Q&A: The M&A wave is creating opportunity for small firms

Where do you see solo practitioners and small firm owners leaving the most money on the table?

This issue often starts with the client acceptance process. Small firms need to be very disciplined about taking on clients and engagements that fit what they do well. We live in an environment where it is a lot easier to get new clients than it’s been for years. All this M&A consolidation is creating unhappy clients, but it makes it tempting for a smaller firm to take a new opportunity even if you’re not the right type of firm for it. That being said, it’s a good business practice to invest in a new line of service, so you may take on work that you hadn’t done before because you see the potential for it to be a big part of your business. 

How can small firms stop scope creep from eating into their profitability?

Most CPA firm owners are often strong client advocates, but sometimes they cross the line and treat them like “dear family.” They tend to be too generous in including extra work in the fee when it clearly is not what was anticipated upfront. If, for example, the records come in poor shape, you’ve got to be able to either send it back to the client or clean it up and charge an additional fee. 

Another issue is how you handle that extra work. Let’s assume the CPA firm owner goes outside the boundary, and they do the work and then tell the client about it. It’s hard to get the extra fee after you do the work versus telling the client upfront. Clients need the right to vote ahead of time. 

What changes can solo practitioners make to improve profitability without working more hours or adding more clients?

Small firms have to be very aware of the fees in their market. Accessing experts like myself can provide guardrails, guidance and ranges to fall within. If you don’t have the marketplace intelligence, you can’t fix your pricing in the right way. In addition to raising the fees, it’s about the value proposition a smaller firm offers. Many smaller firms provide considerable hand-holding and personal attention. That's a strength, but that additional value needs to be reflected in pricing.

With staffing costs rising, how can smaller firms use technology, automation or outside resources without having to build everything themselves?

Inflation for CPA firms has been a real factor in the salary level for years now. There’s a scarcity of talented people, so it’s important to make sure your firm is using technology and automation at its highest level of accessibility. That’s a challenge for smaller firms because they’re multitasking a lot. One solution is to collaborate with another firm that’s already making headway with offshoring and automation. Use the same outside provider or the same process as a friendly competitor and offer to pay them a referral fee or orientation fee to receive training. These relationships can have longer-term benefits, too, potentially opening the door to collaboration or even succession opportunities later.

What should a solo practitioner put in place now so the practice — and its clients — are protected if illness or disability suddenly takes them out of the business?

None of us know when trigger events are going to take place, so I encourage small practitioners to create an arrangement with a firm they know and have vetted to act as a covering agent when a sudden emergency occurs. Ideally it’s one with which you've already developed a working relationship and is large enough to absorb the workload. Come up with the financial conditions of the deal, whether it’s an hourly fee or a percentage of receivables, then put in guardrails about client and staff poaching during any engagement. If it does happen, you need to have a price in place to be compensated for that event. 

Once you have a contingency relationship established, touch base with the firm at least annually to make sure they’re still prepared to help. Also let them know if your own business focus has changed to ensure they can still handle the work. 

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