the happier, saner, richer tax firm

it’s not easy, but it is possible.

by frank stitely
the relentless cpa

i’m back. since writing the “relentless cpa – the new 21^st century system for driving success at tax and accounting firms,” i have spoken to dozens of cpas and accountants, been called a dozen names (some of them deserved), and received a few death threats.

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actually, the death threats came from my wife, who said she’d kill me if i said “yes” to any new projects. she watches lots of crime shows, so the fbi regarded her threats as serious. i am writing this to buy a bulletproof vest for when she gets out of jail. thank you for your contribution to saving my life.

in talking to firms from around the country, i realized there are three types of firms out there:

1. firms and practitioners who are sliding into retirement, whether they know it or not
2. firms that see the need for change, but don’t know where to start
3. firms that see a clear path to the future through better practice management

i am writing this for the latter two groups.

since publishing the book and launching the clarity practice management workflow and collaboration application, i have talked to practitioners from firms of all types and sizes. my cpa firm pursued a few acquisition opportunities.

i learned that there are a lot of practitioners who are either incapable of adapting to our profession’s 21^st century changes or unwilling to adapt. that’s ok, if you are making an informed choice to retire and don’t care about realizing much in value by selling your firm.

however, i see firms that haven’t evolved, that believe their firms still have significant value. their clients are old and dying. their practices are hemorrhaging revenue or just barely treading water. as anyone who is involved in m&a knows, a desperate seller is, well … a desperate seller.

we looked at buying one firm that lost 15 percent of their clients in a year. they wanted us to pay them a fixed price for their dying firm at an asking price of 1.2 times collections. while they became educated about the multiples firms with primarily 1040 clients are getting, they never did get the concept that we weren’t going to pay them for resurrecting their client base.

our effort, our profits. buyers pay for what is, not what might be.

another firm owner told me that he hadn’t accepted referrals for five years, but he was certain he could just turn on the spigot from his referral sources. after five years, don’t you think his referral sources had moved on?

i am reminded of a line from elton john’s song, “empty garden.”

“some say he farmed his best in younger years. but he’d have said that roots grow stronger, if only he could hear …”

these firms aren’t hearing. their practices are becoming empty gardens. a couple of small practices in our area just folded up and sent their clients to us. great for us, but sad.

let’s analyze why a practice full of 65-year-old clients isn’t very valuable. is a practice full of 55-year-old clients more valuable than a practice full of 65-year-old clients? of course, the practice with 55-year-old clients is more valuable. you just know this almost by instinct. but why?

practice acquisitions mostly work as follows:

1. the buyer pays for the practice over five years.
2. the buyer works the practice for another five years.
3. the buyer sells to the next buyer in line.

will a 65-year-old client likely be around until age 75 for the next buyer in line? even if yes, will a then-75-year-old client have any value to the next buyer? the chain of selling these clients ends somewhere, hopefully not with you.

if a 75-year-old client has little value, the same client at 65 has diminished value. why would you pay full value for a 65-year-old client you won’t be able to realize full value from when you sell? it’s like buying a bond that doesn’t repay your principal.

financially, you can rate all clients very simply – by the cash flow each produces over the life of the relationship.  that cash flow is produced by two factors:

1. firm profits produced by working for the client
2. the length of time the firm receives that profit stream

this is also called lifetime value of a client. if you follow tech companies, they live and die on this metric.

obviously, 55-year-old clients are more valuable than 65-year-old clients just on that math alone. they have more potential years to produce profits for your firm.

of course, you’re thinking, “oh relentless one, you get a bump in revenue when the client dies.”

you are unlikely to get that bump. sometime before your elderly client dies, the next generation is likely to take over the financial affairs. the next generation is likely between 40 and 55 years old. if you don’t have them as clients before the transfer of financial affairs happens, they likely already have a relationship with another firm. you’ll never get that death bump, and you’ll likely lose your client five years or more before your client dies.

guess who gets that death bump? the firm with the relationship with the 40- to 55-year-old next generation. that firm wins twice. the younger clients are even more valuable than they would at first appear. they control more than one relationship.

how do i know this is how it works? over 30 years, i have been on both sides of this. having the next generation is the more pleasurable financial experience. if you’re on the wrong side of this enough, your practice is in decline.

but you say again, “oh relentless one, what about all of the referrals the elderly client will provide before buying the farm?”

whom do elderly clients likely refer? other elderly clients. whom do younger clients likely refer? more younger clients. and – they have more years to refer clients. this is like compound interest.

i can see that you’re buying that older personal tax clients aren’t as valuable as younger ones. but what about business clients?

the math works exactly the same way for business clients only worse – for the cpa with the older clients. there are only three possible exits for business owners at retirement.

behind door number one, the business just closes and you lose the client. this is far and away the most likely outcome.  most businesses never see a second generation of owner. there are lots of businesses, like real estate agents, which never sell, because they are so personal in nature.

this is also mostly true of very small cpa firms and sole proprietors. clients are loyal to the proprietor and not the firm. when a sole proprietor retires, the clients are changing relationships one way or the other. they might as well control the process.

behind door number two, we have a transition to a younger generation within the family. doesn’t this sound a lot like what we already saw with personal tax clients? if you don’t have a relationship with the younger generation, you lose the client.

finally, behind door number three, we have a sale to a third party. that third party likely has a relationship with another cpa firm coming into the transaction. not always, but mostly. again, you likely lose the client.

if your client base is old, your garden is emptying.

enough of the depressing stuff.

if you’re reading this, you’re probably not looking forward to tending an empty garden. you understand that major changes are necessary, but you may not know exactly where to start. that’s the purpose of this manifesto.

let’s start with where not to start – practice management consultants, who spent a few years in the profession and then decided that they knew everything there is to know about running a firm. most of these idiots never even made it through a full business cycle. after 30+ years, i still don’t know much, and most of the things that i know won’t be true in another five years. at least i know what i don’t know, which puts me miles ahead of these consultants.

i called out one of these organizations in “the relentless cpa.” now there’s another one that has accounting firms all running the exact same ad on facebook down to the exact amount of promised tax savings. am i trolling them? of course. that’s what i get paid for. actually, the pay isn’t that good.

i see four or five of these exact same ads every day as do thousands of other facebook users. when your desired client sees your ad and four others from other firms exactly like it, what‘s left except the laughing? there’s differentiation for you.

what i wrote in “the relentless cpa” is still true. stay away from the people with easy answers. nothing about our business is easy, from marketing to serving clients to practice management.

but we can do this – together. we can make more money, have happier clients and lead saner lives. i promise that it won’t be easy, but we’ll get there.

the purpose of this manifesto is to show you how and where to spend your time and money to make the most profitable changes to your firm. there are an infinite number of changes you could make. we’ll cut them down to the ones that give you the biggest bang for your money and effort.

 

posted on february 9, 2021