Edward Mendlowitz – Art of Accounting: The Future of the Small Firm

By my reckoning there are about 42,000 accounting firms in the United States, and 41,600 might be considered to be small.The No. 1 firm has revenues of about $16 billion with about 65,000 people. Number 100 has revenues of $35 million with about 175 people. Number 300 has about $8 million in revenues and No. 400 has about 20 people and $3 million in revenues. That means the revenues of any of the next 41,600 firms are less than $3 million, and they have fewer than 20 people, including partners or owners. By any standard that is a small business. Most of the small firms are really small, with less than four or five people and revenues less than $600,000. I see a bright future for these firms.

At first glance, there appears to be much merger activity and consolidations among the larger firms. There are many reasons for this, but few apply to smaller firms. Two significant reasons for the larger firm acquisitions are the lack of successors and the capital base. For smaller firms, succession is not much of an issue. When the owners decide it’s time to retire they can sell their practice to one of the many capable and willing buyers. Aging owners are a natural occurrence and there’s no reason to read anything noteworthy into it.

The brightness of the future, or its bleakness, is a function of whether small firms offer a service or a value and fill a need, and I contend they do. We all like to think we offer a valuable and needed service, but that is not always necessary. Many smaller firms provide an essential service by maintaining the set of books, filing local, state and federal tax returns as required, and providing the comfort that these compliance services are being handled effectively and timely. Others do this but look to add value by offering additional analyses, data, interpretation and even predictive services, not only adding but creating value for their clients. Filling a need can often be met by providing an available and friendly ear to a client when it is necessary since many small business clients (and even some larger ones) are alone with no one to talk to, vent and share their thoughts.

Just by being there, an accountant can help. These valuable services that are either compliance oriented or value-added focused cannot really be replaced by owners or partners of larger firms. Therefore, there is a continued need and positive future outlook for small firms.

But there is more:

• Owners of smaller practices all make a living, most truly love what they do, and regardless of the sometime pressures of overloaded work and a compressed tax season, are still their own bosses and feel in control of their destiny and to a greater extent are in control of their destinies. Life is good. It might not be perfect, but it is not only good, but for these people it is probably a lot better than it would be if they were someone’s employee.

• In terms of liking what we do, I speak directly with over 400 accountants a year and a large percentage really like what they do and would not want to change. Many would like to make some changes, but not to change what they do. They really like it.

• The potential for growth is always there. It may not be realized. It may not be attempted, but it is there. That is a comforting feeling. I know that because I’ve been there. In fact The Wall Street Journal wrote an article about what my partners and I did about it. I will write this up and post it here next week.

• Most businesses are small, and the owners prefer accountants and other advisers who are experienced in their size business. They might not necessarily want someone that only works with their size business, preferring those with little larger clients since they want an accountant they could grow with and who they feel can handle that growth. However there is a range of sizes, and smaller accountants fill this need perfectly.

• Clients want a hands-on accountant, not one who is shielded with layers of staff. Larger firms cannot work that way for their smaller clients. Smaller accountants are singularly adept in this.

• Smaller firms are better equipped to respond to requests from prospective clients. The owner or partner shows up and talks to the prospect—one on one—and if they are perceptive, they look for the opening that reveals the real reason for the prospect wanting to leave their present accountant. Sure, partners in larger firms do this too, but they are constrained by their firm’s protocol of preparing proposals, projecting staffing and time, and are hesitant to offer fixed fees for fear they will be too low and face questioning or challenge from their partners. Smaller firm owners quote enough of a fee to let the client know that no matter how far off they are based on “time” they will still be adding what they collect to their bottom line.

• There are more opportunities for clients to buy additional services. This is so because many smaller owners do not push the additional services, as they are usually too busy working and meeting deadlines. This can easily change with the right mindset, so the opportunities are there, if they are reached for.

• Training staff is always a problem, but small firm owners with the right effort, approach and method can train very effectively and be with the staff person while they are learning.

There are many articles about the vanishing services offered by accountants and the outlook for a dim future. There is some merit to what is written, but I believe the essence of what the small accounting firms does is not affected. The smaller practices have great, exciting opportunities ahead, but they need the recognition, desire and ability to go after these opportunities.

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, published by www.CPATrendlines.com and “Managing Your Tax Season, Third Edition,” published by the AICPA. Ed also writes a twice-a-week blog addressing issues that clients have at www.partners-network.com. Art of Accounting is a continuing series where Ed shares autobiographical experiences with tips that he hopes can be adopted by his colleagues. Ed welcomes practice management questions and can be reached at (732) 964-9329 or emendlowitz@withum.com.