Are my concerns legit?

My parents own two businesses that they’ve worked to build since they came to this country over 30 years ago. The first is an accounting firm (dad is a CPA) and the second is a real estate investing and management company.

The accounting firm brings in over $500k net a year while the real estate business brings in around $1.5M a year net. I’m the only one in my family who is capable of taking over these businesses and while I should be content, I have many concerns and was hoping to get some feedback from you all on whether or not these concerns are warranted.

75%+ of our clients in the accounting firm are involved in the oil/gas industry (predominantly gas station owners/operators). That’s a lot of concentration in one segment and my concern is that, should there be a sudden shift or even just a steady shift over the next decade towards electric vehicles (most likely), these businesses won’t survive which in turn would impact profitability of the firm.

My second concern is that many of the clients are not tech savy. As technology progresses and becomes more pervasive in our lives, I can’t help but feel many of these people will be left behind or their businesses would suffer as a result of not adapting to emerging technology. This also applies to us as well; I’m not sure how much of what we do will be disrupted by technology but I’m betting that a lot of it might be since so much of accounting is repetitive, stationary work, especially things like payroll and financial statements.

My third concern is that many of these clients will be aging out within the next decade and it appears they don’t have members of their families to take over the businesses for them so there is a deadline looming for some of these clients purely from an aging perspective.

I don’t have too many concerns with the real estate business although our largest asset was basically dead this year since it was shut down due to COVID so that will have to be something we must address in the future. Deciding on acquisitions for the future is what is really on my mind most.

I never really woke up thinking I can coast because I’m inheriting these businesses. I’ve been working with my parents for only the past 5 years too so I’m not a seasoned veteran by any means but given my concerns above, I feel as if I need to start something on my own on the side, another source of income in an industry/industries that are more “up to date” as in digital, tech, online, etc. If at least the accounting firm is going to take a hit over the next ten years, I can keep milking that until I can’t squeeze any more out of it but at least I’ll have other income sources. Alternatively, I can focus on acquiring more tech-related clients and maintain the accounting firm that way. Or I can slowly shift my attention to real estate over the years and keep building that up.

I’m open to any thoughts, comments, etc. Are my concerns legit or am I thinking incorrectly on this? What would you all do in my shoes?

 

Thanks for the reply Phat.

The firm is actually self-sustaining in terms of new clientele. Each year we get a handful of new clients purely by way of referral and have lost very little clients over the years. We have never actively pursued obtaining new clients since all of our time goes to running the businesses and up to this point, we've been okay with referrals trickling in. Perhaps now is the time to start actively finding new clients, especially in other industries.

I think my dad was eventually planning to sell the CPA practice at some point but that was before I hopped on. 

 
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If you haven't, do a formal SWOT analysis on the overall business and then each segment independently. My inclination is to tell you that you should focus more on the threats to your real estate business, it's 75% of your profits and clearly under pressure. The CPA side is one that, sure, may fade over time but you have profits and more time to consider strategic alternatives. 

You should also speak with your parents, and determine the extent to which you care about their view, on the goals of the business. Maybe understand where they see the opportunity, threats, etc. to help you base your own. They make help you answer some questions, or think of alternatives you haven't already. It'll also help you anchor yourself as to where you need to spend your time. 

The CPA side is one where you will want to consider the risk that, if you aren't a CPA, you'll need someone in that seat - whether there's already someone or not I've no idea. But that's one where you should really try and think about how to expand your client base, are there new markets you can enter, advantages you have, smaller ones you can buy out - or just punt it to someone interested in that book of business. It's much like a law firm, right? At a minimum, to scale you'll need more CPA's and you have profits today that you could use to acquire other sole providers or otherwise. At a minimum - you have clients now who can refer you, maybe ask for their buddies in other industries? Lots of options. 

 

Thank you Addinator.

Good call on the SWOT analysis. I have addressed my concerns with my parents from time to time, but we don't see eye-to-eye on many things. They don't see electric cars as being that much of a threat, at least not soon enough to be a cause of concern for the oil industry. My parents are also not very tech savy and are more/less unaware of how tech is finding it's way into many industries. Maybe I'm overreacting about all this so I haven't ruled out that I could be the wrong person here but I'd almost rather be paranoid and establish fail-safes just in case, even if they turn out not to be necessary any time soon. 

I'm an exam section away from getting my CPA license. I figured it was a prudent thing to do, at least for the time being, relative to the overall success of the business. I think to scale initially we'll need people to eliminate the more menial tasks since those take up so much time, purely from a mechanical stand point. From there, more CPA's would be an option but having "outsiders" enter the business is another thing my parents and I don't agree on.

Agree with you on the real estate and I don't mind spending more time there as I love the industry. While the rest of our properties are doing great, when your largest asset gets taken out, ever if it's temporary, it's cause for concern.

 

Have you considered exit planning/transaction advisory for the CPA clients? I know a guy who sold 30 McDonald's franchises - people who own them tend to own more than one or two. CPA firms commonly offer consulting services (like setting up POS systems and doing other things to make a gas station sellable). 

The real estate one might be dead in the water or a money printer for life. Depends on the details lol. 

If I were you I'd do it!

 

Hi Donnie. We do offer consulting but shockingly, it's the one thing we offer that my dad hasn't monetized (facepalm). Much of our consulting is focused on business optimization, investments, helping clients buy/sell businesses, etc. To me, it's the most enjoyable part of the business and definitely has much more room to grow if we actually committed to it. My dad has just had it just as a free service that you get when you sign on as a client.

Our properties are spread out over a few dozens residentials and commercials. Our biggest asset, an LA Fitness, was doing great until COVID of course. They haven't filed for bankruptcy yet, but if they do, they'll definitely go after the rent. How much of a reduction they'll want, I'm not sure but I'm assuming it'll be quite a bit. We actually were wanting to sell the property well before COVID happened but unfortunately we didn't act fast enough. If we sell now, we'd probably sell it at a loss. Regardless, we own all of our properties free and clear. I'm wanting to expand things outside of our state, however, since all of our properties are here in California.

 

I would stay the course on the real estate, we can't stay locked down forever. And especially in California, there will always be demand for space. 

What stops you from monetizing the consulting practice? If you're already doing it, you know what you're doing and you can get customers. I work in consulting at a CPA firm so I know exactly the situation, and it's a good one to have. There's a book called Value Maps by Warren Miller, I don't know how widely known it is but it's one of the best resources I've ever come across. And it's super specific to your situation. 

 

on the gas station thing, I don't think your concerns are legit so long as my memory serves me well. I seem to recall that the vast majority of gas station profits are not at the pump but inside (kinda like how movie theaters don't make any money on tickets, it's all on concessions) and I find it hard to believe that just because emissions go down that people stop coming to gas stations/c-stores. on the contrary, perhaps they'll be come hubs for people to hang out while charging their EVs.

others have said good things about the CPA business, and the business evaluation is similar to how I'd approach valuing someone's PWM practice - average age, growth potential, referrability, and so on.

on the lack of tech savviness, I wouldn't worry about it too much. I've got clients who are software developers for major tech companies that still use a CPA, they have the intellect to do it themselves they just choose not to. so long as you're being holistic, proactive, and communicative, you're gucci.

on real estate, I'm not the best one to ask, I have an inherent bias against RE investing and so I'm not an impartial opinion there

 

Thanks for the reply brofessor. You are correct in your assessment of gas station profits in that much of it is derived from the c-store which is why most of our clients have actually done better this year. Their c-stores have been swamped by people buying food, alcohol, cigarettes, lotto, etc. while fuel margins have been low.

I'm doing my best to acquire more broad skills/knowledge so that I can be more holistic and proactive. I definitely don't think I can just get my CPA license and coast. 

 

Big oil have sold off most gas stations they operated themselves, they have limited ability how the future will change the business model. If the owners / franchisees turn them into EV charging centers they may lose out big time. It is not entirely clear at this point that gas stations won't make it.

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It's tough to say how the industry will evolve. I'm hypothesizing that charging stations will not be nearly as ubiquitous as gas stations. From what I understand, it's more feasible to charge a car in a parking lot or at home over longer periods of time. I suppose it remains to be seen how the technology evolves but as you have said, it's not entirely clear yet.

 

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