Costs of Starting a Professional Services Business
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Like Lawrence Fuller, a financial services advisor in Scottsdale, Arizona, many professional services providers have daydreamed about the perks of self-employment. What’s keeping these individuals, whether they’re attorneys, psychologists, hairstylists or accountants, from becoming their own bosses?
According to Lawrence, it boils down to capital and risk. “The barriers to entry include the up-front costs and the confidence that the business is going to be successful. You need to have a certain level of experience to be able to go out on your own, and you need the capital to start the business and run that loss until you build up the client base big enough to earn a living.” As the founding member of Fuller Asset Management (FAM), an investment management firm, Lawrence is doing just that.
A former collegiate tennis player at the University of North Carolina – Chapel Hill, Lawrence followed his father Larry, a Merrill Lynch mutual fund manager, into the financial services business and worked for a variety of large investment firms.
What made Lawrence decide to step off the terra firma of the corporate org chart and into the potential quicksand of self-employment? “The real benefit is the control,” he answers without hesitation. “Having control over what I’m doing and not having to sell proprietary products or services from a large firm. If I’m working for a big firm, I don’t have any control whatsoever as to what fees are charged the client, not to mention how much of that fee I receive.”
Once Lawrence chose to shoulder the risk, launching the business came down to five steps that apply to many professional services businesses:
- Securing necessary licensures
- Establishing the firm’s legal identity
- Finding smart ways to work with vendors
- Establishing a place of business
- Marketing the business to prospective clients
Step 1: Secure necessary licensures
“Lawrence spent about $1,400 to register the firm as an investment advisor with the state of Arizona, and the National Association of Securities Dealers (NASD). To ensure that FAM complies with NASD requirements, the firm spends approximately $13,000 per year to retain the services of MarketCouncil, a specialized consulting group. “As a registered investment advisory firm,” Lawrence explains, “the NASD requires us to keep books and records on the company and on our clients and their accounts.”
Each type of professional services business will, of course, have its own special licensure, compliance and regulatory issues and expenses. Entrepreneurs should consult with their industry’s trade association to network with others in their field and to get a sense of what special requirements apply to their businesses.
Step 2: Establish the firm’s legal identity
Lawrence set up FAM as a limited liability company, or LLC. The firm also incurred a one-time expense to create an agreement by which clients consent to pay a fee for specific services. FAM’s initial legal fees amounted to $4,500, which covered founding the LLC, registering the firm with the appropriate regulatory agencies, and drawing up the advisory agreement. In addition, Lawrence expects to spend about $1,000 per year for tax preparation.
Step 3: Find smart ways to work with vendors
Lawrence urges new business owners to look for economical services offered by industry vendors. FAM, for example, is a client of Fidelity and TD Ameritrade. They provide free operational back-office support for FAM’s clients, such as opening new accounts, supplying checks and ATM cards, and providing online account access.
Lawrence has found other vendors for specialized products and services. For example, he spends $5,000 per year to license a software program to track clients’ assets. The software allows FAM to generate quarterly reports showing clients how their portfolios are performing, how much they’ve paid in fees, and which stocks and other assets are held in their accounts. Specialized software programs abound for professional service providers (e.g. for medical billing, accounting, insurance) which may require a big upfront investment, but pay off in the long run by enhancing efficiency and customer service.
Step 4: Establish a place of business
Lawrence leases office space on a floor shared by about 20 other small businesses. The cost is $900 per month, and includes utilities and a receptionist who serves all the businesses on the floor. A common conference room at the entrance to the suite can be reserved for client meetings. “The office in Scottsdale is really a small boiler room,” Lawrence says. “It’s not designed to meet with clients, but the rent is very low and includes everything – our phone, our internet access, and rent.”
Finally, Lawrence incurred miscellaneous costs to set up the office. For example, he spent about $3,000 on office furniture, including two large workstation desks, two filing drawers, a storage cabinet, and a bookshelf. He also spent $2,000 on desktop computers and about $600 on a color laser printer.
Step 5: Market the firm to clients
Image is important in the financial services business, so Lawrence decided to spring for a 17-page glossy brochure with a custom-designed logo. The brochure cost $4,000 to produce, plus an ongoing cost of about $15 per unit for printing. The brochures are given to new and prospective clients and handed out at small-group meetings, but at this time Lawrence uses no more than ten of them per quarter.
To design and host the Fuller Asset Management website, Lawrence spent approximately $500 upfront, and now spends $600 a year for ongoing design and hosting. There are a variety of website design and hosting companies from which to choose according to your budget and needs, but Lawrence chose to go with a company that could create his website using templates, as opposed to paying for a completely new, custom design.
All in all, Lawrence spent approximately $35,650 to open FAM for business:
- Licensures and compliance – $14,400
- Legal services – $4,500
- Specialized software – $5,000
- Office equipment and computers – $5,600
- Deposit on office – $900
- Marketing (website & brochures) – $5,250
“I kept certain costs extremely low, and focused a lot of our operating budget on a few things, one of those being the brochure, which is the outward projection of the firm to our prospective client base,” Lawrence explains. His clients are individuals and small business owners, and all of his business is through referral.
Lawrence is quick to admit his biggest mistake: “Not having done this a long time ago,” he says. “There is absolutely nothing I’d rather be doing.”
Melissa Martin is a freelance writer for StartupNation.