Accounting for Success
with Sam Coulter

A Knoxville Business Movers and Shakers interview with Coulter and Justus accounting firm Principle, Sam Coulter

During the course of this interview, we discussed Mr. Coulter’s business history, and that of C&J; the importance for small business owners to understand accounting, or having someone on your payroll who does; the TVA-Oak Ridge-UTK technology corridor, and more.

We begin with the history of Mr. Coulter’s firm, Coulter and Justus.

When people think of CPA firms, they think of tax practices, but C&J is really a bunch of small businesses that do different things. We have an audit practice, a tax practice, information services, a business valuation group, and a financial services group. So there are really 5 small businesses here. We operate together, but each group has its own manager and plan and sales forecast.

What’s the definition of a small business? Isn’t it ‘anything under 100 million dollars,’ or something crazy like that? That has to be an accountant's definition!

Well, that was the Ernst and Young definition, and they're one of the largest accounting firms in the country...which brings me to a funny story. I started with Ernst and Ernst in 1969 when I graduated from UT, and became a partner with them 11 years later in 1980. I was a partner with them until 1993, when they wanted to “exit the Knoxville market.”

But before then, they called me from Atlanta and said they were starting a unit within our company that was for small business accounting practice. And I asked them, “well, what’s the definition of a small business?”

And they said, “They’re less than $100 million in revenue, they’re privately owned, they’re not reporting to the SEC, and they typically have an owner-operator.”

And I responded, “Well, we are a small business practice. That’s our market.” For a few years after that, we operated as a part of the small business accounting practice in Ernst’s Atlanta office -- Small business by their definition!

But we’ve diversified since then. We audit Baptist Hospital, we have audited Knox County Schools, we audit a huge trucking company in Greenville; so we have some clients that are over $100 million, and we have 5 SEC-reporting companies, but the vast majority of our accounting clients are small businesses.

Is that a lot more accounting work to do financial reporting for a SEC-reporting company?

Yes. Everybody thinks they want to have a public company, but practically no one should have one. It’s not a gold mine, and it’s so, so much reporting. I’ve seen businesses with a million dollars in revenue go public, and you have to ask “why?” Because after all the reporting and account's and attorney’s fees, they’re paying more to be public than they’re making personally.

What accounting advice do you give to small companies?

The hard thing about a small business and about starting a small business is that you really should go see a lawyer and an accountant first, but people feel like they can’t afford to.

Do you think there’s a specific point in time when somebody starting a small business should say, “Okay, it’s time for me to talk with an accountant and lawyer and take a legal form?”

Well I think it’s Day One, because of the legal liability. I think you’re really running bare until you’ve got that legal protection wrapped around you.

Unfortunately, business is not simple, and one size does not fit all. So you don’t want your friend or your stock broker telling you what type of business you should be in.

You need professional business advice from an accountant and an attorney to make the decision that’s right for you.

The most important decision people make related to this is what legal form your business is going to take. You can be an LLC, a partnership, a C Corp, an S Corp, a sole proprietorship.

The two things you want to look at to make this decision are:

1. What’s the legal protection you need?
2. What are the taxes you have to pay – federal and state – for each form?

There are forms that are more popular, but they don’t work very well for some businesses. So it’s really worth a thousand dollars or so to talk to a lawyer and an accountant to figure out at the very least what form you ought to be.

I think the hardest thing we see is that there’s a lot of failure in start ups. I don’t know what the percentage rate is, but it’s something like 80 or 90 percent. What we see most commonly is a person who has a really good idea, but they have no idea how to run a business; and they don't understand the crucial importance of maintaining accounting records.

These days, typically it’s a scientist with an invention or an idea, and they’re very intelligent, and they think the business side of things is going to be easy. Because those business administration types, you know, they’re the ones who couldn’t make it in the scientific world!

But they get killed when they get into business. Maybe they don’t choose the right business form, or they don’t do things well relating to running their business – like making payroll every two weeks, keeping books, and all those mundane accounting tasks that keep you afloat.

Also start-ups typically don’t have good cash-flow forecasts, and the name of the game is cash flow. You figure out the cash that you have, and how long you can live on that, plus the revenue you’re going to make. The length of time you come up with is your “burn rate.” If your burn rate is 12 months, you don’t have much time to get things fixed, or to raise more capital.

If I were going to talk to a start up, I’d say “You’ve got to have a business person on the team. It doesn’t matter if you’re a technology start up or any other kind. You’ve got to have someone with some business savvy who understands accounting and the filings you’ve got to do – all those repeat things that have to be taken care of every month.”

For example, your payroll tax returns. If you forget to file the 941, the government gets really nasty about that. A portion of your payroll taxes are the employee’s money. So if you don’t file it in time, the government considers that stealing from your employees, or at least using the money improperly. And they get very nasty. They’ll come to your house and seize your assets, or your business, depending on what your legal form is.

So there are some real dangers if you don’t do just the routine, mundane things that businesses have to keep up with every month.

It seems like so much to keep up with, such a large expense up front to have somebody else in a small business run the business and accounting side of things while you’re doing whatever you have to do to get your small business off the ground.

Right. Well it’s ideal to have that, but it doesn’t always happen. Many times we get involved when a small business is 3 years old and in a big mess.

They’ve gotten to the point to where maybe they’ve had enough success that they want to get a bank loan and grow to the next level. The bank wants to see their financial statements, and either they don’t have one or the ones they have are in poor shape. So they get us involved.

Accounting firms can do one of three things – one of three levels of assurance on a financial statement.

1. We can do an audited financial statement, but most small businesses can’t afford it. A minimum there is $5,000; and they can go up to hundreds of thousands of dollars.
2. We can do a review, which is a level below an audit, and it has some assurance.
3. Or, we can do a compilation to help you get your financial statement in good form, and put all your disclosures together so you can take an accounting statement to the bank. With this you look like you have a pretty good financial statement, but there’s no audit involved at all.

A lot of times when we get hired, we find out that their books aren’t in very good shape. They’ve been operating out of a checkbook -- basically, they have no accounting procedures in place. They don’t know really whether they’ve made money or not. If they have money in the bank, they think they’ve made money. If they don’t, they think they’ve lost money. They just don’t have a primary financial statement.

Would you have any accounting advice specifically for Mom and Pop businesses that are still afloat, but having serious financial problems?

Well, you put a lot of hours into a small business – a lot of sweat equity – it isn’t a 40 hour work week. I think the last thing you want to do is think you’re doing okay, and then find out, “I really haven’t been so successful after all.”

You can have a businessman who thinks he’s successful because he has money in the bank but then he gets an accounting firm to prepare a financial statement, and he says, “Oh, I have to depreciate my assets, and that means I’m operating at a loss?” or “I didn’t know I’ve accrued all these liabilities that I haven’t paid yet.” In other words, Accounting isn’t second nature to people.

A great resource is people who have worked for big accounting firms and then gone on to have their own business. They have a ton of knowledge, and they go into businesses that can’t afford a full-time accountant and charge maybe $50 or $75 an hour to do things like review their books and make sure they’ve paid their payroll taxes. It keeps the train on the tracks, so to speak.

What if a small business owner hasn’t yet chosen a legal form for her business, because she’s just getting started?

Well, that person has a legal form. You’re operating as a Sole Practitioner, which means you file a Schedule C in your 1040. You could have self-employment tax to pay, and at the end of the year if you show a profit, you could be surprised by extra taxes. But then again, you might be surprised by the number of things you can deduct for your business. And small business owners also need to remember to save their assets with a legal form that offers the appropriate protection.

As a corporation or LLC, only the corporate assets are at risk. And the secret there is, you don’t want to have many corporate assets. I mean, look at this accounting firm. We lease this space. We own the furniture, and the computers, accounts receivable, and that’s about it. So a lot of times you’ll be much better protected if you’re in a corporate form.

Do you have a favorite memory of when you were getting started as Coulter and Justus?

There are a lot of stories there. Personality wise, with Ron Justus and me, is a good one.

We were called to Atlanta to be informed that they wanted us to buy this accounting practice. Ron is the ultimate optimist, and it’s great. It’s really taken him far. And I am the realist. So on the way back from Atlanta, I just really felt like my life had ended. I’d been with the firm for 24 years, I was the managing partner of the office, and I had the rest of my life planned out. So I was almost physically ill. And Ron was like, “Man, we have got to do this! This is such a great opportunity!”

Looking back, it’s funny. And he was right; it turned out to be the best thing that’s ever happened to us. The practice has flourished since 93; we’ve gone from about 18 people to about 70.

And there are several things that made it work. Part of it was knowing the business. We knew what we were doing – the marketing and the accounting and other services. Another part was being able to make local decisions that make sense for this market.

We were probably 70% audit work and 30% tax in 93, and Ernst would not let us do anything else -- nothing but accounting. We could not have a business valuation group; we couldn’t have an information systems group; and none of the big accounting firms had financial services as part of their business back then. But even if that had been part of services offered, we couldn’t have had it, because it wasn’t part of what they wanted to be our “critical mass.” So again, just being able to make decisions that make sense for this market has been a big part of our success.

For instance, when we got into business valuation, there was no one in Knoxville who was doing it, and one of our former partners called us up and said, “I’m leaving Atlanta, and I want to come start a business valuation group with you in Knoxville.”

We decided to give it a try, and we now have five people in that group. Plus we’ve just moved into mergers and acquisitions, so now we can start collecting success fees for that.

What are the reasons people come to you for business valuation?

There are a lot of reasons why you would value a business.