Stumbling Block to Starting your Own CPA Practice
Potential problems to starting a CPA practice include an insufficient client base and partner mismatch.
This article first appeared in The CPA Insider™.
As with any new business, a CPA practice requires time, money, energy, and creativity. By planning in advance, you can better anticipate your challenges and create solutions beforehand.
Despite planning and preparation, new practices do run into problems that can ultimately cause them to fail. These stumbling blocks fall into three categories:
- Insufficient client base;
- Poor selection of a partner or other business associates; and
- Bad choice in a practice acquisition.
From my experience advising owners, I have found that these problems usually occur because the practitioner lacked objectivity (underplanned) or was just overconfident.
Insufficient client base
An insufficient client base is the first and most critical stumbling block. Starting practitioners may unrealistically expect certain clients to come over to them. They assume the clients they took on through moonlighting, through anticipated references from friends and associates, and through their previous employment will follow them to the new practice.
This can be a really bad assumption. People don’t take switching accountants lightly. From the clients’ perspective, if they are fairly happy with the service they have been getting, switching is quite inconvenient. It requires their time.
Clients often don’t switch accountants as hoped or expected for a number of reasons, including the following:
- Clients established on a moonlighting basis may not want to use you in your own practice because of perceived or real fee increases (one more reason to never sell your services for below-market rates).
- Friends and associates, as well as referrals from these contacts, may choose not to use you because they do not want to share their personal information with you. After all, accountants are privy to some of people’s most sensitive information, including income, past business dealings, lawsuits, and tax history.
- Former clients at your previous employer who might want to use you may feel it is prudent to wait until you are established. They may also have more loyalty to your employer than you realize, and switching is a hassle.
- Finally, some employment or noncompete agreements require the purchase of clients that leave with a departing CPA.
Having a mentor or two to provide a sounding board is also a very big help. Your banker, other CPAs, and seasoned business people love to help ambitious people looking for guidance.
A mismatch with a partner or other business associate is the second stumbling block that will severely hurt your business. Because working with others requires effective communication and the ability to compromise, it is imperative to really know your potential associates. In large practices, clashing individuals can work around each other, but such polarization cannot be tolerated in small firms. Be sure you understand the personality and background of your associates and establish well-defined boundaries for working with each other.
Just as one can make a poor choice in a business associate, one can err in a practice acquisition. A poorly chosen acquisition, combined with a poorly executed transition, can turn into a nightmare. Most acquisitions that fail are the result of a mismatch of technical skill, management style, and personality. Losses also are incurred by not planning and executing the transition well. To counteract the possibility of this happening, you need to evaluate carefully any potential acquisition and weigh the pros and cons objectively.
Editor’s note: This column is an excerpt from the second edition of the book On Your Own! How To Start Your Own CPA Firm, by Brannon Poe.