How to Determine Whether a Client is the Right Fit for Your Firm

Every accounting services firm wants to grow their book of business. Over time, there’s client churn, and unfortunately, some pass away, so it makes smart business sense to want to always be operating at full capacity. Plus, if your end goal is to sell your firm someday, you need a significant base of revenue-producing, vetted clients. Building this base, and being successful at client retention, takes both time and effort. 

Most firms jump at the prospect of onboarding new clients, and it can be tempting to bring in new accounts without researching them thoroughly. Unfortunately, however, it doesn't take long for these business relationships to sour and firms to find themselves in a bind. In many cases, the overall energy and time spent onboarding and maintaining these clients' accounts outweigh the remuneration paid.

In the end, this doesn’t bode well for client retention, which is why you must evaluate every client carefully to determine whether you are the right fit for each other. Doing so will spare you the headache of investing significant amounts of time into business relationships that simply aren’t going to last. 

How to Evaluate Potential Clients 

The one way to reduce the chances of working with such businesses is to exercise due diligence in accepting clients and engagements. It doesn’t really serve you to have a broad base of low-quality clients. 

The best way to evaluate prospective clients is to use your experience with previous ones to determine the attributes you should look for and which ones to red flag. It’s where a detailed evaluation comes in, and these are some steps to follow:

• Evaluate the prospect’s integrity. Personally meet with business owners, senior management, or directors of the company to determine their credibility and standing in the market.

• Ask for and always follow up with the references they provide, including bankers, attorneys, business consultants, major vendors, and customers. Verify that they did not truncate their relationship with the client because of disagreements regarding outstanding invoices or poor business practices.

• Obtain credit histories from the prospective client and determine the type of business entity their company is - LLC, sole proprietor, partnership, C Corp, or S Corp. This information becomes the basis for the other questions you will ask them. It will help you eke out crucial details such as the scope of work and specific requirements that you will need to handle their books.

• If your prospective client has parted ways with another firm, assuming their previous accountant or bookkeeper hasn't retired or passed away, the churn happens because there was some issue. If their accountant is a rational person, it means the client’s behavior or attitude was enough of a problem that they were willing to give up an income stream.

  When dealing with a prospective client who is changing firms, seek authorization to get more details about them. Some aspects to look into are their integrity and ethics, whether they pay their bills on time, their business policies and procedures, etc. 

You need to know that their previous firm can provide only limited information about the client. If you want additional details, the firm will have to obtain a disclosure statement (Internal Revenue Code Sec. 7216) from the client. Even so, the former's reaction to this particular request (and the predecessor firm’s responses) can help you determine whether the client is a good fit for you. 

• Ask the prospect more about their financial accounts, as it will help you assess how much time you would need to dedicate to reconciling their monthly statements. Apart from their business and personal checking accounts, savings, and credit cards, find out if they have leases, a bank loan, a car loan, a PayPal account, etc.

• Find out whether they are keeping their business and personal finances separate. Companies operating as corporations and LLCs have to maintain independent business and personal bank accounts by law. If they’ve been paying various personal bills from their business checking account, you may find yourself dealing with a total mess, and the client could face severe legal action. 

• Check whether the business operates on an inventory-based model or has employees. Payroll can quickly complicate matters if they haven’t used a reliable professional for the task, and you need to find out how they process it. If their business doesn't have a dependable service provider, decide whether you want to be responsible for their payroll tax schedules and payments. 

Ask yourself whether you have the knowledge and capacity to manage the task for them. Engagements involving inventory accounting may need specialized expertise. The degree of complexity involved in working with inventory can vary considerably from one client to the next, so this isn't a decision you can take on the fly. 

• Also, find out whether they are up to date on their tax filings and inquire about their income tax (and, if applicable, their sales tax.) You need to know in advance if you might be entering a vortex of neglected tax payments. Businesses that have failed to file returns on schedule might be irresponsible, unethical, or highly unorganized, so proceed with utmost caution!

Take the time to ask these vital questions before accepting any new clients. Assess them and keep an eye open for red flags like the ones mentioned above. When you vet prospective clients properly to ensure they are a good fit, you’ll find your work far more fulfilling. 

Create a Formal Process 

It’s best to adopt a systematic approach to evaluating potential clients. The right types of clients will keep you feeling enthusiastic, as opposed to the wrong ones who will only deplete your energy and distract you from providing outstanding service to the clients you value most. Formalize the process to vet clients so that you can easily determine whether you should work with someone or not. Here are some pointers to streamline the process:

• Develop a Client Acceptance Checklist – Create a checklist to document the decision-making process. It should identify what your firm deems important, serving as a written record of all the representations made by your prospective clients and why you accepted them.

• Develop an Ideal Client Prototype- Compare this prototype to every prospective client to determine whether they are the right fit for your firm. You will come across some "ideal" clients, but if you decide to accept some that deviate from this ideal, presenting increased risks, justify and document those deviations first.

• Draft an Engagement Letter- Once you have decided to accept a new client, draft a detailed engagement letter. When dealing with a high-risk client, get a committee to review the letter before sending it out and provide services only after the client signs the engagement letter. Following this process will help you cover your bases and shield you from potential tax claim lawsuits down the track. 

Evaluating Continuing Clients 

Conduct similar evaluations annually with all your continuing clients. Reevaluate even the best ones, mainly when there are changes in their management team or the financial landscape. Follow this process when they request your services in connection with a prospective or planned business transaction. 

It’s a Smart Way to Do Business

Prudent risk management is all about knowing as much as possible about prospective clients before agreeing to work with them. Forgoing client evaluation procedures can result in unwanted surprises, including unpaid fees, professional liability concerns, write-offs of billable hours, and staff frustration. Following a structured client assessment process allows you to weigh the rewards and risks of the engagement. 

Find clients who magnify your talents and will be a pleasure to work with. When you have a clear vision of what your ideal client should be like, you won't end up wasting time working with ones that aren't the right fit for your accounting or bookkeeping firm. Instead, you will find yourself working with clients that will help your business thrive.