Solo, But Not Alone

Why you just might find yourself in business with your competitors.
BY STEPHEN WEINSTEIN

EXECUTIVE SUMMARY

  • MANY SOLO CPAs ARE CONSIDERING some very important questions: Will sole proprietor practices operate as part of special group or affiliated entities? Must solo CPAs merge to survive?

  • WHAT CPAs WILL BE DOING TO MAKE a living in the year 2009 will be quite different from what they do today. Primary changes include
    • Technology. Clients will continue to become more self-sufficient due to improvements in computers, communications and software.
    • Competition. The intense competition (on price and service) will continue to increase.
    • Specialization and niches. Industry specialization or service niche consulting will become more prevalent.

  • SOLE PROPRIETORS SHOULD DEVOTE time to planning for their future. They need to evaluate whether they have the interest and skills to expand any specialty niche or whether a merger or affiliation is in their future.

  • SOLE PRACTITIONERS INTERESTED IN setting up shop with others like themselves—sharing offices and taking advantage of the many new opportunities that come up when there is more than one CPA in an office—may be better prepared for success in the next century.
STEPHEN WEINSTEIN, CPA, is the owner of a practice management and consulting firm in Branford, Connecticut, that specializes in CPA and law firms. He is the creator of the seminar, "Successful Mergers/Acquisitions of CPA Firms." His e-mail address is swcpa@worldnet.att.net.


Today's sole proprietors are being forced to look in the mirror and answer tough questions about their futures. They're asking themselves: Can I maintain my one-person practice, keep my independence and still function like a larger firm? Is a merger or alliance the only way to survive during the next 20 years?

Who is the Sole Practitioner?
Of the 47,751 AICPA member CPA firms, 21,166 are sole proprietors. They are fiercely independent and they love their flexibility, control and, most important, reaping the rewards of their firms' success. The downsides? Sole practitioners often complain they do not have peers to share problems and concerns with.
They often worry about backup when they vacation or are sick, and some argue that their image can be a handicap when competing for larger clients or for certain specialized work.

Why? The marketplace differs vastly from just five years ago, and all indicators point to changes happening at an even faster clip in the next decade. Accounting and audit revenue has been flat for the last seven years, and more taxpayers are filing their tax returns electronically with user-friendly software. Services such as financial statement preparation have lost their luster as companies look for new sources of real-time information. One of the most ominous changes is the emergence of full-service financial companies that compete with CPA firms by promising customers one-stop shopping.

In addition, sole proprietors must compete with larger CPA firms that offer clients new services and pay higher salaries and more benefits to staff and spend more on marketing and public relations.

All these professional concerns weigh heavily on sole proprietors as they ponder whether they should or even can continue to operate on their own. Do they really have the luxury of choosing to work solo if they also want to prosper into the next millenium? The answer seems to be: Maybe . Because if they opt to stay the solo course, they'll likely have to make some changes and concessionsand consider alternative practice structures or develop specialties that give them a competitive edge.

Successfully Staying Solo

Practicing on your own does not guarantee that you will stand out. You have to be able to offer clients something special that will keep them coming back. This basic tenet has never been ignored by Carolyn Sechler, a sole practitioner in Phoenix, who takes the time to sit down with each of her clients, often at a picnic table or on a swing in her own backyard.

Sechler operates a full-service firm by herself, and from her home. She has made a name for herself among local businesses as a technology specialist, but she does traditional compilation, tax and review work as well. Instead of specializing in one practice niche, she has focused on customizing a mix of new services, such as long range strategic planning and executive coaching, with traditional accounting for each of her clients. "We can't deliver the same thing to everyone," said Sechler. "We have to deliver customized services to each."

She often works with companies that already employ an outside CPA. These companies want Sechler to provide training staff on-site in QuickBooks or set up quarterly planning meetings to prepare the companies for their year-end audits. "We are their per diem controllers and CFOs, or we act as their executive coach," said Sechler.

To meet all her clients' needs, Sechler has formed a network of alliances with other local CPAs and other professionals, who work for her as independent contractors. Sechler makes the contact, secures the engagement and schedules the most suited of her per diem staff. The six CPAs who work for her submit progress reports by e-mail every Monday morning. She also maintains contact via an "electronic water cooler," by using a real-time Web-based e-mail program to stay in constant touch with her pool of CPAs. They meet at her house every other Thursday, too. Sechler invites referral sources such as attorneys and other professionals to her Thursday meetings so everyone can meet face to face. "I'm networking my network," said Sechler.

Casual satisfaction
How does Sechler find new clients? She stays visible. She is always on the lookout for the right speaking engagements; she remains very involved with the Arizona State Society of CPAs; she publishes articles; she constantly updates her Web site—and she reminds her clients that she always appreciates a referral.

Nonetheless, she chooses each new client cautiously. "It is very important to be selective to ensure the client understands that I do business differently than other CPAs," said Sechler. "Some of my clients come over to my house, sit on my swing and talk business. Others go home from work, change into jeans and then come over to my home office. This isn't for everyone, but my clients like it; they think it's cool."

Solo forever
Sechler worked for two regional CPA firms before forming her unusual sole proprietorship. She was offered a partnership at the last firm she worked for, which had five partners and a staff of 40. Sechler accepted and worked with the firm for two years before leaving. "There were a number of cultural barriers that we were unable to bridge," said Sechler. While at the firm, the other five partners could not accept Sechler's penchant for working outside the office—she was often at her clients' sites rather than receiving in-office appointments. "I was in contact with my clients continuously, not just once a year," Sechler said. She finally resigned from the firm and started doing business her own way.

Sechler will not consider merging with another firm for now. She doesn't believe forming a permanent relationship with any one firm will allow her the flexibility to satisfy her clients. "Staying solo and setting up strategic alliances with other CPAs is how I plan to head into the next century," said Sechler. "It's easy to lose a market if you are not agile enough to meet its needs. That means I must team up with the right CPAs at the right time and in the right environment. My arrangement allows me to make that happen."

John von Brachel

THE FIRM OF TOMORROW
The best advice for sole practitioners is this: stay on top of changes in the marketplace. What CPAs will be doing to make a living in 2009 will be quite different from what they do today. The changes that will have the greatest impact on the sole proprietor include

Making Way for Changes

The AICPA and state CPA societies have adopted changes to the rules of conduct governing the operation of practices and fee-sharing that facilitate alliances and mergers and protect the public interest. Thirty-two states now allow commissions and contingent fees in certain circumstances; most state boards of accountancy and state CPA societies support changes to accountancy laws that provide for substantial equivalency and non-CPA ownership and allow the acceptance of fees. The AICPA professional ethics executive committee has adopted changes to the Code of Professional Conduct to ensure application of the code to CPAs who practice in alternative structures. These are just some of the many changes that have been taking place nationwide. Many other state legislatures are debating comparable issues that will significantly influence how CPA firms operate.

More information, including material on the Uniform Accountancy Act, a nationwide overview of state regulations and a digest of state issues, is available online at www.aicpa.org.

Technology. Improvements in computers, software and communications continue to make clients more self-sufficient. Many of the traditional write-up and compliance services provided today by sole proprietors will be performed by clients themselves or by low-cost, highly efficient non-CPA firms or financial services companies. This will force CPA firms to replace traditional compliance work with new consulting services.

Competition. Competition on price and service between CPA firms and financial services companies will continue to intensify, driving the marketplace, especially for basic services, such as tax, write-up and payroll. Financial services institutions—such as American Express, Century Business Services and HRB Business Services (H&R Block)—are already competing in the marketplace. Brokerage firms and large banks will enter or expand into the market as well.

Specialization and niches. More firms will specialize in specific industries such as health care or construction or specialty niche services such as personal financial planning or business valuation to ensure that opportunities for long-term growth always exist.

WHAT ARE THE ALTERNATIVES?
In order to stay on top of all these changes—and stay competitive—many sole proprietors are beginning to affiliate with other local practitioners or are merging with other firms. In fact, some sole practitioners are setting up shop with their competitors—sharing offices and taking advantage of the connections and referral sources that pop up when there is more than one CPA in an office.

Sole proprietors have always cherished their independence and control. To obtain the advantages of a merger without losing those two important characteristics, many CPAs are setting up strategic alliances with firms of similar size operating in contiguous but noncompeting areas. These arrangements allow them to refer specialties within the group and help the group compete with consulting companies, law firms and other CPA firms.

These alliances also allow sole proprietors to expand an existing specialty or niche while offering clients other consulting services. They help CPAs who have wanted to do more marketing or practice development but have not had the resources or time to do it themselves. Judging by current trends, more and more sole proprietors likely will form or become part of some type of affiliated practice group in the future. These alliances will continue to evolve and grow over the next 10 years.

Merging for Security

Over lunch, one week before Thanksgiving 1997, sole practitioner Thomas F. Burrage was being courted by a full-service, 40-member firm. He told Bruce Melat, managing partner of Meyners and Co., that he was flattered by the overture from the well-known regional firm but he was not interested in joining them.

Burrage, of Albuquerque, New Mexico, was running a very successful compilations, tax and litigation support practice. His staff consisted of one CPA, one CPA candidate, an administrative assistant and a runner. In 1996, Burrage's solo shop grossed in excess of $500,000, and his net profits exceeded $180,000. He had agreed to meet with Melat to develop a new referral source for audits and reviews—he hadn't even considered merging with another CPA firm. That was before Burrage suffered a heart attack.

Reassess priorities
While recovering at home from his angioplasty, Burrage fielded a number of office crises and reassessed his long-term plans. He had always managed his practice alone, consequently there was not a strong support base to handle clients in his absence. Also, when he was involved in large engagements, he often had found himself turning down work from referral sources. When his computers crashed he had to stop everything and serve as his own technical support team. This was particularly challenging because his litigation business had increased in size and complexity, and the hours he needed for research could add up.

He was also the sole administrator: "When bills had to be paid, when accounts had to be collected, I was the one writing the checks and on the phone," said Burrage. "I was the human resources manager—dealing with staff health insurance, life insurance and employee benefits. At the same time, I acted as the firm's marketing director—scheduling speaking engagements, taking clients to lunch, developing referral sources and giving clients special attention when they asked for it."

The heart attack forced Burrage to change some lifelong health habits: give up smoking and start going to the gym on a regular basis. Most important, his doctors told him that he had to reduce stress. "If my heart attack had occurred during tax season, it would have stretched the resources of my practice to its absolute limits," said Burrage. "So I realized that if I wanted to provide my clients, staff and myself with a stronger sense of security. I would have to merge with a larger firm."

The payoff
To find the right candidates Burrage researched all the local and national firms that operated in Albuquerque, had a good reputation and could service his clients. He met with his clients to talk to them about his plan and to reassure them that they would continue to be well served.

In the end, the original offer from Meyners & Co. made most sense; the firm had 40 employees, five partners and a full-service practice that included audit, accounting, compilations and review, tax and litigation support. Meyners & Co. also had a technical support staff to troubleshoot any PC problems.

Meyners & Co. offered Burrage a partnership and agreed to hire his entire sole-practice staff. And perhaps the best perk in the deal: Burrage and Meyners & Co. did not share referral sources, so no one lost out when the two practices were merged.

The amount of time Burrage spends in the office is far less than when he was a sole practitioner because the firm provides him with administrative and technical support. His chargeable time is up 40%. "I'm more efficient now," said Burrage. "Using hindsight, was it a good decision? Yes. I have lost some independence and autonomy and the feeling that I'm my own boss. But given my life-style and security now, I'd say it has been a good trade-off."

John von Brachel

TAKING SHAPE
Affiliations between CPA firms, such as practice sharing and alliances, can take many forms. For example, in one form—a version of space sharing—several firms remain totally separate entities, but all operate from the same facility, share overhead costs and have agreements on servicing each other's clients. In most space-sharing arrangements, a noncompete agreement protects each person's client base; the participants have no fear of losing a client to a space-sharing partner.

Affiliated CPAs might operate with a group name or each individual may merely indicate the relationship on business cards and letterhead. Or they may not even operate from the same facility. Each firm would join the group and have agreements on sharing work. Members might share the promotional expenses (for the group name or affiliation), and pay one firm member to administer the group practice and do marketing.

CPA firm affiliations have operated throughout the United States and internationally for the past several decades; however, the smaller, regional form—often considered a group practice—is a new concept for sole proprietors. Member firms join for a very low fee, one firm generally handles all the coordination and administration and there are no full-time employees. The group practice's primary goals are to give the appearance of a larger entity and to provide member firms with a variety of referral sources.

Some group practice structures involve non-CPA firms, including law firms, financial advisers and other consulting companies. Members pay a fee for the affiliation and, in return, receive technology, software and marketing support services tailored to their needs. Most important, they earn the ability to network and refer other independent professional advisers.

YOUR ALLIES
As odd as it may seem, you may find yourself working with competitors. Many affiliations allow the sole proprietor to contract with a competitor to conduct a particular service directly for the client. For example, another local firm may be able to provide your clients with services you don't offer, such as investment advice. You would issue separate engagement letters and the allied firm would bill the client directly for the service. Or, in a different arrangement, your firm would administer the entire engagement. In either case, you coordinate the scope of the service and monitor the engagement on behalf of your client.

Affiliated firms also can provide the sole proprietor with just-in-time consulting. If your client has a question and you don't know the answer, you could spend three hours researching the problem or you can pick up the phone and call an allied firm that specializes in the topic for the answer. The formal arrangement you set up with affiliates holds them accountable for the answers they give. In effect, you become their client. Either firm can bill the client.

Merging? Cover Your Past

When merging a practice, most CPAs want to know whether their potential partners are covered for malpractice. Most malpractice insurance for CPAs is written on a claims-made form, which requires the CPA to report claims during the policy period. In a typical sale transaction, the CPA closes up shop and discontinues coverage. If a subsequent malpractice claim is made for services performed before the CPA closed the business, it is not covered. To be covered, the CPA must have an effective policy when the claim is made or when the incident giving rise to a claim is reported.

Reduce the risks
Two basic methods are used to ensure all claims are covered after selling or merging a firm. If the CPA is selling the practice to a firm and the seller plans to continue practicing as part of the buyer, the CPA should obtain coverage for prior acts under the new firm's malpractice policy. As a general rule, prior-acts coverage endorsements are available only to CPAs with prior malpractice coverage.

A CPA who sells a practice should make certain he or she is covered under an extended reporting period. Such coverage commonly is referred to as tail coverage. Many insurers offer tail coverage to existing customers at discounted rates. Generally, the longer the CPA stays with the same malpractice carrier, the less the extended reporting period is likely to cost. The most common terms for extended reporting periods are three and five years.

Compiled by Steven M. Platau, CPA, JD, chairman of
the faculty of Accounting, University of Tampa, Florida.

NO MAN IS AN ISLAND
Right now, if you're a sole proprietor, you need to take some time from your day-to-day business and plan ahead. Make time now to think about the future. Some of the questions you should consider: Do you have any interest or skills that would allow you to expand any promising specialty or niche you're currently in? Would you ever be able to work with a partner?

You also need to put into writing your development and action plans. You should draft a firm profile that describes your practice, including its services, client base and what you have to offer, such as personal and technical skills. Use this as a starting point as you develop your strategic plan. The profile will help you take stock of where you are and help you when you approach possible affiliation and merger partners. Include the same data you would require from your small business clients, such as

  • Your average firm billing rate.
  • The number of chargeable hours you average per year.
  • The number of hours you worked last year.
  • The number of personal, corporate, partnership and other entity returns you prepare.
  • The breakdown of total fees between service categories (corporate tax, personal tax, consulting, write-up or estate).
  • The clients or industries you bill the most.
  • A list of your top 25 clients, rated by fees, services and years as a client.
  • Any niches or specialty services you offer.
Suggested Reading

CPA Firm Merger Strategies That Work, by August J. Aquila, Allan D. Koltin and Marc L. Rosenberg. McGraw-Hill Professional Book Group, New York City, 1994.

Developing a CPA Practice: A Comprehensive Guide to Building a Successful Small to Mid-size Accounting Firm. James J. Stapleton. John Wiley & Sons, New York City, 1997.

Mergers & Acquisitions of CPA Firms: A Guide to Practice Valuation. Nicholas J. Mastracchio, Jr., CPA, American Institute of CPAs, New York City, 1998.

Mergers of Professional Practices: Managing the Process. Morden S. Shapiro. Canadian Institute of Chartered Accountants, Toronto, Canada, 1992.

Planning Kit for CPA Firm Mergers and Acquisitions. CPA Services, Inc. Brookfield, Wisconsin, 1992.

Practical Guide to CPA Firm Mergers. Marc L. Rosenberg. Practice Development Institute. Chicago, 1989.

Next, you should evaluate whether affiliating with other CPA firms will help you develop the practice and position it for the future. If you're willing to have a partner, promoting someone or merging with another sole proprietor or a larger, multi-partner firm may be a viable alternative to associations and affiliations. While developing your firm profile and action plan you may conclude that merging with another firm is your best option, even if you have to sacrifice the independence you enjoy while working solo.

It's a good idea to meet with other sole proprietors or a practice consultant to discuss the issues raised in this article. A good way to network with CPAs in your area is to get involved with your state CPA society's local chapter. Placing ads in the state society newsletter describing your interest in space sharing, affiliation or merger also will attract other like-minded practitioners. Explore these possibilities today, not tomorrow.

YOUR BEST BET
There's always the possibility that clients who left you for a large financial services companies may come back—when they grow tired of the impersonal service and proprietary product bias. They may become a strong client base for smaller CPA firms, but you can't count on that happening.

Sole proprietors will succeed if their skills match the clients' needs. Those who merge or affiliate themselves with other firms bring more services to the client's table. Now is the time to consider how an alliance or merger will strengthen your firm for the future.

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