Building a Business – Live
Join us each day this week at 1 p.m. to participate in one-hour live discussions with old hands in the world of business start-ups.
Washington Post reporter George Hager spoke with John Tuccillo, an economic consultant, about how to break free from a large organization, start your own business and give up a steady paycheck in exchange for independence.
So you want to leave your day job and become a consultant. Where do you work? What does it take to set up an office? How do you find clients? Can you make money? Is it nerve wracking or liberating (or both) to give up a steady paycheck?
Tuccillo, who has worked on his own for two years, had to face the questions every would-be consultant faces.
Welcome! I'm George Hager, and for the next hour we'll be talking with John Tuccillo, an economist and business strategist who two years ago last month left his secure job at the National Association of Realtors to set up his own one-man consulting business. John, we have lots of questions lined up for you, but let me exercise my rights as host by asking the first one: What made you decide to go out on your own? And how tough a decision was that to make?
John Tuccillo: My decision was arrived at over a fairly long period of time, so I wavered quite a bit. Ultimately it hinged on my uncertainty as to my marketability. Ultimately I decided to leave because I felt that I could still do a lot of things I liked, get rid of things I didn't like to do and take on other things I would find interesting.
Is there a formula or method for determining how much you will have to make as a freelancer to compensate for the benefits you would give up in your full time job?
John Tuccillo: Take your current compensation (before tax salary) and gross it up by about 40 percent. Divide this amount by the number of days you expect to work and that gives your daily rate. If you have a second household income that will afford you some health or insurance benefits, the grossing-up factor can be less. Be aware that you will be paying your own taxes, so liquidity is important!
Guayaquil, Ecuador: Do you think companies really appreciate consulting?
John Tuccillo: Increasingly, companies are looking to out source to save money. This has opened up a great market for consulting. Whether they appreciate it is less important than whether they think it's necessary and whether the check clears!
Are you incorporated? Why or why not? Are there advantages to states like DE for incorporation? Are taxes higher for the self-employed? What do you do for health insurance, etc.?
John Tuccillo: I am incorporated in Virginia as an LLC, which allows all net income of the company to flow through to the personal returns of the owners. It cuts down on my exposure. Taxes are not any higher Federally for the self-employed. In my case, operating out of Arlington County subjects me to business taxes which raise the overall burden. Be aware that you will be paying all your social security taxes as well as income taxes.
Bethesda, MD: Are you able to juggle the use of a cell phone, lap top, answering service, etc. and not have any "off" time?
John Tuccillo: Probably my greatest asset is my cell phone. By using it, I can be available to my clients virtually anytime. I've even done conference calls while playing golf---difficult but not impossible--and I'm sure the clients thought I was in the office. With caller ID, voice messaging and call waiting, it's the ideal tool to look efficient. I carry a laptop for e-mail, calendar and word processing, so I'm really never out of touch. I do have "off time. Some--plane trips--is unavoidable. Other is at my own choosing.
Rockville, MD: Do you receive work or referrals from your former employer? Did you anticipate such work when you decided to go out on your own?
John Tuccillo: When I left the National Association of Realtors, I had a consulting agreement that lasted through 1997. It was renewed at a lower level in 1998 and then ended. It provided a good base for my efforts and I could not have transitioned as smoothly without it. However, it did not provide all my income and in 1998only a minor part. The contacts I made during ten years at NAR have provided me with business and referrals and still do, even though I am no longer involved with the organization. I think your current employer is the first source of business when you separate.
Fairfax, Virginia: Did you have some money tucked away before you "cut the cord" of a steady paycheck? If so, on average, how many month's income should one have on hand before starting a consulting business?
John Tuccillo: I did not have any significant cushion, but had the prospect of enough work to keep me going. I would propose about six months income plus your start up expenses are about what you need. I had the income in terms of committed work and spent about $10,000 to start the business.
Fairfax Virginia: One of the laments of consultants is said to be the lack of a sense of closure on an assignment or not seeing the final result or participating in the implementation and being left feeling "unfulfilled".What do think of this?
John Tuccillo: This is an occupational hazard. I do a lot of strategic planning work, and it's extremely disappointing to see a company take the plan and shelve it. So part of what I do is to try to motivate the company to use the benefits of my labor in an active way. That means counseling, follow-up, anything it takes to provide real benefit and not just temporary slave.
George Hager: John -- A few answers back you mentioned that liquidity is important. How much do independent consultants have to worry about their cash flow?
John Tuccillo: Cash flow is vital. In any engagement, you should ask for 25 to 50 percent of your fee up front. Otherwise you'll get to a point where you're receivables look great, but your cash flow is terrible. Especially tense is the period around April 15. You have a tax payment and an estimated tax payment both due at a time when the accounting departments of your clients may be focussed on things other than paying you!
Alexandria, VA: I'm thinking about leaving my secure job and doing what you did. One important element in making this work is to get a consulting retainer from my current employer. Any tips on how to do this?
John Tuccillo: Make sure your employer understands your value and the loss you represent when you leave. Then suggest that for a limited period of time--six months to a year, say--you will continue to provide the valuable services to the company as a consultant and save the overhead you now soak up. If you have a good relationship in the company, this should work.
Alexandria, VA: I'm an unemployed programmer, so I consider myself to be a prime candidate for becoming a consultant. How do I go about finding people who are willing to pay for what I can do? I'm not much of a salesman or a people person.
John Tuccillo: If you are not a salesman or a people person, then the best approach is to hook up with a consulting firm in your area. They will handle the marketing and you will do the work. If you want to be fully your own person, work for them as an independent contractor. Look around your company now and see who they hire as consultants. Network through them.
Connellsville, PA: Since you take your phone golfing, has being self-employed helped or hurt your overall game?
John Tuccillo: Nothing either helps or hurts my game--that's the charm of golf! Although I must admit that I was on conference call that absorbed 10 holes one day and for those ten holes I shot significantly better than my average.
Columbia, MD: You said that you spent about $10,000 to start up your business; what sorts of things are included in this? Also, are you working out of your home, or do you rent office space?
John Tuccillo: I work from my home. The $10,000 included office equipment and furniture, incorporation and licensing fees, brochures and stationary. The last piece was the most expensive since I decided to go with a four color, slick, commercially produced piece. You can cut any and all of these costs by choosing different machinery (even the stuff I bought is cheaper today), different business form, different location and different marketing materials (I had some work from the start so I didn't have the time to do my own desk top publishing).
Hi, this is George Hager again. Thanks to all of you who have submitted great questions. John's trying to answer as many as he can, but we won't be able to get to all of them. But we still have more than 10 minutes left, so don't go away!
Vienna VA : A new opportunity may be too large -in scope or skill mix- for a solo engagement - so having an established "consulting network or affiliated group" -such as The Professional Group at GMU- is a great resource enabling a coherent response to such prospective business. Do you have any experience with such a collaborative arrangement?
John Tuccillo: I am a partner in Tecker Consultants, a firm specializing in work for non-profits. It has been a great source of business and collegiality. I have access to resources and can work with talented people. Any such arrangement can come with a referral fee that will cut into your income.
McLean, VA: I'm concerned about the mechanics of billing as a consultant. Do you offer an hourly rate, or ask for a fee based on the task? Also, what about billing travel costs?
John Tuccillo: I bill all costs as a pass through. Coach airfare, lodging, transportation and meals are added to the professional fee. I charge by the day and estimate in advance the time needed to do the work. Travel time is included in that so a trip to the west coast is a more expensive engagement than one on the east coast, even if it is the same work.
Gaithersburg MD: I am just starting out as a consultant and have been doing work for contacts from my old job. How do I effectively expand my exposure to new markets? What is the most cost effective way to spend my limited marketing dollars? Where should I be focusing my marketing efforts as a new consultant?
John Tuccillo: It's very difficult to break into new niches. In my case it has happened because of my speaking and writing. I seek out opportunities to meet with audiences outside my contacts and then gather address lists to send marketing letters to.
We're down to our last five minutes, but you'll be able to go see a transcript of this entire chat -- and all the other great chats from the Business section this week -- in Washingtonpost.com's online archives.
How do you pay yourself? How often? Can you explain what a disbursement is instead of paying oneself income?
John Tuccillo: I draw money from my business account twice a month and transfer it to my personal account to pay household bills. The QuickBooks accounting software is a good way to categorize your income and expenditures in a way that allows taxes to be done very easily. There is a wide latitude of expenses that can be written off, but not as many as you might dream of. When I started my business, I sought the advice of the accountant who does my personal taxes and have continued that relationship. It has been a great help.
1. How do you determine what to charge a client and is it normally done on a per hour basis?
John Tuccillo: I take a target income, gross it up for taxes, retirement and insurance, divide by the number of days I expect to sell and establish that as a daily rate. You can check this against the fees charged by your competitors to determine your reasonableness. The more specific your knowledge the smaller your market, but the higher your fees and the greater your marketability.
Alexandria, VA: How important is years of experience for consultants? For example, would it be more difficult for a late twenties person to start consulting vs. a late thirties, early forties person? Do clients really look at the age factor-years of experience or the work accomplished so far?
John Tuccillo: Years of experience are always a plus because you know more people and thus have an easier time marketing yourself. You've also established your credentials in your field. But make sure it's ten years experience and not one year ten times over. In other words, you need some clear expertise to sell. If you are in a new and emerging filed and you have several years experience at the cutting edge, youth is an advantage, not a drawback.
That's all the time we've got. Thanks for visiting, thanks for your questions, and have a great 4th of July!
How difficult is it to start your own consulting business?
John Tuccillo: I found it relatively easy. It gets easier if you identify people who can help you with specific tasks--designing your marketing materials is a good one--that are not your strong points. Initially, you've got to go with who you know, but plan to expand your base after a year or so.
We're really done now. Thanks again for joining us!
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