Divesting clients.

Many firms seek to offer business planning and other consulting services to clients in addition to traditional engagements, but it can be very difficult to expand these offerings while trying to meet the deadlines and other requirements involved in ongoing compliance work. Bea Nahon, a sole practitioner in Bellevue, Washington, decided that the only way to grow was to reduce firm size first. She recently sold a part of her practice in order to focus on her firm's strong points and to control the practice's future expansion.

CHANGING NEEDS

Nahon left a large local firm in Seattle in 1982 to launch her own practice, which has since grown to a total of eight members. She caters mainly to small businesses, "but that's a big wide band. For us, it ranges from part-time professional practices to multistate health care organizations. Some have very sophisticated needs. We may do their corporate tax returns, but we do consulting for them for most of the year." Her client acceptance policy was fairly uncomplicated. "If they were high-quality clients and we could serve them technically; if they came from a good referral and they could pay the freight, we took them," she says. That policy set the stage for healthy growth, but in recent years Nahon began to wonder if it was still serving the firm's best interests.

"The world has changed a lot since 1982," she says. "Clients' needs have become consulting-driven." When Nahon launched her practice, nearly all the work was compliance-based income tax returns, write-up work, representing clients at Internal Revenue Service clients at Internal Revenue Service audits and financial statements. "It was a time when obtaining an audit client was a real coup," she recalls. In the tax area, most clients were intimidated by complex tax laws and imposing forms, so they sought help from their CPAs. Tax planning meant simply figuring out how much was owed.

"Today," Nahon notes, "the tax law is still complicated, and so are the forms, but the computer literate would just as soon prepare their returns themselves. Many of those services from 1982 are no longer cost effective to render unless they are part of a larger package of long-range planning for a client."

Although practitioners now strive to serve clients' more complicated needs, that may not always be possible. "When you have a lot of clients and they keep coming back and sending their friends, you get very caught up in a compliance cycle that keeps you from growing the consulting side." Even though the profession is seeing that the demand for compliance services may eventually dwindle, "when you're constantly doing compliance services and chasing deadlines every month, you think, `I'll concentrate on the consulting work as soon as I can meet this deadline.'" But once one deadline passes, another one is always looming. "You have to break the cycle," Nahon says, "which is very hard for a lot of firms to do."

For her firm, the effort to change began with an analysis of its clients. Nahon and her staff members poured over engagements to determine what industries or types of services were most often represented. The project revealed specialties in real estate professional services firms, auto dealerships and high-wealth individuals. The firm also works with people going through a divorce, advising them on how to divide or dispose of assets in order to achieve the best tax and cash flow outcomes and sometimes assisting in the mediation process or appearing in court as an expert witness." We address questions such as `Should the house be sold? If not, what's the best way to keep it? What are the tax ramifications of difference assets and liabilities? What are their cash flow ramifications? How can we keep both parties alive and well financially?'" She has cultivated attorney referral sources in order to develop this specialty and her Web sites, which are under construction, are being designed specifically to attract more of them.

THE SALE

The firm also had clients outside of the four industry specialties and its divorce work, and Nahon decided it might be a good idea to narrow her range. With a more focused practice, it would be possible to offer a larger variety of services to clients in her identified specialties. She determined the only way to solve this problem was to sell about 10% of the practice. "They were really good clients. However, while we were working hard to keep up with all of the various deadlines, I knew that we had the ability to offer so much more for our clients. Frankly, I was worried that because we were so busy doing our work, we weren't effectively communicating our capabilities to clients, and so were risking losing some of them to the marketing efforts of other firms. I wanted to do more for the clients in my niche areas, and I didn't want to have my great attorney contacts hesitant to call me with work in February, just because it was tax season. And of course, the clients outside of my niche areas were good candidates for additional services, too, but how could I offer so much more in so many areas and still achieve great results? I couldn't." While these clients were mainly tax-oriented, they had other kinds of needs that could be properly cultivated by another CPA.

To arrange the sale, Nahon tried two approaches. First, she took advantage of service offered by the Washington Society of CPAs that allows practitioners to list their practices for sale confidentially. The society provides a description of practices for sale without revealing owners' names. She also called two friends with their own practices, and even before receiving any responses from the society, one friend offered to buy the bulk of the engagements while the other took the rest, since they suited the needs of her practice. The transition was helped by the fact that the main purchaser was looking for a new location and is now sharing space with Nahon. "For the clients, it was seamless," Nahon says. "They come to the same place, see the same receptionist. Although they know they have a new CPA, they know I'm right down the hall if a question comes up."

Proximity means nothing if clients don't accept the change, however. Nahon says that hers have done so because they are businesspeople themselves. "They have bought and sold businesses, changed careers, reoriented their lives, so they understand. Clients are human, too. We all know too many people who have been forced to make changes because their work affected their health. I feel very lucky to have made changes of my own accord." Clients have been reassured, too, by their new CPA's strong credentials and her status as the immediate past president of the Washington society.

Although Nahon would like to minimize the time her firm spends on compliance work, "I don't think we're there yet. My consulting clients still have evolving compliance needs. They may no longer want me to do their general ledger, but they still need me to do those corporate tax returns." While she sold compliance clients in industries that were outside her main niches, she believes a complete move away from traditional services must be gradual. In addition, compliance work adds to her credibility in some consulting services. "If you want to testify, as I do in the divorce niche, you should roll up your sleeves and do some of the work. Otherwise, I think your value is diminished."

Nahon says it is difficult to gauge immediately how the realignment will affect fees. "We did projections before the sale, of course, and we believe that overall our total fees and more important, our total profits, will increase. We also look forward to having a level workload year-round. For the first time in several years, we are not adding temporary staff for tax season. And tax season will be a peak rather than a crisis. I think it will take a year -- one full business cycle -- to know the effect on fees. But we have the talent, the marketing and the availability, so this has to be a winning decision."

WHY NOT EXPAND?

Another option for firms in Nahon's situation might be to expand in order to develop client services while retaining traditional work, but she rejected this possibility for two reasons:

1. Like many sole practitioners, she likes to run her own show. "I function better managing an organization that is the right size for me, and there's a limit to how much you can manage in terms of administration and assuring a quality product. Also, I don't think I'd make a good partner. I accept input, but I need to win."

2. There has been a dearth of good staff in the last few years. "Finding quality staff is more challenging than I ever remember," says Nahon. She attributes the undersupply to entry-level hiring cutbacks at some of the largest firms several years ago, which translated into fewer people entering public accounting. In addition, in Washington State, many bright college graduates surge to companies like Microsoft. "It's best to stick with the quality staff you have," she concluded. In her last search, it took over a year to find a good person, and she finally hired a very successful staff member who had three years of industry -- rather than public -- experience.

PLANNING AND INPUT

Nahon advises practitioners to invest time if they mean to shed part of their practices. She spent one year analyzing the industries and the services of her best clients, her sources of revenue, the nature of the services she performed, her deadline cycles and how to flatten them out. Another tip is to involve staff in the process in order to gain valuable input and to ensure they understand and buy into the project.

To keep a healthy practice thriving, "you have to change," she says. "It's better to approach it with good planning and with the help of your staff."

EXECUTIVE SUMMARY

* It can be difficult for small firms to increase their business planning and other consulting services while trying to meet the deadlines and other requirements involved in ongoing compliance work. Bea Nahon, a Washington sole practitioner, sold some of her practice to focus on her firm's strong points.

* Nahon and her staff analyzed clients and found concentrations among real estate, professional service firms, auto dealership and high-wealth individuals, as well as a niche in divorce-related litigation services. Although she had good clients in other industries, she ultimately decided to shed about 10% of the practice.

* A confidential listing service offered by the Washington Society of CPAs, as well as networking among friends and contacts, were used in the sales effort. Nahon chose not to expand because she likes to run her own show and due to a dearth of good staff in the last few years.

* Good planning and enlisting staff in the process are keys to success, according to Nahon.

Firm Profile

Name: Bea L. Nahon, CPA.

Year opened: 1982.

Location: Bellevue, Washington.

Total personnel: Eight.

Number of partners: One.

Number of CPAs: One, plus two candidates.

Area of concentration: Real estate, professional service firms, auto dealerships and high-wealth individuals; divorce-related litigation services.

Gross Fees: $600,000.

Percentage of fees in (as projected, after the sale)

Compilation/Review: 10%.

Auditing: 3%.

Tax: 44%.

Consulting/Litigation services: 30%.

Property management: 10%.

Assurance services (eldercare): 3%.

Types of clients: Nonpublic companies and individuals.

Advertising and marketing programs: Web sites under construction; a nontraditional series of brochures developed in-house; service on the boards of not-for-profit organizations.

Best thing we did in the last five years: Transfer a portion of the client base to allow us to change the practice's focus.

Worst thing we did in the last five years: In a tight employment market, hired people who seemed promising but "who could not think beyond the numbers. We would have been better off to have kept looking."

How the practice will change in the near future: Greater emphasis on consulting services.