This is the sequel of my Friday’s post as promised. In the previous post I intended to discuss the market and the industry in regard to the Income Tax Preparation Services in Canada. Now as I read it again, it becomes clear to me that the post only captured a small part of the industry. I also realized too many tables and numbers are not suitable for a blogpost. As a result, probably a number of areas I wanted to highlight, actually were hidden behind the numbers. Today, my intention is to go into some details about the operations and profitability of a tax preparation service, the investment it requires for a start-up and I also want to give some tips on building such a business and running it profitably. However, before I start discussing these areas, I would like to summarize a few important discussions about the industry from the previous posts.
From the previous post it was apparent
- Income Tax Preparation Services is a profitable industry in Canada
- The percentage of loss making establishment in the industry is very low
- The market is somewhat fragmented with many micro establishment and one very large player
- There are around 2,500 businesses operating in Canada (44% of these establishments are in Ontario)
- The operators represent a very small niche in total Canadian landscape
The previous post included a small data table showing the total number of Individual Tax Returns (T1) were efiled in 2013. The total number was 13,953,964. This in fact is a pretty good measure of the size of Income Tax Preparation market. The data shows that 50% of the tax returns filed in Canada are filed by Commercial Tax Preparation Services. I was curious about the market share of the largest player, H&R Block and it was not very difficult to find. The 2015 annual report of H&R Block reports that the companies Canadian operations filed 2,658,000 tax returns in 2015. So H&R Block penetrated less than 20% of the market. There is another US company operating through their franchises in Canadian Market, Liberty Tax Services. They are far behind H&R Block and holds less than 1% of the total market shares.
For many entrepreneurs, considering Income Tax Preparation as a start-up, an obvious question will be “How do I compete with a giant like H&R Block?” The answer is simple, the presence of a very large farm holding less than 20% of the market is not at all a barrier to entry. In fact the presence of a large farm like H&R Block can sometimes be an advantage for the small players (I will elaborate on this probably in another blog).
There are several business models an entrepreneur may choose for a start-up Income Tax Preparation Service. The most appropriate model will be based on several factors. The list below will shed some light on the determinant factors for an appropriate model.
- Revenue Target
- Seasonal or Round the year
- Initial Investment
- Owner’s Education, Training and knowledge
- Full time or part time occupation for the owner
- Long Term Objective
- Advertising and Marketing Strategy
I will start with some real life examples (names and places changed).
Jack graduated from High School in 2007. He took six 4U/M courses in High School and graduated with average grades. His objective was to go to Brock University and study accounting. He did not qualify for admission. He was heartbroken but at the same time he was determined to pursue a career in Accounting. He found a diploma program in a Ontario College with an option study for four consecutive semesters to accelerate his path to graduation. He studied Canadian Tax Course and also learned to use a tax software (Profile). He graduated in December, 2008, started looking for a job but that was the height of recession and in August 2009 he gave up. He made up his mind to become self-employed. Jack’s parents were not wealthy but they agreed to give him a loan of $10,000. Jack researched several options and finally decided on opening an Income Tax Preparation Business. He prepared a budget for his start-up:
|Education and Training|
|Individual Tax||$ 295.00|
|Corporate Tax||$ 395.00|
|Rent (1st and last month)||$ 1,300.00|
|Tax Software||$ 1,350.00|
|Marketing and Advertisement||$ 3,500.00|
|Grand Total||$ 7,500.00|
He kept $2,500 as contingency fund.
During his research Jack realized that an efiler licence is a must for the success for his business. He applied for the licence in October, 2009. All his tax returns were up-to-date, he got his efiler number and password within three weeks. He also built a website and started promoting it in November.
Jack took possession of his office on January 1, 2010. With the help of some friends he completed the upgrading of the office by January 15. During this time Jack realized he needs a big sign for his office, for a tax business a good visible sign is a must. He did not want to use the contingency funds for the signs and started looking for a bargain. Finally he settled for a banner with top and bottom loop and heavy duty suction cup and a retractable banner stand. The total cost was $380, he had to borrow this money from his friends.
He made it a point to open the office everyday starting from January 16, knowing very well that clients will not start walking through his doors before February. During this time he sat in his office for a couple of hours every day, introduced himself to other store owns in the plaza and also to the businesses across the street.
Jack got his first client on February 2nd. It was a simple tax, Jack charged $30 for the tax. That was his first and only client for the day. Between February 3rd and February 20th the business was very slow. Jack prepared 50 tax returns during this period and made $1,650. Things started improving from February 22nd. Jack got 7 tax returns on that day. One of the returns was for a self-employed person, Jack charged the client $100 for the return. Between February 22nd and February 28th, the business started picking up, Jack got 35 clients and made $1,400 in revenue. At the end of February, Jack’s total revenue for the short month was $3,050. That is almost 50% of what he invested. He paid his rent ($650), repaid the loan ($380) and ordered his first round of flyers on the first day of March.
The timing of first round of flyer distribution was chosen following many discussions with experienced tax preparer, the connection Jack started building in the last quarter of 2009. One of his father’s cousins had a pretty good tax business in Kitchener and he was a great help. In accordance with Canada Revenue Agency regulations, all T slips must reach the tax payer by the last day of February. As a result if the flyer reaches the potential clients at that time, it works as a reminder. At the same time Jack’s flyers was not like a cold call, he was following warm leads through his flyers. Jack was also pretty visible online by this time. He spent a little money in Yelp, did some targeted promotion through google AdWords and was listed in many Business Directories. In March he spent around $800 in advertising and promotion. All these efforts proved to be fruitful. Jack prepared 235 tax returns in March and his total revenue from these returns was $10,457 from the returns. He also got 20 corporation taxes and 80 complex individual taxes that he passed on to his uncle. He made an additional $5,700 in commissions from his uncle. So Jack grossed $16,157 in March. Net of his expenses of $1750, his profit was $14,407. Jack’s flyer looks somewhat like this:
April is always the best month for a Tax Preparation Business, without going in to details, let me summarize his financial performance in April:
Tax Returns prepared 300
Gross Revenue $15,925
Commission $ 7,250
Total Revenue $23,175
Jack’s Expenses in April was $3,350. So before tax Jack’s profit was $19,825. If we look at the overall performance in three months, before tax his profit was $36,352.
This is a real life case study. Jack’s performance was well above the average mark. The reasons for his success was the choice of the right location (a corner store in a busy strip plaza), a good business plan, thorough research that enabled him to target his promotional activities to the right market segment, his knowledge in finance, extreme hard work (he worked 60 hours weeks in March and April) and of course the invaluable help he got from his father’s cousin. Below are some free market research tools available on the web. Jack made best use of all free tools.
The tools are available in City of Toronto and Canada Post websites. I intend to write a blog on How to use these tools.
All start-up tax preparation businesses should not expect to perform this well in the first year, but achieving 65% of what he achieved is very much possible in this business even for somebody who does not have any background in Finance or Accounting.
Jack has a well-established tax business today in two location. Three employees work for him. One of his operations runs round the year. He has added a few other services in this location. I can list many other achievements of this extraordinary entrepreneur. Although he is not an entrepreneur anymore, he has graduated to the level of a successful businessman in a very short time.
Jack’s other achievements will be excellent material for another blog. This story should end here.