The State of Small CPA Firms

Accounting Today contacted me recently for some insights on the state of small CPA firms – which is basically the vast majority of the 45,000 CPA firms in the U.S.A.  I define a small firm as any practice with revenues under $3M, including sole practitioners.  Here are some of the topics we covered:

The demise of the small firm Pundits have been predicting this in every one of the 30+ years I’ve been in this business. This is hogwash. There will always be small firms. The main reason for this is that the CPA firm market is so robust there is plenty of room for all players.  Most larger firms have plenty of clients (this doesn’t mean they are satisfied with their revenue level) and grow every year (except in recessions).  Therefore, larger firms can afford to be choosy about the kind of clients they accept.  They usually opt for business vs. 1040-only work and larger vs. smaller clients.  This leaves a huge universe of smaller firms willing to make a very nice living on clients that are not a good fit with larger firms.

And the flip-side is true.  There will always be smaller clients that prefer the personal touch they receive from smaller CPA firms.

The biggest issues facing small firms in 2017

1. Finding and retaining quality staff. This is a huge problem for larger firms, so imagine the difficulty for small firms.  I often risk offending smaller firms by asking them the following question:  Why would a smart, ambitious young staff person want to work for a tiny firm, with limited advancement, development and compensation opportunities, when they can work for larger, more sophisticated, dynamic firms?
2. Because of the difficulty of finding and retaining quality staff, small firms have an enormous succession planning challenge. 80% of first generation firms never make it to the second.
3. Revenue growth. Because of limited resources, small firm owners are engaged in a constant battle to do practice development while finding time to get the work out.   Also, small firm owners often don’t enjoy marketing and are reluctant to do it.
4. The investment in technology  – required of all firms, not just small firms – grows every year, making it especially difficult for small firms to keep current.

CPA Firm Management & Governance is a must-read for partners who want to run their firm like a real business.  The book addresses ►Best Practices for managing and structuring the leadership group, ►how decisions get made, ►voting, ►how the Board functions, ►the role and expectation of a partner, ►the Managing Partner, ►organization structures for various firm sizes, ►job descriptions of key management positions, ►partner accountability and other issues.

Given their small size and limited resources, what services should small firms be offering?

Hands-down winner is consulting.  Small firms think they are too small to do consulting, but this is a self-imposed limitation.  Small firms need to staff up to free their time to perform consulting services.

Do you think it is likely that small firms will sell out?

Yes and no.  Statistically, because succession planning is so elusive to small firms, it is likely that many will eventually merge out of existence.  But as I said earlier, there will always be a place for small firms simply because most larger firms’ growth strategy has no provision for small clients and/or a large 1040 practice, the bread and butter of many small firms.

What should small firms invest in to stay relevant? What can small firms do to thrive in today’s competitive environment?

One of the main things small firms should do is stop acting like a small firm.  The following are common examples:

• Adopting the tactic of marketing by charging low rates. The CPA firm business, regardless of firm size, should be a higher priced/lower volume practice instead of low priced/high volume operation.  Stop accepting any client with a heartbeat.
• Small firms must avoid being too busy doing the work to focus on building a firm.
• By practicing the above, the owner(s)’ time is freed up to focus on growth, staff development and consulting.