Synergy

This past week, a lovely young lady, named Lisa, who is a big fan of the blog, asked, “Frank, have you ever had a big steaming turd of a business idea that cost you thousands of dollars, hours of agony, weeks of lost sleep, and made you kick the family dog like Mark Mosely kicked footballs?” Lisa will be able to read my answer when she gets out of the hospital in sixty days or so. I hear she'll be coming off life support by the end of the week. Thanks to all of you, who sent bail money. The Loudoun County jail doesn't serve Yuengling. Let's all wish Lisa a fast recovery – in time for my trial. My lawyer thinks I'll get off if I use the following alibi, “The bitch set me up.”

Yes, dear Lisa, I have had a few steaming turd ideas. One involved my pursuit of synergy. Here is my definition of synergy. Synergy is when you buy or create a business in a field similar enough to your existing business that you deceive yourself into believing you know what you are doing. That may not be the definition you learned in business school. It certainly isn't the one I learned up at the C.U. (Clarion University).

One genius idea I had back in the early 1990's was to open a bookkeeping company to complement our CPA firm. As I have written before, you should be able to summarize the financial model of any new business on the back of an envelope. I followed my rule. My financial summary went as follows. We could charge $40 to $50 per hour for bookkeeping services. We would have to pay about $25 per hour in labor costs. If we had thirty hours of bookkeeping services per week that would yield $1,200 to $1,500 per week with a labor cost of $750. That would give us a gross profit of $450 to $750 per week before any overhead expenses. There shouldn't be that much in incremental overhead costs for a CPA firm, since we already had an office in place.

The gross profit alone wasn't enough to get me as hot as I get around my beloved Jennifer Aniston. The key was the synergy between the bookkeeping business and the CPA firm that would develop. Synergy would let us convert bookkeeping clients to more profitable CPA firm clients. In other words, bookkeeping clients would ask us to prepare their tax returns and financial statements. That is how the false god known as synergy tempts you. You do something that makes marginal, if any, financial sense in the hope of a much larger payoff down the road. This is how Las Vegas works. If I had turned over my financial model envelope, it probably read, ”Frank is a moron.”

There were two big problems with my idea. First, my back of the envelope financial model was missing one very big cost. Since we are a CPA firm, professional standards and the laws of the great state of Virginia, required that Paul and I spend time reviewing and supervising the bookkeeping. This killed almost 100% of the gross profit. Now, all I had to rely on was synergy. If bookkeeping clients became CPA firm clients, the idea still made financial sense.

Unfortunately almost none of the bookkeeping clients became CPA firm clients. Why? I learned something very important about the bookkeeping business the hard way. Most people like their CPA's. Few people like their bookkeepers. I have written in the past that 80% of bookkeepers stink. So you might justifiably believe that makes business owners hate their bookkeepers. However, in my experience, business owners don't even like the good ones. When a potential new client first comes in to meet with me, I frequently hear,”My bookkeeping is all messed up. I need your help to fix it.” They say that even when I don't find much to fix.

We ended up with a bunch of lousy, unprofitable bookkeeping clients, who took up time better spent on our CPA business. After a little more than a year, we buried our rotting corpse of a bookkeeping business. Chasing synergy is like chasing strippers. The chase gets more expensive by the minute, and you go eventually home alone with an empty wallet and an unfulfilled fantasy.