The Bridge: Spring 2018 | CPA Edition by Oak Street Funding

C P A P R O F E S S I O N A L K N O W L E D G E F R O M O A K S T R E E T F U N D I N GÂŽ

a first financial bank company

CPA Edition | Spring 2018

Transformation: Is it time to update your brand? Page 6

Expansion: Debt as a tool for growth Page 12

FEATURES

CPA Edition

Spring 2018

Publisher Oak Street Funding Editorial Director Meghan Milam

Do you have what it takes to thrive in a competitive environment? Evolve your business and take it to the next level.

6 Transformation: Time for a brand update? Keep your brand fresh to engage clients.

Expansion: Debt as a tool for growth Push beyond organic growth with an infusion of capital.

14 The Art of Attraction Are potential clients interested in your practice?

Share Your Thoughts If you have any questions, comments or ideas for The Bridge®, let us know. Email us at marketing.box@oakstreetfunding.com or visit us on social media. Oak Street Funding does not make any representation as to the accuracy or suitability of any of the information contained in these advertisements or sites and does not accept any responsibility or liability for the conduct or content of those advertisements and sites and the offerings made by the third parties. Third party advertisements and links to other sites where goods or services are advertised are not endorsements or recommendations by Oak Street Funding of the third party sites, goods or services. Oak Street Funding assumes no responsibility for the content of the ads, promises made, or the quality/reliability of the products, services, or positions offered in all advertisements.

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Contributing Editor Sharon Robbins Art Director/Designer Aidreen S. Hart Graphic Contributor Beth Winchell The Bridge is a newsletter produced by: Oak Street Funding 8888 Keystone Crossing, Suite 1700 Indianapolis, Indiana 46240 844-343-1428 Loans and lines of credit subject to approval. Potential borrowers are responsible for their own due diligence on acquisitions. California residents: Loans made pursuant to a Department of Corporations California Finance Lenders License (#6039829). The materials in this paper are for informational purposes only. They are not offered as and do not constitute an offer for a loan, professional or legal advice or legal opinion and should not be used as a substitute for obtaining professional or legal advice. The use of this paper, including sending an email, voice mail or any other communication to Oak Street, does not create a relationship of any kind between you and Oak Street.

www.oakstreetfunding.com/cpas

LETTER FROM THE FOUNDER/CEO

Destination: EVOLUTION

Whether your practice has experienced no, average or exponential growth in the last few years, it can become easy to get stuck on autopilot. Doing things as you have always done them can jeopardize future growth, as stagnation can make it harder to implement the required changes for sustained success. This edition of The Bridge is all about looking inward to determine

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which elements of your practice need a push to evolve. Is your current branding doing an effective job at communicating who your company is, how you are different and what you offer? Are you meeting all your clients’ needs, or is there something you can do to improve your relationship? Should you finally implement those strategic growth initiatives? You are in the driver’s seat. In which areas will your business better itself this year? Strategically evolving may require an investment. Oak Street Funding

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planning to exit your business, evolution should be a constant theme. We’ll get you there.

Oak Street Funding® Vision Statement Rick Dennen, Founder, President & CEO

To be the market leader in client experience for commercial financing by delivering unique and diverse product offerings through cutting edge technology and exceptional employee and client service. 844- 343- 1428 • w w w. o a k s t re e t f u ndi n g.c o m | 3

sk most people about naturalist Charles Darwin, and they’ll probably mention evolution. But the real hallmark of Darwin’s work dealt with a concept called natural selection. Through natural selection, species that adapt to the challenges of their environment achieve long-term survival, while those that fail to adapt quickly become extinct. The concept is also widely known as “survival of the fittest,” and it’s equally applicable to the world in which today’s CPA practices do business. Today’s public accounting marketplace is the most complex and challenging in history. As if the sheer number of practices competing for the same clients, and new technology-based competitors weren’t enough, there are the many regulatory and legal changes that keep CPAs on their toes.

Barriers to adaptation

While it may seem that adaptation should be an ongoing process throughout the life of a CPA practice, the reality is that owners or partners often resist those natural changes. Typically, there are several reasons behind that resistance. One of those is a mindset that believes what has always worked in the past will continue to do so in the future. That’s especially true when those strategies have been particularly successful or lucrative. However, you don’t have to look very far to see organizations that were longtime leaders in their industries and yet quickly became irrelevant. Want an example? Remember a pair of companies called Polaroid and Eastman Kodak that dominated the photography industry for decades? When was the last time you purchased or used one of their products? When was the last time you thought of either? Sometimes it’s just the lack of a compelling vision for the future. Practice owners get so focused on the here and now that they never 4 | w w w.oakstree tf un di ng.com • 8 4 4 - 3 4 3 - 1 4 2 8

look ahead to next year and the decade after that. What’s ironic about that is most CPAs counsel their clients to prepare for the future while neglecting to do so themselves. Even when one owner or partner has a vision for tomorrow, his or her fellow owners or partners may not share that vision. Finally, many people – even seasoned professionals – have a deep fear of the unknown. Rather than confront that fear, or take steps to expand their knowledge, they choose to pretend that the future will simply go away. If you’ve tried that strategy, how well has it worked?1

Offering new services

As the public accounting world experiences fundamental challenges and consolidation, one effective way to adapt is to expand your practice’s importance and value to your clients by moving beyond the traditional roles of a CPA practice. Clients are also dealing with dramatic changes in their industries and marketplaces, and they want to be able to survive and thrive, so they’re in search of innovative, trusted advice. They want more than just tax preparation and compliance services. Practices that limit their offerings to those areas may stay busy, but they’ll fill their days with work that’s comparatively unprofitable. The most valuable services accounting practices can offer – and the ones that enhance the practices’ own viability – are those which are closely integrated with the client’s own business. That means going beyond traditional roles to help clients make the most of opportunities offered by cloud computing, to become a valuable resource for complying with the ever-more-complex human resources sphere, and to address personal finance issues closely tied to business, such as retirement planning and preparing for generational ownership transitions.

Some accounting practices have spotted niche markets that have presented extensive and profitable opportunities. Examples include serving in a “family office” role by managing daily finances for high-net-worth families, or targeting clients in the growing LGBT community. Services like these give practices a unique value that differentiates them in the marketplace.2

Staff development and retention

The backbone of every CPA practice is its professional staff. Besides the knowledge held by those professionals, they sustain the relationships with clients. As practices adapt, it’s important to keep the staff involved with and contributing to the changes. First, staff involvement minimizes the chances that they may become frustrated by the changes and consider taking a position elsewhere. More important, they’re in closer contact with clients, so they’ll have a better understanding of what those changes will mean to the clients and how to best implement them. Professional development must be an ongoing process, but to be effective, it has to be thoughtful and purposeful, not a random assortment of additional classes and certifications. A CPA practice that’s focused on the long term should have the route to partnership clearly defined and shared with employees. Once established, staff members with an interest in becoming partners can clearly see what’s expected of them and what steps they’ll need to take. This approach also gives the current partners a yardstick they can use in evaluating the progress of individuals. A route to partnership shouldn’t be limited to quantitative measurements such as years of service and billable hours. It also needs to describe more subjective traits that the practice will need to grow, such as expertise in consulting, specialized knowledge, and a commitment to innovation and improvement. It’s also a good idea to consider how working with clients can be transitioned as staff members move along the partnership track. As an example, the senior partners could sit down annually and identify clients that can be transitioned to the prospective partners, along with a timetable for making that change. Another benefit of this approach is that it reduces the amount of daily client-service responsibility for the senior partners, so they can focus on more strategic matters and mentoring the up-and-comers. 3

Millennials offer an insight

You may be tired of hearing about the generational group that’s often labelled “Millennials,” but you cannot ignore the impact they’re already having upon the accounting profession. In just three years, 46 percent of U.S. workers – that’s nearly half of the workforce – will fall into that category.4 While there are plenty of stereotypes and jokes about the perceived habits and flaws of Millennials, the reality is that they have a strikingly different view of the world and very different expectations of workplaces. For example, when it comes to the factors that encourage Millennials to stay with a particular employer, one of the biggest is a break from standard business hours. According to an Institute of Management Accountants survey of top finance professionals, nearly half cited flexible worktimes as the key to keeping Millennials happy – even more important than competitive compensation. 5

What underlies those results is something that’s critical in retaining employees of all age groups: today’s workers value culture. Specifically, they place a strong importance on being able to master skills, have a sense of autonomy in their jobs, and know that there’s a real purpose to their work. They want more than a paycheck; they want to believe that they are making a difference for their employers, their clients, and their communities. 6 Those factors build a connectedness with the workplace that experts refer to as “employee engagement.” Studies show that higher levels of engagement are linked to lower turnover and higher returns. However, less than a third of employees surveyed felt that they were engaged with their workplaces, and more than half stated that they were not at all engaged. 7 In the accounting profession, the lack of engagement is particularly acute among Millennials, and much of it seems to stem from their relationship with partners and managers. Only about half of the Millennials surveyed felt that they were truly valued in their workplaces. Given that between 40 and 50 percent of the professional staff at more than 500 practices surveyed in the 2015 Inside Public Accounting National Benchmarking Report had less than six years of experience – in other words, they were most likely Millennials – that finding is troubling. 8 How can practices strengthen engagement? Helping younger professionals feel more valued and more in control of their work is a start. Staff mentoring and helping them better understand the bigger picture are key, as is helping them grow as professionals and people, and recognizing the effort they invest in their work and in client relationships. Most of all, it demands frequent and constructive communication to identify and address issues, and to allow all staff members to share in the develop of vision and the review of the outcomes. 9 Your own adaptation All of the concepts outlined here provide insight into the types of self-examination and change strategies CPA practices can use in developing their own plans for adaptation. Your practice is unique, and there may be other approaches that are more suitable. But whatever you choose, you need to do something. The profession is ever-changing, and Darwin’s wisdom will be proven again and again. Footnotes 1 TH Hood, Tom, CPA, CITP, CGMA, “The Top Five Barriers to Adaptation and Innovation,” Linkedin.com, November 29, 2017. 2 Hoffelder, Kathleen, “Staying Competitive: A Game Plan for Business Success,” nicpa.org, May 12, 2017 3 ibid. 4 Espinosa, Melissa, “Insurance: Attracting Millennials,” careerplug.com, September 16, 2016. 5 Hoffelder, op. cit. 6 McGinnis, Jim, “3 Ways to Engage Accounting Employees,” firmofthefuture.com, undated. 7 Carrillo, Castellano, and Keune, “Employee Engagement in Public Accounting Firms,” The CPA Journal, December 2017. 8 ibid. 9 McGinnis, op. cit.

When you think about your practice’s brand, what comes to mind? If you are a nationally recognized practice or part of the Big Four, your brand has likely been defined for you, but if you are an independent CPA, you have an opportunity to set yourself apart from the rest of the practices in your geographic region. When did you last ask yourself: Is your current brand doing an effective job in communicating who your company is and what you offer? To get started, let’s review exactly what a brand is, and what that means to your practice. Your brand includes a comprehensive blend of several things, including the following: • C ompany Mission/Vision: What does your company stand for? For example, Steve Jobs’ original mission for Apple® was “To make a contribution to the world by making tools for the mind that advance humankind.”1 •P romise: This is typically an extension of your company mission. What is the tangible benefit you give to clients when they purchase your product or service? •P ersonality or Voice: If your company was a person, what would be its personality? Formal? Cheerful? Serious? Sophisticated? This brand personality or voice can come across in your marketing and communication. • Logo (visual representation of your business): This is what most people imagine when they hear the word “branding.” The logo is the company’s symbol that represents the brand visually, using graphicallydesigned symbols and/or words. You can even seek to trademark your logo. • Tagline (catchphrase or slogan): When referring to branding, the tagline can be used alongside the company name and logo to represent or identify with your product, service or company. 6 | w w w.oakstree tf un di ng.com • 8 4 4 - 3 4 3 - 1 4 2 8

• Marketing messaging: The language you use in marketing materials should also correlate with your overall brand strategy. This could include the personality or tone of the content in an advertisement, your website content and printed marketing materials.

Successful Brands Start with a Plan

One way you can create a successful brand is to have a formal marketing and communication plan. A marketing plan can help guide you toward creating a memorable brand because it involves steps like analyzing your competitive landscape, identifying your ideal client, and developing your unique selling proposition (USP). From there, you can determine your mission and vision, along with the best logo, tagline and marketing messages to use in your marketing and sales campaigns. Let’s dive in further on how you can identify your unique brand through an exercise:

Uncovering Your Unique Selling Proposition (USP)

The acronym USP, is a marketing term which stands for your unique selling proposition, answers the question, “What is it that my company offers that our competitors do not?” In other words, “What makes us so unique that our clients prefer to buy from us over anyone else?” If you are not using your USP in your branding and marketing activities, you are failing to differentiate your business from your competitors. First, you need to complete some analysis on your ideal clients, so you can understand their top pain points, beliefs and values, as well as research on how you can find other similar clients. Second, think about the one benefit that makes you stand out from the rest. Make sure that your competitor cannot claim the same thing, or it’s not a unique differentiator. What problem do you solve for your client better than any other practice?

Here are some common ways you can create a USP for your business: •P rice (higher or lower): Be sure to explain why your company positions itself as a high- or low-cost provider and make this your differentiating factor. In a commodity market such as financial services, it’s easy to be tempted to lower your price in your marketing strategy to get the client. But if you truly want to step away from becoming a commodity product or service, the key is to make your practice stand out so much from the crowd that people are willing to pay a little extra to get the added benefit from your differentiator. • Above and beyond customer service: Again, this is a big selling point for CPA practices but it’s easy for you to start sounding like every other practice if you claim this USP. Instead of simply stating that you have the best customer service, tell us why by providing a few examples of how you provide excellent customer service. One way to do this might be to highlight a client testimonial or story, show how you solved a client concern in an outstanding way, etc. • Convenience (location, ordering, etc.): Do you offer a special way for Your USP clients to purchase or interact with you? Examples might be online chat services, after-hours appointments, or similar benefits. Again, think Statement: of your ideal client and their reasons for choosing you. •P roduct features or benefits (exclusive, popular or ___________________________________________________________ innovative): Don’t spend your time here describing what your (my company) policies include. Think of something extra that you offer that offers ____________________________________________________________ your competitors don’t offer, which is also appealing to your (target audience) client. This could be a new, innovative product, an app which ______________________________________________________________ makes your clients’ lives easier, or even something you offer in (your unique offering) your office that is an added benefit, such as notary service. so that they can _______________________________ As you begin to think about your company’s brand, consider (benefit gained) writing your own USP statement using the exercise above. If it’s not unique enough, ask your clients why they chose you. Sometimes this process will reveal a hidden USP that you didn’t consider. This might become the ticket toward a successful new brand! Sometimes emotion plays a part in developing a company’s USP, and these “beneath the surface” triggers serve as emotional levers that help the prospective client to buy in. Once you have written your USP statement, it’s time to create or update your brand. If your current brand does not convey your new USP, or it needs an update, now is the time. Enlist the help of a professional marketing or design practice to create your new brand, which will include a brand statement, logo, messaging, color scheme and marketing messaging. In addition, you should establish a brand guideline sheet which outlines your brand, colors, messaging and how to use it. Your brand needs to be everywhere, including on your logo, website, business cards, email signature, client invoices, marketing and advertisements, direct mail campaigns, office signage, and more. Try to establish a cohesiveness across all aspects of your branding and marketing to reinforce your mission for your prospects and clients. Stay true to your brand and strive to be distinct. Train your employees to live and breathe the new brand, and it will continue to serve you well. 1 https://www.investopedia.com/ask/answers/042315/what-apples-current-mission-statement-and-how-does-it-differ-steve-jobs-original-ideals.asp

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:industry news

Evolving responsibilities of internal audit professionals pivot towards software Internal auditors’ widely diverse job descrip-

focused on the auditor’s role with cybersecurity

tion is continuing to expand. Their reliability,

indicates that only 43% of chief audit executives

confidentiality, and precision make them ideal

believe their internal audit functions are fully or

candidates to engage with and apply software

partially prepared to react to disruption. And

to their practice. Recent reports have sought to

yet another survey found an increasing number

measure the relationship between software and

of organizations (63% in North America) are

auditors. One study found that 75% of

using data analytics in the audit process more

companies who use internal audit technology

frequently. With barriers to technology quickly

see ROI, but only 14% have an advanced

dissolving, one can expect to see more software

adoption of that technology. Another report

application in the future.

Avoid that month-end stress The disproportionate amount of time spent collecting month-end numbers versus time spent analyzing the data for the benefit of

Provide value-added benefits to your clients through writing Writing, a creative skill, may sometimes seem intimidating to CPAs who excel in fact-based communication and numbers. However, writing provides a great opportunity to connect with and appeal to your current and prospective clients. Three options for writing include: 1. Case studies: documents that describes services you’ve provided to a customer and their resulting successes 2. Whitepapers: longer documents, 3-15 pages, with the purpose of in-depth education about a specific topic 3. Articles: short educational or opinionated writings that are published by a third party Not comfortable or confident with your writing? Hire a ghostwriter or record yourself speaking and transcribe it to print. 8 | w w w.oakstree tf un di ng.com • 8 4 4 - 3 4 3 - 1 4 2 8

the organization has long been a pain point for companies. According to a survey by FloQast, this pressure to close quickly negatively impacts 88% of accounting and finance professionals. Although the month-end close is unavoidable, there are steps companies can take to relieve the stress and streamline the process. These suggestions include developing, documenting, and improving processes; considering and using automation when appropriate; and spreading out the work among staff and throughout the month.

New certificates in forensic accounting can help diversify your company The AICPA recently launched two new programs in

Overcome resistance to change Most supporters of change within an organization are met with some degree of opposition: people who are comfortable with today’s environment, excuses that there won’t be enough time or money, and concentrating on the negative “what-if’s”. However, you can recognize three realities about change: • You don’t need everyone to buy in

forensic accounting- “Core” and “Specialized” certificates. “Anyone wanting to expand his or her knowledge of financial forensics can benefit by enrolling in our new certificate programs,” says Barbara Andrews, AICPA director of forensic services. The Core certificate will cover topics including forensic engagement and management, the discovery process, and effective interviewing techniques, while the Specialized certificate covers data recovery, mergers and acquisitions, and detecting and investigating fraud.

• Change is easier with good strategy and communication • You will meet some resistance Accepting these truths and preparing responses to overcome objections can help foster the change required for a company to thrive.

To audit, or not to audit? CPAs, the accounting profession, and the clients who need them tend to either find audits essential and valuable or excessive and not needed. Increasing requirements, while improving quality, demand more time to process and complete, resulting in higher costs. Streamlining the process, while making auditing easier, may compromise the integrity and purpose of an audit. Laws and regulations may have involuntarily turned the audit process into a checklist, rather than viewing an audit as a tool to learn more about one’s business. As such, fewer businesses are opting to audit unless required. It may be time to evaluate the process and reaffirm its value to business leaders.

https://www.accountingtoday.com/news/internal-audit-profession-making-tech-advances-in-cybersecurity-and-data-analytics?feed=00000152-a2fbd118-ab57-b3ff6e310000

http://cpatrendlines.com/2018/03/11/write-way-expert-status/ https://www.journalofaccountancy.com/issues/2018/mar/streamline-month-end-close.html https://www.journalofaccountancy.com/newsletters/2018/feb/3-truths-12-responses-drive-change.html https://www.accountingtoday.com/opinion/boomers-blueprint-the-firm-of-now https://www.cpajournal.com/2018/03/01/icymi-audits-become-inefficient-expensive/ 844- 343- 1428 • w w w. o a k s t re e t f u ndi n g.c o m | 9

Get to Know BRUCE WARREN Bruce Warren is Vice President of Strategic Markets Sales at Oak Street Funding®. If you need capital to support your CPA business goals, we would encourage you to talk to Bruce. Here are some frequently asked questions that he has received from his borrowers that might help you as My bank doesn’t understand my

I don’t know how to

CPA practice. What makes Oak

bring the next gen-

Street Funding different and what

eration of ownership

is the process like?

into my practice. How

If they don’t know me, this is the first thing people ask! We are different because we understand intangible asset lending, professional practices, and what fuels them. Our required collateral is the practice itself, not your house. When we work with clients, we want to truly understand how they are going to fit in with us, and vice versa. If people want the cheapest and easiest solution and to close in a day, then that’s probably not us. We are here to build a relationship. Let me tell you a bit about my process with new customers. First, I want to find out about the clients and the history of their practice. We have to understand them because we’re not the one and done shop; we’re the ones who want to partner with you throughout the life of your business. Then I discuss more about Oak Street, and what makes us different. We have the portfolio, we have the flexibility to offer acquisition lines of credit, and we can handle all aspects of their capital needs simultaneously. Finally, the upfront process to get terms is fairly easy; it can be anywhere from 2 to 7 business days to get initial terms after they have submitted an application. Depending on the type or complexity of the funding, closing could occur 30-45 days after an accepted term sheet, but that really depends on the clients and how fast they get information submitted to us.

do I do that? I was recently working with some clients who founded their practice in the 1980s. They were ready to sell but didn’t want to sell it to some big firm, and they wanted the practice to survive through their dying days. We understand that desire. We work with our clients through those generational successions, which represent about 50% of our CPA business. For this sort of next generation transition, you have two options: staged succession funding or a partner buy-in. They’re both great, easy options, so it just depends on the structure of the loan and what our clients want. Larger practices are more likely to have a partner buy-in. For the partner buy-in, the incoming partner borrows personally, but the practice guarantees the loan; in succession funding the practice does the borrowing.

What is it like to work with the Oak Street Funding team? It’s a circus! It’s the most intense bonding experience most borrowers will ever experience, and they will become a permanent client of ours. When I work with my clients, I want to know- what’s your dream? What’s the number? Where do you want to

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be- number of clients, size, revenue? Do you have dreams to have family members take over, dreams to retire early and enjoy their retirement years? Do you dream about selling your business and calling it a day? I get all kinds of different answersmy clients want to pursue philanthropy, physical training, or travel. The process will be formative; I deliver good news quickly and bad news faster, if necessary. I’ve been told that working with us becomes the most well-informed borrowing experience in one’s life. My team and I partner with them. They don’t get a blank lender. I can boldly say that. Ultimately, our experience lending to CPAs truly sets Oak Street apart. We understand their needs, their growth, and the industry challenges, and that is what I bring to our team. Are you ready to learn more from Bruce? You can reach him at bruce.warren@oakstreetfunding.com or 317-428-3829.

Accountants and CPAs often mistakenly think they must be certified or highly trained in Business Valuations in order to perform or discuss valuations. In addition, many firms do not want to send a client to a competitor in their city or state. We do not have a typical CPA practice, we only prepare valuations and consult on value. So we work as your outsourcing partner, and keep you engaged in the process so your client sees the team effort. Our team will complete the valuation or consulting engagement, handle all the research and sign off on the engagement.

Only see 1 - 2 valuations a year? Don’t have time to keep up on the credentials and pay for the expensive databases? No problem. Our process allows CPA’s and accountants to provide assistance (minimal time) in the valuation process without being an expert!

•

100+ engagements completed annually.

•

Purposes: - Buy/Sell Agreements - Marital/Shareholder Dissolution - Gifting of Equity/Estate Planning - Exit Planning

•

Patton has partnered with hundreds of firms across the country.

Visit us at www.pattonvaluations.com or give us a call at 800-800-1776. Phone: 800-800-1776

www.pattonvaluations.com

Debt

“Neither a borrower nor a lender be,” cautioned Polonius in “Hamlet,” and William Shakespeare’s advice has gone on to form an attitude about debt that has survived countless generations. Most CPAs are financially conservative by nature, and their attitudes toward borrowing often spill over into their businesses. They avoid debt in their personal lives and do their best to steer clear of it in their practices. There is unquestionably some wisdom in avoiding debt, particularly for individuals. One of the first financial lessons most people learn is to live within their means. Taking on more debt than we can afford to repay can easily push us into a situation that spirals out of control.

Different for businesses

But debt plays different roles for individuals and businesses. In fact, when it comes to business borrowing, “debt” isn’t the most accurate term. A better choice is “leverage,” because that describes the role borrowing can play in your practice. Essentially, when your practice borrows, you’re leveraging other people’s money to achieve a purpose that will increase your wealth and/ or the value of the practice.1 In fact, the idea of borrowing is so negative to many business owners, that they make a big mistake in an effort to avoid it. When they need extra capital, instead of taking on temporary debt, they permanently give up part of their equity by assuming partners or equity investors. When you sell equity, you’re giving someone else the 12 | w ww.o akstree tf un di ng.com • 8 4 4 - 3 4 3 - 1 4 2 8

opportunity to profit from the hard work you’ve already put into the business, and you’re taking on what Kevin O’Leary describes as “a permanent partner that will bother you for the rest of your business’ life.” 2 Some business owners believe a more sensible approach to business is a reliance on organic growth that doesn’t involve borrowing. On the surface, that may seem like a better solution, but pursuing organic growth forces you to reinvest profits that you would otherwise be taking out of the business as income. It takes more time to achieve, and it essentially forces you to accept a smaller return on your personal investment in exchange for the eventual growth of the business. Careful borrowing, on the other hand, gives you the opportunity to simultaneously increase your practice’s profits and your overall return. 3

Debt can be healthy

When you use debt instead of granting equity, you don’t lose any control of the company. As long as you repay the loan on time, you know exactly what your borrowing costs will be, and once you make the final payment, the loan disappears for good. You’re left to run your practice the way you want. 4 In addition, you may be able to deduct both the interest and the principal on the loan from your business taxes, making debt even more affordable. Be sure to verify deductibility before you borrow. 5

When does it make sense?

You probably wouldn’t take out a 30-year mortgage to buy groceries. Nor should you take on long-term debt to address short-term needs. It’s important to think of debt as a strategic tool. You can use tools such as lines of credit to help you with shorter-term needs such as managing cash flow. There should be a specific purpose for your decision to obtain financing, whether that’s to buy upgraded technology, build a new office, or acquire another firm. Before deciding to borrow, create a business plan explaining your objectives and the return on investment that you anticipate receiving. Be conservative when estimating – understate expected revenues and overstate your costs – so that any surprises are pleasant ones. If the expected return on investment is significantly higher than what it will cost you to borrow, taking on debt may be strategically wise. However, you should always stress-test your plan. In other words, consider whether you’ll be able to meet your obligations if, for example, your profits don’t match your expectations. 6

Debt drawbacks

As an accountant, you know that every reward carries corresponding risks, and the use of debt is no exception. The advantages of using debt to grow your practice are offset to some degree by several points. The biggest is that you’ll be expected to repay what you owe, even if something happens to your business. In many cases, you’ll be expected to back your loan with a personal guarantee, so that if the lender can’t collect from your business, it can attach your personal assets. In addition, if you file bankruptcy, the lender will get first crack at any assets that remain. And, if the lender requires collateral, borrowing may place some of your business assets at risk. Depending on the market, the lender, your practice’s financial health, and your own personal credit history, you may have to

pay a higher-than-normal interest rate. The more you borrow, the higher that rate is likely to go. 7 Finally, if your practice becomes heavily dependent upon debt, it might be viewed as risky at some point in the future when you’re courting investors or seeking a buyer or merger partner. 8

Ways to borrow

Typically, CPA practice owners in search of financing turn to the most familiar source: that local bank officer they see at Chamber meetings. However, most traditional banks aren’t comfortable with the structure of fee-based businesses like CPA practices. Most are geared to making loans to businesses that have tangible assets such as inventory, equipment, and real estate. That’s why CPA practices will generally need to explore other alternatives. It’s important to choose the approach that best matches the needs and nature of your business. Asset-based lenders. These lenders typically provide funds that are an advance against assets such as a practice’s equipment. Again, because few CPA practices have a significant amount of assets, this approach isn’t often a practical option. Factors. Similar to asset-based lenders, factors usually provide short-term capital in exchange for an interest in a practice’s accounts receivable. They typically arrange to have clients make payments directly to them through a lockbox. Microfinance. Microloan companies specialize in making small loans (typically $500 to $35,000) to small businesses and entrepreneurs, at interest rates below those charged by business credit cards. Revenue-based lenders. RBLs typically advance an amount that’s a percentage of a company’s prior-year revenues. Repayments are normally based on current revenues, increasing as revenue climbs. 9 Specialty lenders. A growing number of CPA practices are turning to specialty lenders that are accustomed to working with the public accounting profession. Such lenders understand how a practice like yours operates, and are familiar with the nature of your income streams, so they can approach the underwriting with realistic expectations and an appreciation for inherent risks. As private companies, they are not restricted by the federal limits associated with some other types of loans.

Managing the risks

However you decide to borrow, start with a plan. Know what you want to invest in, what it will cost, and what kind of return it will provide for your practice. As a CPA, you counsel your clients about the value of risk management. Don’t neglect to use it with your own practice’s finances. 10 Footnotes 1 “When Debt is Good,” Investment Advisor, July 3, 2017. 2 O’Leary, Kevin, “3 Ways to Grow Your Cash Flow With Debt,” inc.com, April 7, 2016. 3 Scott, Mark, “Debt is a cheaper way to grow your business,” sbnonline.com, January 1, 2017. 4 Allen, Scott, “Debt Financing: Pros and Cons,” thebalance.com, March 20, 2017. 5 Kunigis, Allan, “How to Finance Your Business Growth,” thehartford.com, undated. 6 Scott, ibid. 7 Allen, ibid. 8 Kunigis, ibid. 9 Schreter, Susan, “Taking on Debt to Grow Your Business,” entrepreneur.com, undated. 10 Scott, ibid. 844- 343- 1428 • w w w. o a k s t re e t f u n d i n g.c o m | 1 3

Are potential clients interested in your practice? How long has your CPA practice been advising clients? Do you do things exactly the same way you did when you first started out? The fact that you’re still practicing would lead an observer to believe that you don’t, because practices that manage to stay in business over time evolve to meet the changing needs of their clients and their marketplaces. Taking a proactive approach to change can make your practice more attractive to your clients and sharpen your ability to compete in an ever-more-challenging marketplace. Whether that involves diversifying your skills, taking advantage of new technology, or applying new concepts to the ways you manage your own business, evolving can give you greater control over your practice’s future. In this article, we’ll look at ideas that may be worth considering – or that may inspire you to evolve in different ways.

Are clients satisfied

Studies suggest that there’s a significant disconnect between what clients want from their accounting practices, and what those practices actually offer. A 2014 Sleeter Group survey found that what small businesses want is strategic advice and help with financial strategies. Despite that, most CPA practices offer little more than basic bookkeeping, tax, and audit services to those businesses.1 No wonder another study discovered that roughly a third of businesses end up using multiple CPA practices to meet their needs.2 The Sleeter Group study also determined that the single biggest reason small businesses move to different CPA practices is that they want more proactive advice. Essentially, business owners look to CPAs to act like CFOs, offering guidance for financial analysis, budgeting, and areas like managing cash flow.3 If you haven’t taken a closer look at your practice through your clients’ eyes, that’s a good place to start. Examine each of

your clients and the services they use. Are they unaware of other services you could provide? Do they have specific operations or divisions you could support? If you identify gaps, the next step is finding a way to approach the clients to discuss the opportunities.4

Diversifying services and skills

There are a variety of skills your team probably already has that could easily be packaged into services your clients would find useful. In addition to providing additional revenue, deepening your relationship with those clients can reduce the likelihood that they’ll switch to another practice. For example, you could serve in that CFO role for clients who aren’t ready to hire a full-time CFO but that would still benefit from the strategic thinking a seasoned financial professional provides. Strategic planning is a similar service. Creating a strategic plan is simply an organized approach to examining every aspect of a business. Developing regular cash flow projections and providing management advice based upon them is an easy-to-offer service that can enhance the financial health of clients. Other issues such as succession planning, business valuation, and assistance in finding and evaluating financing are other areas in which CPA practices can enhance their value to clients. 5

Expansion opportunities

Another way practices can evolve is to expand the scope of the markets they serve. One approach involves expanding into additional geographic areas, such as neighboring communities. Careful research is needed to ensure that there are enough businesses whose needs match your practice’s capabilities. Another type of expansion is into new vertical markets. For example, if your biggest current sector is manufacturers, you may be able to pursue business among companies

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that provide raw materials to those manufacturers, or who transport finished products. Staff members may have experience in a particular industry, giving you an opportunity to target clients in that sector.6 A third option is to expand into an allied field, such as IT consulting or personal financial planning. In addition to offering more services to existing clients, that approach provides a channel for bringing new clients into the practice and cross-selling the other services you offer.

Sharpening your skills

One additional way to evolve is to look for opportunities to add to your practice’s skillset. That can include everything from becoming familiar with a wider variety of accounting software tools to obtaining additional certifications. You can encourage and provide incentives to your team for adding to their professional knowledge, such as covering the cost of continuing education or advanced degrees. Creating a plan to identify worthwhile industry and technical expertise, along with practice development tools, is an excellent starting point. The next step is determining who would benefit from that knowledge.7 That kind of growth and skill development is just as important to you as an individual professional. Whether you’re the senior partner at a practice or a staff professional hoping to move up through the ranks, evolving to meet changing needs is an excellent way to remain relevant in a changing marketplace. Footnotes 1 Parsons, Sabrina, “5 Ways Accounting Firms Can Stand Out as a Trusted Advisor to Clients,” CPA Practice Advisor, January 20, 2015. 2 “7 Value-Added Services to Expand Your Accounting Practice,” firmofthefuture.com, undated. 3 Parsons, op. cit. 4 Howard, Michael, “4 Key Tips to Grow and Expand Your Accounting Firm,” americanexecutivecenters.com; August 31, 2015. 5 firm of the future.com 6 Howard, op. cit.

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