SMALL FIRMS NEED TO REIMAGINE THE PROFESSION – and OFFER SERVICES OUR MARKET SEGMENT NEEDS

While CPA CANADA is telling us that we need to REIMAGINE THE PROFESSION, it doesn’t make sense for small firms to simply copy the business models and service lines of the largest firms. We need to understand who our clients are – and what services they actually need.

We need to help our small business clients comply with the many intricacies of tax and regulatory compliance. We’re actually really good at that.

But small clients generally can’t – and shouldn’t – use the services of traditional business consultants. Small businesses need advice that takes into account who they actually are, what their goals are, and what makes sense for them.

WHAT SERVICES SHOULD WE OFFER

Currently accountants are one of the most commonly used and respected services in one of the largest NAICS codes in both Canada and the US. This is equally true for small business as for the economy as a whole.

1.TAXATION

In 2014 the 3 legacy accounting bodies amalgamated to form CPA Canada…

So the public – and the business press – associate CPAs with tax expertise.

In our view taxation services are the number one reason businesses seek out accountants. And they appreciate what we do. We’re not alone. In 2015 WASP BARCODE TECHNOLOGIES did a marketing study of small to mid-size businesses, primarily in the US.

Their respondents ranked their accountants as being the most important outsourced professionals to their business.

Based on the survey questions it’s clear that taxation was the key issue, at least in the minds of people responsible for designing the survey.

WASP BARCODE TECHNOLOGIES sells inventory systems to businesses with between 11 and 100 employees. While their survey was fascinating, it skewed to the larger end of small businesses. What BC STATS would call large businesses (i.e. 51 to 100 employees). Fully 33% of the respondents would be considered large companies by BC STATS. In Canada, only about 1.5% of businesses have more than 50 employees.

While 48% of the respondents outsourced audit services, if you adjust for the size of companies surveyed, only about 2.6% of small businesses required audit services.

Any way you look at it, the public values the work of professional accountants. And overwhelmingly, they associate us with tax expertise.

WHAT ABOUT AUDIT SERVICES?

But if only between 1.6% and 2.5% of small businesses require audits, and the importance of assurance services is declining, should assurance services be a key tool in our toolbox? Only about half of public accounting firms in BC offer assurance services, and it doesn’t appear to be a key source of revenue for most of those that do.

If only between 1.6% and 2.5% of small businesses require audits, and the importance of assurance services is declining, should assurance services be a key tool in our toolbox?

In our opinion audit services are a specialty – like SR&ED or Transfer Pricing. Unlike those services (particularly SR&ED), audits aren’t valued. Audit services are important – if you need them. But for most business clients getting audited is kind of like going to the dentist. It’s unpleasant, but it’s got to be done.

Also we have to remember that, if a growth company is looking to scale they want to be associated with a “branded” firm – not a small, local firm.

2. SYSTEMS DESIGN and STRATEGIC PLANNING

In our view we should diversify into DESIGN – COMPUTER SYSTEMS – and STRATEGIC PLANNING.

We should do this for 4 reasons:

We already have expertise in key skills that relate to these services
The services are generally required by many small businesses
The competition is often small and vulnerable
It provides a path for new recruits to meet new CPA competency requirements

Certainly, accountants are significant consumers of IT (Computer Systems) and have expertise as users. Much of the importance in IT relates to management – and accounting – information. Most importantly strategic planning and in particular – management statistics – align well with our existing skills. While design services are typically outside of our core skillsets as accountants, they align well with marketing strategy – and marketing statistics[1]. They are most often delivered by very small firms and can readily be outsourced to lower cost, international staff and combined with strategic planning services.

Design services are largely provided by small firms and ripe for acquisition. They align well with some aspects of strategic planning, and are widely-used by small businesses.

WHY COMPETITION FROM MANAGEMENT CONSULTING FIRMS IS VULNERABLE

The majority of small businesses are what investors would call ‘lifestyle’ businesses. Most business consultants assume that they really ought to be ‘growth’ businesses. That works for business consultants – who often provide pointless advice to feed the dream of unparalleled growth – and don’t have to deal with the costs of failure.

The transition from lifestyle business to growth business most often happens organically. For those small businesses that can successfully transition from a lifestyle business, we need to be there to help with the process. The transition can be triggered by a fortuitous discovery[1], or a new generation taking the helm of a family business. Unfortunately, the skillsets aren’t generally taught at business schools.

[1] Read Nassim Taleb’s business classic: THE BLACK SWAN

Read Nassim Taleb’s business classic: THE BLACK SWAN

Business consultants who pretend they can reverse engineer entrepreneurial brilliance are simply not credible. Over the years I have worked with angel investors who want to invest in early-stage companies in an attempt get a small piece of the next ‘big thing’. They are looking for “unicorns” but will settle for “gazelles”[1].

Most angels believe they have the ability to identify “growth” companies. For them a “lifestyle” company is a “zombie” or an “unexitable”. Unfortunately, that belief (i.e. in their own ability) is rarely – if ever justified. They also look for a management team that is “trainable”. The supposition is that they can reproduce their own business success (or luck) by bringing their management ‘expertise’ to bear on the issues facing their investee companies.

[1] Unicorns and gazelles are more or less defined terms in the business press.

Unicorns and gazelles are more or less defined terms in the business press.

While angel investors themselves may be a market for skilled management consulting services, they may not themselves be trainable.

Unfortunately too many angels believe that they can recreate their own success. Most often it was it wasn’t just greater intelligence and harder work that allowed them to succeed. Luck, timing and connections were also critical ingredients. Those are much harder to reproduce.

From my perspective they also put too much store in protecting intellectual property. It’s much more important to develop IP than to protect it.

What could be useful for early-stage investors is advice on how to exit the zombies and the walking dead that are cluttering up their portfolios and stopping them from realizing their losses.

I still remember going to Seattle with a group of Vancouver-based angels. The group leader was trying to sell Seattle-based angels on investing in a British Columbia Venture Capital Corporation (“VCC”). A VCC is a tax-assisted investment designed for BC investors investing BC companies. For US investors at the time, a VCC was what’s known as a “PFIC” (Passive Foreign Investment Company). I didn’t know what to do or say when our team lead made his sales pitch.

Still other investment groups advise early-stage companies in Canada to organize themselves as US C-Corps. That would mean that the company would not be able to take advantage of lucrative Canadian incentives like SR&ED or BC IDMTC, in an attempt to make themselves attractive to US investors. It would also saddle them with complex – and expensive – cross border compliance issues at a time when resources are the most scarce, and management should be focusing on growing their business.

Yesterday I took a professional development seminar from the Canadian Franchise Association. The content was interesting. But it was most instructive to get the measure of the attendees.

These were hard-working folks with retail businesses or restaurants. They had dreams of becoming the next AMAZON or MCDONALDS and were being encouraged to pony up hundreds of thousands to lawyers and consultants who specialized in that area. Many Canadian provinces have franchising legislation to protect franchisees. There is little to protect prospective franchisors from their own naivete.

While there is an opportunity to diversify into management consulting, we have to do it right.

No.1 Concern for CPA Firms