What Private Equity Means for Accounting Firms: Thought Leaders Explore Pros and Cons

Private equity firms have been increasing their investments in accounting firms, says Isaac O’Bannon in a March 15, 2023, article in the CPA Practice Advisor. What does this mean for the future of the profession?

“The recent push by private equity firms towards investment and ownership of professional accounting practices is a sign, at least, that they see the potential to make profit in this area. This can either mean that they believe this market is intrinsically positioned to grow, or that these practices are missing blatant opportunities for revenue expansion. In many cases, the answer is likely a combination of the two,” wrote O’Bannon.

In brief, the concept of private equity investment is basic capitalism. A group of investors buys a controlling stake in a business as an investment, for the purpose of realizing gains from that investment when sold typically 3-5 years later. Of course, all firm founders have a goal of making profit, and the traditional partner role is built upon an equity stake model, but over a long and often undefined term. With private equity firms, however, the investors are generally not professionals in the specific field of the business they acquired, and usually have a short-term goal of selling the business for a profit.

There are, however, complications. According to O’Bannon, “audit firms cannot be owned and operated by non-CPAs, therefore firms that accept majority outside investment, or are hoping to attract it in the future, generally must organize their audit/attest practice independently from their tax/advisory/consulting side, allowing for PE investment in the latter.”

The first major deal by a private equity firm to acquire controlling interest in a top 20 accounting firm happened as recently as 2021, when TowerBrook Capital acquired EisnerAmper’s tax and consulting practice for an undisclosed amount. Since then, several more top 100 firms have sold to PE firms, and firm acquisition experts like Allan Koltin, CPA, who advised on the EisnerAmper deal, see this trend increasing.

Koltin provides a primer on PE in the profession, including why it has become more frequent in just the last couple of years, and where he thinks it will lead.

“The accounting profession has been in existence for 135 years, and for the first 132 years, it was steady Eddie,” he said. “Firms had two products, financial statements and tax, and then some went down the path of advisory and wealth management. The profession is now transforming due to factors such as AI, commoditization of tax services and other technologies, and capital from private equity investments can help in this transformation, and also help in the war for talent.”

Another interest for firm leaders, Koltin said, is that the current partnership model is built upon a risky premise of, “Come join us. You get nothing at first, you’ll have to revest. And in 10, 20, or 30 years from now, when you’re 65, if you’re still alive, if the firm is still here … we’ll pay you two times your earnings as ordinary income over 10 years, with no interest. That’s only like 50 or 60 cents on a dollar.” PE firms, on the other hand, see accounting firms as having much greater value and are willing to pay principals handsomely.

Over the past two years, Koltin says he has signed engagement letters with 50 PE firms, and so has a good understanding of the trends. What size accounting firms are private equity groups eyeing? Koltin says about a third look at top 25 firms with revenues at $300+ million. But even firms in the $50-100 million range are being actively targeted, and Koltin has seen firms with under $10 million revenue being acquired.

For much more, see What Private Equity Means for Accounting Firms: Thought Leaders Explore Pros and Cons - CPA Practice Advisor.