting firm. The IRS has also imposed prepared penalties when reasonable comp has been challenged by the IRs.

What do those penalties run about?

Up to $5,000. Of the ones that I have firsthand knowledge of, one was $4,950 and the other one was exactly $5,000, so right about $5,000. That gets expensive real quick, especially when they realize that you’re doing the same thing with all your clients, and then we tend to see that contagion run through the book of business. Those of you who have listened or know Eric Green, he said that happened specifically to one of his clients. Total penalties on that case, I’m trying to do this off the top of my head, I think we’re about $30,000 just in single $5,000 penalties to one CPA.

There are ways to prevent it. That’s why we’re here talking about not only the importance of it but also this is a revenue stream. This is another way to show your knowledge, show your value, prepare a new client for success, and be able to charge even more than you do, maybe even on tax returns or any of the compliance work or accounting services that you would do. Not only courtesy but also help them set them up to reduce their tax liability to the IRS.

That’s where I see the value of reasonable comp planning come in. Making sure they’re on the right entity source or right entity for their business. When you are looking at this from your practice standpoint, it is a fantastic revenue stream for multiple areas. There are a few different ones, but one of the first ones I think of is most people typically have an 1120-S package. Simply adding the cost of that report in there and the requirements for all your clients, on the low-end, should be in the $400 and $500 range. It’s a compliance requirement moving forward with the IRS, especially with its funding. All of your 1120-S packages have now increased by that amount. That’s one way I see it built into the practice.

AA 123 | Reasonable Compensation

Reasonable Compensation: The value of reasonable compensation planning comes in making sure they’re on the right entity source for their business. From a practice standpoint, it is a fantastic revenue stream for multiple areas.

 

Another way is when you do run these reports, they’re very detailed. Those of you who may be doing fractional CFO or offering payroll or other services, that will come out in the report and that gives you a natural segue to have those conversations. You’re spending 11% or 15% or whatever amount of time it is in bookkeeping. It’s not something that is a good use of your time because you’re already busy. We can offer that service to you and we can take it off your plate. You’ve now built in a reoccurring revenue stream on payroll for your firm.

How much revenue have you seen some of the firm owners generate from that recurring revenue?

There are so many different buckets they can put it in, but it starts with the initial planning. That piece is easily a few thousand dollars. Beyond that, it depends on what level of payroll service you’re offering. “Are you offering an A to Z? Are you coming in and working remotely on their QuickBooks file?” Whatever amount you want to put in there, that’s part of our planning tool. You can build all that into your initial model and get a sign-off from your client on that. As well as whatever you want to charge for your annual 1120-S.

When you’re talking about reoccurring revenue when you’re doing entity planning, you can build into a proposal for the client’s approval or not. Items like payroll 1120-S, if they’re not already a corporation, and anything else that you want to build in. You can easily take a new SMB and build it into a $2,500 to $5,000 reoccurring revenue client per month.

When you see that happening and for anyone interested who wants to talk to Paul and see how he does this, that is not my wheelhouse, but I am all about increasing the revenue. This sounds like a great idea. I’m also all about not having you have penalties and doing things the right way in your firm. They can do a demo of this with you.

We describe ourselves as an education-first company and we do a tremendous amount of education. The best way to see the software in action is to jump onto our website at RCReports.com. You’ll find a demo button there without any trouble. Just book a quick 30-minute demo with somebody on our staff. They’ll walk you through the platform and give you a good inside view of not only how to use the software, but how to build that software and use it to build your advisory firm.

If you mention the Abundant Accountant show, they’re also going to give you a little bit of a discount off of the services if you purchase.

You want to mention this show. All the folks there know, and they will be able to give you that discount on the spot.

What have you seen as far as an ROI from most of the firm owners? If we can get back into an exact case study, that would be great. If you could walk us through the whole process, what they were doing before, if they had penalties, they invested in your software, they generated X amount of revenue. If you could walk through some of these details on one specific firm, that would be fantastic.

I’m thinking of a firm out of the Midwest that implemented this. We’ve seen it implemented in a few different ways. One is all at once. In other words, as of this date, everybody in our book of business and anybody coming in our book of business, that’s an SMB, we’re going to do reasonable comp analysis on them, whether they’re an S corp or not. The other way is they feather it in over typically a three-year period. Either way, you’re going to end up at the same revenue, whether you’re going to get it in the first year or three years.

What happened with the Midwest firm?

The Midwest firm, they did the rip off the Band-Aid. They’re like, “We’re doing it all this year.”

How many clients did they have?

They’re a pretty good-sized firm for some of the smaller firms. I want to say they had 6 or 8 users in our system. All of those users had a book of business. Some were working with SMBs, a lot of SMBs, others weren’t. Their return on investment was over 6.000% that year, which means that our software cost for the product they were using was $1,500 a year. Multiply that by your 6,000% return, that’s what their return on investment was at that time by starting with that reasonable comp analysis, then building other products on.

That’s a significant amount of revenue, but what’s more important is that everyone had the entity planning, they had the reasonable comp analysis complete, and the client felt more valued, more supported, and the firm was taking a proactive approach.

It was a win-win-win. The client now has a defensible position. They’re likely saving either time and/or money that they can put back into their business. Somebody else is doing their payroll. They’re now an S corp, so they’re saving some money on payroll taxes. The firm has a steady stream of reoccurring revenue, whether that’s payroll services or fractional CFO services, those are two of the most popular. We’ve also added 1120-Ss. Most tax preparers would rather do an 1120-S than 1040, but I’m guessing.

I would imagine so. At least that’s what I’ve heard from my clients, but I don’t know what all those terminologies mean. I know about the top-line revenue. In total, you said it was 6,000% ROI. What was the total revenue they generated by making the switch, ripping the Band-Aid off, and going all in for their book of business on the 6 to 8 users that they had?

They estimated that making that switch over brought in additional somewhere between $75,000 and $100,000 into the firm that year.

That was just additional revenue by adding this on and having everything backed up in case there was anything from the IRS site came knocking, they have all the documentation in line. Is there anything else that you learned from this case study with the Midwest firm that you’d like to share with some of the firm owners about any other risk mitigation that this helped them with not only increasing the revenue, doing the payroll, and a few other things, but also some of the perks that they didn’t even know were possible? Some of those hidden things.

The thing I’ve heard surprisingly more than anything else and from Midwest firm as well is that the clients that cause you the most headache and put you as a preparer at the highest risk, when they implement this, those clients left. They became somebody else’s problem. What a psychic relief that was. Not to have clients that eat up a lot of your time and don’t produce the revenue that you need for your firm. Move on and find somebody that better matches who they need as a preparer.

AA 123 | Reasonable Compensation

Reasonable Compensation: It’s a relief not to have clients that take much of your time and don’t produce the revenue you need for your firm. Move on and find somebody that better matches what you need as a preparer.

 

We’ve talked a lot about those clients, the pain-in-the-ass clients. If they’re not willing to invest and do the right thing, they’re on the see-you-later program. It’s a win-win for everybody. The mental clarity, the freedom, and the space to onboard new clients who are ready to follow your process in the firm are exactly what every single person here wants. I know that. Everyone’s sick of the clients that are trying to run the show, get their documentation into you late, ask you for emergency stuff, “This is important. I needed my returns done yesterday. How come this is late?” Yet, the client or the person who’s leading the pack on the lateness of everything.

I couldn’t agree with you more. I had seen a random email string that I was copied on where somebody was frustrated because their clients didn’t want to do a reasonable comp report. I’m like, “I don’t understand. Why are you giving them the option? You’re the professional. You wouldn’t tell them how to do their job.” I don’t understand why accountants ask their clients how they should do their jobs. That’s always been baffling to me.

That would be fun to talk about. What would a firm owner say or what do you educate your firm owners who haven’t done this? They haven’t done any entity planning. They haven’t done a reasonable comp analysis. They’ve been getting away with it and going with the flow because they’ve been so busy. How does one present that to their client and say, “I haven’t been doing this. We need to do this. It’s important. We need to mitigate the risk in case of an audit?” What are the ways that you’ve been educating the firm owners that are like, “I should have done this, but I haven’t been?”

A lot of it is what you mentioned, which is having that conversation with the client. It’s paramount that the accountant and the client have mutual respect for one another. As that trusted advisor, and that term’s been used a lot for good reason, if you come to your client and say, “We haven’t been doing this, but we need to, and here’s why.” That client should be saying, “Let’s do that.” If you can show additional value while doing that and by showing that, “You’re already stretched thin. How about we take payroll off?” it’s a win-win for both of you.

It’s the conversations that don’t seem to embrace or have that respect built in. Those are the ones that sounded like you’ve talked about quite a bit. Why are we continuing to work with them? They’re not taking my advice. Not only are they putting themselves at risk, but now they’re putting me at risk because I have prepared penalties that could be headed my way. Also, I don’t want that reputation.

Paul, thank you so much for sharing all this. Is there anything else that you would like to share that you think might be important from the Midwest firm case study? Any other red flags that maybe a firm owner’s not seeing right now on why they need to implement this, especially for those who are focusing on small business owners?

I will leave you with this. Reasonable comp had been something that had been a back burner thing for a while. It is not any longer. It’s such a foundational piece of any conversation with a small business owner that getting that conversation rolling and bringing it in as part of your tools or your tech stack, etc. It is eye-opening. It’s a value-added service that other firms may not be offering, but I’ve yet to see it be a win-win and help build that firm out. Take a few minutes to jump on a quick demo. We also do a tremendous amount of other education in the area. If you’d like to jump on some of that, we’re happy to have you on those as well.

Reasonable Compensation is no longer on the back burner. It is a foundational piece of any conversation with a small business owner. Share on X

Thank you so much, Paul, for being here with us on The Abundant Accountant show. It is a no-brainer and it should be part of the way you operate your firm. It also is a good covering type situation on your own part and making sure that you’re following everything to have documentation for the IRS and have your clients set up for the most success. Thank you again for being here.

Thanks for having me. I very much enjoyed the conversation.

Thank you all so much for joining me on another amazing episode of The Abundant Accountant show. I know that everyone might be telling you that the best way to increase your revenue is to work harder, get more clients, or discount your fees and volume. That only works if you want to increase your firm revenue at a snail’s pace, end up burnt out, and resent the work you do.

At The Abundant Accountant, I teach a very simple method for firm owners that allows you to charge premium fees, double your annual revenue, get paid first and upfront, and never have AR ever again while reducing your workload and getting your life back. If you want to see how my clients are doing this, you can register for my free masterclass over at TheAbundantAccountant.com/Masterclass. It’s an investment of twenty minutes of your time that will change the financial future of your firm forever. I look forward to seeing you there.

 

Important Links

 

About Paul Hamann

AA 123 | Reasonable CompensationPaul is an expert on determining Reasonable Compensation for closely-held business owners. He’s educated more than 100,000 financial professionals on the topic and has been published in numerous national and state journals. When he isn’t in the office, he enjoys spending time with his wife and chocolate lab, hiking Colorado’s back country or paddling its scenic lakes and rivers.

 

 

Pin It on Pinterest

Share This