Mom-and-Pop Shops

Here are 15 tips on how CPAs can best serve and engage small business clients.

BY RICK TELBERG
July 1, 2003

EXECUTIVE SUMMARY
SMALL BUSINESSES ARE THE CORE of U.S. enterprise—70%—and the backbone of the small and local CPA firm market. Stresses caused by the rapidity and degree of change in the business world and the culture at large are putting pressure on CPAs to provide them with an ever-more-complex range of skills and services and to make themselves more available.

CPAs CAN HELP MOM-AND-POP companies with a range of management activities, from measuring business performance to finding executive-level talent to analyzing billing and collection procedures to advising family-owned business how to share the profits or set compensation.

FAMILY-OWNED BUSINESSES HAVE critical and unique estate tax issues and need advanced tax and succession planning and other strategic advisory services such as investment management, maintaining solid relationships with banks or finding alternative financing.

SMALL BUSINESS CLIENTS NEED to pay more attention to their overall investment picture, including personal and business assets. Their retirement plans will depend on everything from real estate (and plant, property and equipment) to debts and mortgages.

DEMAND FOR BASIC COMPLIANCE services is tailing off as clients increasingly automate, but they need legitimate tax planning and clear development goals.

RETAINER BILLING LETS A FIRM BUNDLE tax returns with outsourced financial management services, which ranks third among functions a small business is most likely to seek after legal services and computer support.

RICK TELBERG is editor at large and director of online content for the AICPA and his views, as expressed in this article, do not necessarily reflect the views of the Institute. Official positions are determined through certain specific committee procedures, due process and deliberation.

merica’s mom-and-pop shop owners form the core of U.S. enterprise—70% of all U.S. businesses, according to the Census Bureau—and the backbone of the small and local CPA firm market. Stresses caused by the rapidity and degree of change in the business world and the culture at large are putting pressure on them and their CPAs, who must provide an ever-more-complex range of skills and service. For instance, small businesses worried about profitability may ask their accountants to help identify and control expenses or to record and measure key returns on investment. Similarly, solutions to their customer-service and getting-new-customer concerns may involve customer-relationship-management systems, forecasting and budgeting procedures or measuring marketing effectiveness. Here are 15 pointers for improving CPA service to the mom-and-pop sector and helping practitioners build business.

INNOVATION AND ATTENTION
Small businesses range from home-based publicists to beauty shops, plumbers, real estate agents, carpenters and consultants. In fact, two are hardly alike, which means there are few fail-safe predictors of small business success. CPAs can improve service to such entities—and their client base—if they follow this advice:

Tip 1: Pick the right client. Most CPAs operate as sole practitioners (call them mom or pop shops) and relate well to small businesses. Indeed, CPA firms are among the most profitable small businesses, and according to BizStats.com of Washington, D.C., 91% of them make money. Only dentists, optometrists and land surveyors are more likely to operate in the black, which indicates opportunities for CPAs seeking profitable clients, says BizStats researcher Patrick O’Rourke, CPA. In contrast, the leading money losers are commodities brokers, computer parts makers, animal breeders and sightseeing tour operators. “Hunters and trappers came in dead last—no pun intended,” says O’Rourke. (See “ The Safest and Riskiest Small Businesses .”)

Good News, Bad News

Top 3 opportunities for small business
1. Increasing sales.
2. Growth.
3. Getting more customers.

Top 3 problems facing small business
1. Lack of employees.
2. Poor economy.
3. Cash flow.

Source: D&B 21st Annual Small Business Survey, www.dnb.com , 2002.

Tip 2: Listen attentively when they talk about unusual operational issues. Joe Whitley in Montrose, Colorado, has worked both sides of the CPA fence. Until a few years ago, he was a practicing CPA. Today, as the owner of a sign-painting business, he’s his own client. Recently, environmental regulations required him to spend a whole day accounting for every last bucket of paint—more government compliance than he cares for. “It’s a nightmare,” he says of the process. However, it highlights something he wishes he’d paid more attention to when he was a practitioner: understanding small-shop rules and regulations. “I would have liked to have had this knowledge before I went into public accounting,” says Whitley, who feels it would have made him a better adviser. “In practice, I didn’t always listen carefully enough to clients. Small business has operational problems I never fully considered.”

Tip 3: Use tough love on mom-and-pop shops that hit financial doldrums. Says Sanford Cooper, CPA, at Cooper & Co., a two-partner firm in Burlington, Massachusetts: “When faced with a prolonged downturn, a lot of small businesses turn a blind eye to the reality of losing money or a need to change their operations. We have to sit down with them and warn the owners they might not have enough to retire on—they’re going to have to go back to work.” (See “ Solutions for Small Businesses. ”)

Tip 4: Bundle traditional compliance and advanced services. Cooper says demand for basic compliance services has been tailing off as clients increasingly automate. Some CPAs have compensated by offering a preset package of services in an annual plan, for which they charge fixed fees, billed monthly. These retainer-billing plans may include tax and accounting services for routine tasks within the business as well as help with “legitimate tax planning and clear development goals,” says Cooper. Bundling services requires experience with the client to gauge basic service and individualized development needs, say CPAs in the field.

Tip 5: Put it in language clients can understand. In Manassas, Virginia, CPA Bill Duvall makes a religion out of being what he terms client-friendly to cement his professional relationships. “CPAs need to put things in plain, layman’s language,” says Duvall, who operates as a Fiducial Business Center, a chain of accounting franchises. “We need to lay out the options, make a recommendation and support it with fact.” (For more information see “ How to Be Careful and Still Be Clear, JofA , Jan.01, page 65.)

Solutions for Small Businesses
These are the top 10 activities small businesses outsource. Practitioners considering the market can use this list to assess practice development opportunities. For instance, besides cultivating referral relationships with attorneys-at-law, CPAs may find opportunities in business-law areas such as implementation of regulations. In addition, many CPAs find new business in handling “computer technical support” issues, most commonly in bookkeeping and accounting.
  1. Legal issues—68%.

  2. Computer technical support—55%.

  3. Financial advice and management—46%.

  4. Bookkeeping and accounting—35%.

  5. Advertising and marketing—28%.

  6. Payroll—26%.

  7. New customer development—24%.

  8. Accounts receivable—20%.

  9. Collections—14%.

  10. Public relations—10%.

Source: D&B 21st Annual Small Business Survey.

Tip 6: Think and act like a long-term business partner and friend. New Albany, Indiana, CPA and lawyer Linda Christiansen says working with small business clients in a small town has led to long-lasting relationships. Christiansen, also a professor at Indiana University Southeast, says, “Small business clients are less sophisticated in finance and accounting, but they know their own businesses very well.” She exerts herself to offer detailed alternatives when her clients urge her to think like an owner, asking her, “What would you do if this was your company?” She recognizes their enterprises are “more than just a job to them.”

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Tip 7: Explain your client’s business to bankers in their language. CPAs who maintain and manage solid relationships with local bankers increasingly help clients find alternative sources of equity or debt financing (see “ Sources of Capital ”). In Warwick, Rhode Island, Bill Pirolli, CPA and principal at three-partner Pirolli Deller & Donaty, says his most successful small business clients are narrowly focused. One client who designs direct-mail materials is flourishing, but Pirolli found bankers didn’t easily grasp a business that involves little inventory or few hard assets.

“The bank wanted to know who his customers were and how much each was worth,” Pirolli says. It was a challenge to explain the enterprise to them: “Financial statements don’t convey the business relationships that are important to my client’s success.” About expressing a business’s more subtle operative factors, he says: “You have to be a lot smarter these days.”

Tip 8: Look at the whole client, from business operations to personal net worth. Bruce Kirkpatrick, CPA, might agree with Pirolli. A principal in two-partner Kirkpatrick & Bertrand, Denver, he chides CPAs for not doing more than numbers-only services. “We’ve fallen short when it comes to understanding clients’ operations,” Kirkpatrick says. Accordingly, he has launched a service to analyze billing and collection procedures for the medical clients in his practice. Kirkpatrick says he urges clients to pay more attention to their overall investment picture, including both personal and business assets. “You have to look at a client’s investment in his business and in his retirement plan,” he says. “That includes everything from real estate (and plant, property and equipment) to debts and mortgages.”

Tip 9: Deal with the nagging issues—from relationships to compensation to succession. In the hard-hit rust belt, Rick Ahaus, president and patriarch of Ahaus Tool and Engineering in Richmond, Indiana, helps build parts that go into cars from Ford, Daimler-Chrysler and General Motors. Alas, some of the big car makers’ billion-dollar profits come out of his company’s margins through pricing pressure. To control costs, exploit new opportunities and plan for succession, Ahaus works with CPA Gary Adamson at Brady Ware in Dayton, Ohio, a large regional firm with 90 staff members in offices in Dayton, Ohio and Richmond, Indiana, as well as non-CPA subsidiaries.

Few issues can be as divisive in a family-owned business, Adamson says, as how to share the profits or set compensation. CPAs can provide objective guidance to research and administer pay plans. “We have four generations in this business,” says Ahaus, who talks to Adamson about management techniques, compensation systems and long-term estate planning to ensure the family works well together from day to day and builds future value. “We’re always looking to Gary for new ideas and advice,” he says. Adamson’s expertise comes from many years of working with clients such as Ahaus. (For more information see “ Offer Family-Business Solutions, JofA , Jul.02, page 55.)

Sources of Capital
Small business accountants must be adept at handling a variety of financing strategies, ranging from leveraging personal savings and loans to helping clients obtain commercial bank loans and asset-based financing. The following are sources of small business financing.
  1. Personal savings—53%.

  2. Trade credit—52%.

  3. Commercial bank loans—52%.

  4. Personal credit cards—51%.

  5. Company credit cards—51%.

  6. Personal bank loans—50%.

  7. Loans against accounts receivable—29%.

  8. Personal loans—24%.

Source: D&B 21st Annual Small Business Survey.

Tip 10: Consider a diversified practice of related entities. Adamson’s firm organizes fixed-price packages for clients and—because it owns and operates related ventures in mergers and acquisitions, investment management and retirement plan administration—it offers a range of services to small business owners, including personal and corporate tax, personal financial planning and pension plan administration. “If we can pick up a company’s 401(k) plan,” says Adamson, of developing new business from existing clients, “we can bundle it with tax returns and put more clients on what we call ‘retainer’ billing.”

Indeed, financial services may be one of the first places a small business looks to control cash flow. After legal services and computer support, financial management ranks third among functions a small business is most likely to outsource, according to D&B. It’s followed closely by bookkeeping, accounting and payroll.

Tip 11: Sometimes, just listen. “Sometimes service is mainly a shoulder to cry on,” says CPA Adamson. “Some Midwest tool-and-die companies really are struggling.” He adds that he does what he can for them: “We’ve been doing a lot just helping clients sustain their banking relationships.” That can involve renegotiating terms or, at other times, finding alternate sources of capital through a network of his contacts.

Tip 12: An executive search can lead to lifelong CPA work. With their breadth of contacts in the business community, many CPAs help mom-and-pop companies find executive-level talent. Chris Bonfanti, CPA and managing partner at the firm of Kiefer Bonfanti in St. Louis, has benefited from working with small business clients. He has a longstanding, close relationship with the owner of Colborne Corp., a Lake Forest, Illinois, producer of pie-making machinery with clients such as Sara Lee and Mrs. Smith’s. It helps produce 90% of all factory-made pies in the United States, says Colborne’s president and proprietor, Rich Hoskins.

Bonfanti says he was just doing his job in 1994 when Colborne, which had had only two presidents from 1879 to 1960 and was in its sixth generation of family ownership, tapped him to help with its succession plan. As part of an executive search team, Bonfanti hired Hoskins away from a Fortune 500 job and interested him in purchasing Colborne. He acted as ambassador, counselor and negotiator between the parties. Hoskins is profoundly grateful to Bonfanti for his success. “I wouldn’t be here today if it wasn’t for Chris,” he says.

Tip 13: Become a good negotiator. “Chris helped me purchase the company,” Hoskins says. “He walked a fine line in getting a win-win for all of us. He always had a good idea on how to work the deal and how to get each side to see the merit in it.”

Small Business Needs
A Journal of Accountancy survey of 263 CPAs showed 79% of CPAs rated profitability “extremely important” for small business, followed by cost control (73%), customer service (70%), sales trends (62%) and getting new customers (59%), rounding out the top five. About 57% of the responding CPAs worked in practice and 35% in business or industry, and the top issues for each group were the same.

Evaluating only the “somewhat important” votes revealed other persistent issues. Family or investor relations scored 55% in being “somewhat important” to small business (but last in the list of 13 items in “extremely”). Growth planning rated 50% in the same category and government rules and regulations rated 46%. CPAs said they were increasingly prepared to handle these vexing small business issues.

CPAs in practice and in industry appeared to agree that the top 10 opportunities for helping small business were, in rank order,

  1. Family or investor relations.

  2. Growth planning.

  3. Government rules and regulations.

  4. Employee and labor issues.

  5. Obtaining financing or credit.

  6. Income taxes and estate planning.

  7. Competition from larger companies.

  8. Getting new customers.

  9. Insurance costs and availability.

  10. Sales trends.

Source: AICPA.

“There’s a lot of psychology involved,” says Bonfanti. “When people have to be pushed to do more than they’re comfortable doing, we need to be counselors. Sometimes you have to ask the owner again and again, ‘Why did you start this business?’ The answer, ultimately, is to sell it or transfer it.” With persistent Socratic questioning, Bonfanti nudges clients into thinking strategically about growth, profitability and business valuation—all links in the value chain where the firm can ply its trade.

The Safest and Riskiest Small Businesses
Based on percentage of profitable sole proprietorship businesses per category.
Safest Top 10
Type of business Industry % with profits % with losses
1. Surveying and mapping (except geophysical) Services 93.7% 6.3%
2. Optometrists Health care 93.0% 7.0%
3. Dentists Health care 91.8% 8.2%
4. CPAs Services 91.2% 8.8%
5. Bus drivers Transportation 90.8% 9.2%
6. Special trade contractors Construction 88.2% 11.8%
7. Mental health practitioners and social therapists Health care 87.8% 12.2%
8. Physicians (except mental health specialists) Health care 87.1% 12.9%
9. Taxi and limousine service providers Transportation 86.3% 13.7%
10. Residential builders Construction 85.9% 14.1%

Source: BizStats.com

Riskiest Top 10
Type of business Industry % with profits % with losses
1. Hunting and trapping Hunting/ trapping 23.6% 76.4%
2. Scenic and sightseeing transport Transportation 33.8% 66.2%
3. Animal production (including pet breeding) Breeding 34.5% 65.5%
4. Computer and electronic products Manufacturing 35.4% 64.6%
5. Commodity contracts brokerage Finance/ insurance 36.6% 63.4%
6. Nonmetallic mineral mining and quarrying Mining 38.3% 61.7%
7. Primary metal industries Manufacturing 41.0% 59.0%
8. Video tape and disc rental Rentals 48.4% 51.6%
9. Catalog/mail order Retailing 48.8% 51.2%
10. Health and personal care stores Retailing 49.5% 50.5%

Tip 14: Remember that small business is family business. Bonfanti knows Hoskins, at age 53, is too young to think about retiring, but with a son and daughter in the business, he has issues and opportunities that span decades. “At the Fortune 500,” Hoskins says, “I was just looking at making my numbers every quarter. But, when you work in your own business, you think about the next generation.” Today Bonfanti is on Hoskins’s board of directors and is a trusted adviser to the Hoskins family. With a little luck—for both of them—Bonfanti will be there for Hoskins’s succession plan, too.

Tip 15: Respect the fact that mom-and-pop shops are a breed apart. CPAs find that small business owners are an optimistic group. Ample capital, good employees, a solid educational background and strong personal motivations such as a desire for freedom to lead a rich family life or being one’s own boss seem to prefigure their success, says a Small Business Administration (SBA) study. Still, only about half of all new small businesses survive past four years. Younger or underfinanced entrepreneurs are more likely to fail yet, paradoxically, about a third of those that close declare the experience worthwhile, says the SBA study. This may seem to fly in the face of common sense, but CPAs who serve mom-and-pop shops know that people get into business for many reasons. Staying there is what they need help with.

It’s a Family Affair

B arbara Golden’s 20-year career as a school teacher now seems long ago and far away. These days she works with her husband and son in the family’s thriving Buford, Georgia, construction business. The company averages about 30 new custom homes a year, with husband James supervising the building and their son driving the grader. “I handle the office—payroll, payables and building permits,” Golden says. “We have a part-time person to answer the phones, and sometimes I do that, too.” When her accounting system seems to need a little extra coaxing to spit out a fresh batch of federally mandated 1099s, she doesn’t worry. She knows she can call her CPA anytime for help.

CPA Phil Juravel of Webber & Juravel in nearby Alpharetta has told Golden over and over again in their 10-year business relationship: “Don’t be afraid to ask questions. You never know what’s going to come up.”

Such attentive service characterizes many small-firm/small-client relationships, and modern technology—for example, cell phones, beepers and e-mail— makes it easy to provide. CPAs say they rely on these tools more than ever before to stay in contact with clients and, perhaps more important, to allow clients to contact them. Some clients may be shy about asking questions, but many CPAs act as help desks, making themselves available to clients for a range of questions and problems, from fundamental to advanced. When they can’t help, they refer clients to someone who can.

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