Art of Accounting: Solo practice challenges

Last week I wrote about the potential difficulties faced by sole practitioners and small partnerships in eventually selling their practices. It elicited many comments, some of which had to do with the difficulties in managing their practices, and I am addressing today.

Some readers affirmed the difficulty in selling their practices now but after speaking to some of them it seems this is not a universal situation. I wrote about the future prospects of a sale. The current difficulties seem to be either geographic or the size of the practice. Some areas where there are small or isolated towns might not have qualified buyers. That is a problem, but there are now larger firms looking to acquire small practices they could roll them up into their model of virtual management, branding and cross referrals within the system. I do not know the deals they are making and the terms, but I believe this is worth following up with if you are currently interested in exiting your practice and know of roll-ups being done. 

There are some solos with pretty large practices and those are more difficult to sell since finding the right type of buyer is harder. That is why accounting firm brokers should be engaged. They have a network of buyers and are familiar with what they are looking for and their capabilities. I also know of some instances where very large firms are acquiring smaller firms to get into a geographic area, acquire an expertise, get into an industry or service area or take on volume. I know of one “merger” where there was a terrible fit and many staff members left. Nevertheless, it accomplished the goal of the buyer, who figured out how to make what was left work and after a while it became a successful acquisition. It also added to the overall value of the larger practice. The point is that the buyers have their own motives that are not always evident to the sellers, but if the price is right and the payment pretty much guaranteed, then these should be considered. 

One reader expressed a desire to grow and was growing nicely. He asked me whether he should add an admin person or an accountant. I told him that he needed to consider where his time would best be spent 1) doing tax returns, 2) doing admin work, or 3) getting new business and setting up systems. If he chose the latter, then my suggestion was to hire both types so he could do what he really needs to do to grow. I suggested that Mr. McDonalds did not grow by grilling hamburgers but by setting up the processes for them to be made his way. He wasn’t doing admin tasks that could be best done by someone else, and if he were, he never would have been heard about. (Look, I know it was Ray Kroc, but I think he got my message.) 

I also suggested he watch the History Channel’s series of one-hour programs titled Food that Built America and start with the KFC/Wendy’s program (season 3 episode 7), but he should watch them all. There was also a movie about Ray Kroc, The Founder, that he should also watch. Of course, if he saw himself as an accountant and tax preparer, then he should save his money and do nothing new. 

Coincidentally just before this column was written, I received an email update from someone I have been mentoring for about 10 years. We spoke when he was doing some fractional CFO work for a couple of large companies and was thinking of starting a real practice but wanted to make it into a “big business.” He wanted to use his experience to build a traditional accounting practice with small businesses, a high-end tax practice and a wealth management division. He was very ambitious and focused and understood that he could not build the business he wanted if he did all the work. I do not speak with him now too often, but he sends me annual updates. 

He just wrote to say he now has 15 people working for him, will be moving into a downtown 3,500-square-foot building and has some experienced staff ready to start when that move is completed. His tax revenue increased 30% last year and is on a similar track this year. His assets under management increased each year since he started offering that service (even with the market downturn), and he is looking to add even more sophisticated financial planning. He has his infrastructure in place, is cleverly focused on growth and has the financial resources to move forward aggressively. He is clearly a businessperson who happens to be in the accounting business rather than an accountant who happens to own his own practice. He did it and so can many others, but you need a plan, the drive to do it, an understanding that you need systems, and a willingness to invest the necessary funds. Further, his investment enabled him to create an asset whose value now far exceeds the cash he put into it.

Buying a practice is a good way to jumpstart growth, but you would need an infrastructure to absorb the new work. If you can, do it. If you are very good at marketing, then a suggestion is to put your money into investing in your practice with added staff, directed marketing and the right systems.

This is a complicated area, and every solution raises added questions, but that’s how growth works. Each time I check my email I get more questions and more things to think about and share with you here. I also call some of the writers, which gives me more ideas to share. This column is not an end all, but a continuing work with more to come. Meanwhile, keep emailing me at emendlowitz@withum.com. This is getting exciting and new issues keep coming up. All real and important.

Do not hesitate to contact me at emendlowitz@withum.com with your practice management questions or about engagements you might not be able to perform.

Edward Mendlowitz, CPA, is partner at WithumSmith+Brown, PC, CPAs. He is on the Accounting Today Top 100 Influential People list. He is the author of 24 books, including “How to Review Tax Returns,” co-written with Andrew D. Mendlowitz, and “Managing Your Tax Season, Third Edition.” He also writes a twice-a-week blog addressing issues that clients have at www.partners-network.com along with the Pay-Less-Tax Man blog for Bottom Line. He is an adjunct professor in the MBA program at Fairleigh Dickinson University teaching end user applications of financial statements. Art of Accounting is a continuing series where he shares autobiographical experiences with tips that he hopes can be adopted by his colleagues. He welcomes practice management questions and can be reached at (732) 743-4582 or emendlowitz@withum.com.