Diversification to limit risk

One of the most basic pieces of advice most CPAs learn long before they take their first accounting course is “don’t put all your eggs in one basket.” Whether that came from your father when he told you to apply to more than one employer, or a guidance counselor who wanted you to explore multiple options, that expression provides an excellent reminder of the value of using diversification to limit risk.

Have you applied the same concept to your firm? I’m not talking about using that expression when counseling your clients about managing their finances. What I’m talking about is looking at your client base with the same critical eye for diversification. The more diverse a CPA firm’s client base, the more likely it can thrive despite changes in the economy, regulations, or any of the other factors that can potentially affect your revenues.

For example, are most of your clients about the same age? That’s not promising, because there will come a day when they retire en masse and their need for your services will diminish or even evaporate. Are all your clients from the same small geographic area? What happens if your community suffers an economic downturn such as the loss of a major employer? Will you risk losing a large number of clients? Maybe most of your clients go to church with you. Maybe they work for the same large employer.

No matter what the situation, if the bulk of your clients can be characterized as part of the same group, you’re making the same mistake a novice investor makes when he sinks 95 percent of his funds into a single stock.

Risk management

Diversifying your client base is a sensible form of risk management. You can achieve that kind of diversification through marketing efforts, but a more immediate way is through an acquisition of another CPA firm. In one transaction, you can dramatically diversify your client “portfolio.”

Perhaps you can buy a firm in a nearby town. Or maybe a firm that’s had success with an entirely different group of people. Or it could be a firm that needs diversity just as badly as you do. No matter the reason, diversifying your client base through an acquisition can be an excellent way to significantly increase your revenues while simultaneously reducing your business risk.

If you’re thinking about this strategy, now’s a great time to pursue it. As the average age of CPA firm owners climbs into retirement territory, there are many who are eager to pursue an exit strategy. Through an acquisition, you can help them solve their short-term goals while giving your own firm a healthy, long-term boost.