Going it alone

The UK has more sole practitioner audit firms than partnerships.

The statistics show that of 11,500 UK audit firms, 6,500 are sole practitioners.

The sole practitioner is looked down upon by many. Recently a solicitor friend of mine asked if he could borrow my Members Handbook to look up the details of a particular firm of accountants; he was starting legal proceedings on behalf of his client and wanted to find out a little more about its adversary. A look of smugness appeared on his face when he saw that the accountancy firm was really a sole practitioner. He was relieved.

But hold on. It is not so bad to be a sole practitioner. In fact life can be jolly good in many ways. Apart from God and the law, the solo is answerable to no-one except to the monitoring inspector and sometimes the spouse. The solo can walk into the office late in the morning, stay longer at lunches, take days off at the drop of a hat and does not have to fill in those dreaded time sheets. The solo does not need to negotiate a second signature on a cheque or the lease contract.

No politics for the boss. The solo has recurring fees from clients who are invariably good friends. The clients hang on the solo’s every word of advice, so nice for the ego. If the solo has built up gross recurring fees of around #60,000, the bottom line can be very comfortable, thank you very much.

Being a sole practitioner is a little bit like being a bachelor or a spinster. To marry or not to marry? Therein lie the slings and the arrows.

Recently, I asked a sole practitioner, who had quit a sizeable partnership, if it is true that a partnership break-up can be as bad as the break-up of a marriage. To my surprise, he said he had actually gone-through break up of both his marriage and his partnership and he could not say which was worse for him.

The text book quite rightly says there is synergy in larger organisations.

The fixed overheads, for example, rent and wages, can be a fraction if shared by several partners. There is cover during holidays and illness.

It is not so lonely. Technical matters can be discussed with colleagues.

Partners can specialise in different fields and thereby avoid overlap.

A better image can be presented when courting potential new clients.

But, if the solo is to be pitied, why do I keep coming across accountants who are so happy to have quit their partnership to become a sole practitioner?

These quitters look respectable, sane and level headed and yet they have quit an apparently prosperous partnership. So, what about the synergy?

Why is the partnership considered a den of iniquity?

Perhaps the answer is, two is company, three is one individual hanging around two buddies, four partners is two sets of buddies, five is one individual hanging around two sets of buddies. It gets better at six – the numbers then become sensible enough for effective democracy.

Of course, any partnership is as good as the underlying personal relationship between the partners. It all depends on qualities such as tolerance, respect, fairness, politeness, forbearance, affability, give and take, kindness, and so on. As we approach the millennium, it would appear such qualities are a little thin on the ground and appear to be getting thinner by the day.

I have great respect for those partnerships that are able to function cheerfully. The teamwork would appear to pay off. It is so pleasing to see letterheads with names of several partners. The office premises are large with several rooms, if not several floors. The range of work is varied and interesting. They command a lot of respect from the local businesses, bankers, postman, milkman, et al. But if you take a look at them after ten years, they are guaranteed to have changed significantly.

At our CPE seminars, I have met many sole-practitioners whose gross recurring fees (GRF) I estimate exceeds #200,000. Such sole practitioners have exceptional qualities. Such individuals are very good at human relationships.

They are good at articulating between numerous clients, staff, taxman and other third parties. They have the vision to invest in effective computer systems and have specialised in niche markets.

They ‘enable’ their staff and do not hesitate in delegating. For that type of solo, most things work well most of the time, and with a certain amount of success too. Such solos are either born with the talent or in many cases have learnt by trial and error, and of course good CPE seminars.

Nevertheless, there will come a time when the solo’s practice will start to decline. The practice could die with the solo’s death. The recessionary pressures make the client argue about fees. The increase in the regulatory burden has made work too tiresome. The small company audit has been made so complex it is virtually unprofitable. The official penalties are a terrible hurt to the accountant’s ego. The taxman is becoming more and more difficult to satisfy, as the budget deficit widens.

So, the sole must, at some stage, try to find someone suitable to be a partner. Finding the right partner can be more difficult than house hunting.

If one partner is flamboyant, the other should be of a quieter disposition.

If one is good in tax, the other should be good in audit and accounts.

If one is a backroom person, the incoming partner should be someone with an outgoing personality.

During partnership negotiations, a written draft partnership agreement is an absolute must. Verbal negotiations are fine but the partnership should not start without a well-worded partnership agreement.

How many partners have a written partnership agreement? If they have one, it is probably out of date. Partnership agreements should be reviewed and updated continually. The clauses should be adapted to accommodate the changing needs, abilities and responsibilities of each individual partner. There is no harm in spelling out the understanding of the duties, responsibilities and the rewards of each partner as memory can and does fade with time.

I now pose an interesting question. When two sole practitioners decide to merge, it is not so difficult to work out the profit-sharing ratio by reference to GRF of their respective clients, with a weighting to resources such as equipment, software, capital, and so on. After the merger, they’ll acquire a succession of new clients. If they separate one day, which partner takes which new client?

This question worries a lot of sole practitioners contemplating partnership.

There is no clear cut answer. Perhaps the solution is the partner who serviced a client should retain that client, obviously with the client’s consent, or whoever’s goodwill brought the new client. A lot depends on the negotiations and the give and take. Unfortunately, just prior to a separation, partners are usually not on speaking terms.

In the current tough business climate, which sole practitioner has not thought of merging? But, be careful in the honeymoon stage. Before a full merger, it is best to share offices. By working together for a few months or years it will become quite obvious whether the individuals can work well with each other.

So why not remain a sole practitioner forever? Only time will tell whether the partnership is the sky is the limit or is it ‘a den of inequity’ Shall we say it is better to have tried and failed than never to have tried at all?

Jaffer Manek FCCA is a director of InPractice CPE Training, a registered auditor, consultant, writer, lecturer and the chairman of Euro Asia Pacific Accountants Group.