Why are private equity firms flocking to acquire accounting firms? We think someone must have sent a memo to all of the PE firms that the accounting industry is the place to be. It’s nice to be noticed by people who are looking at this industry with the steely eyes of objective, professional outsiders. We couldn’t agree more, and we’re bullish on the potential that firm ownership offers.
This year in particular, we are noticing the increasing trend of private equity firms setting their sights on accounting firms.
Five reasons why private equity thinks accounting firms are an excellent investment:
1. Steady Streams of Revenue: Accounting firms, especially established CPA practices, often boast stable and predictable cash flows. Clients rely on their services year after year, making them somewhat predictable for investors seeking consistent revenue streams with a “sticky” client base.
2. Resilience in Economic Uncertainty: The accounting industry has proven to be resilient even in times of economic downturn. Whether it’s tax season or financial consulting, businesses and individuals require professional accounting services, making these firms recession-resistant. Private equity firms recognize the value of investments that stand strong amidst economic uncertainty.
4. Scalability and Efficiency: This is where it is exciting for us. We know there is an opportunity to improve this profession in many ways. Private equity firms specialize in optimizing business operations. By infusing capital and management expertise, they can help accounting firms scale their services efficiently, quickly and profitably. They are betting that they can transform firms. By providing capital, organizational structure, and objective leadership, they see the potential for an attractive return on investment. Many of these firms intend to “roll-up” multiple CPA firms to take advantage of the economies of scale that bigger firms enjoy. Technological advancements and streamlined processes enhance client satisfaction and increase profitability – a win-win situation for both parties.
5. Client Relationships and Cross-Selling Opportunities: Trust is the currency of our profession. Accounting firms often enjoy long-term, trusted relationships with their clients. Private equity firms recognize the potential of leveraging these relationships to cross-sell complementary services. For instance, offering financial planning to existing tax clients creates additional revenue streams. This ability to cross-sell is often well understood by many accounting firms but the ability to execute can sometimes be difficult. Private equity can be a catalyst for much more intentional business development.
Is a Private Equity buyer right for your firm?
It definitely isn’t for everyone. Private equity is usually a good fit when the acquiring firm has experienced CPAs within their group. For now, this is the exception rather than the rule. Many of these firms are in a very experimental phase when it comes to this industry. Perhaps the best candidate for a PE firm is one where the firm owners are looking for a partial partner exit and/or wish to continue working as an employee or partner after the sale. An owner with several more years to work who wants to keep growing their firm, but just needs additional capital and structure to maximize their opportunities, could be an excellent candidate. In this instance, an owner could sell part of their practice now, with a formula for a later exit at a higher valuation. The hope is that the “second bite at the apple” is more than the first.
The biggest issue we face in the accounting industry is finding good people. This is a multi-tiered issue but we believe that a well-run firm has an easier time attracting and retaining good people. Private equity in many cases will come in and optimize the overall strategy, go up on fees, and probably help create more revenue and fewer working hours for a team. They will make significant changes over time, so owners need to have clear expectations of what changes are being contemplated post-close.
On the flip side, we do have concerns that some private equity firms are unaware of just how many accountants are leaving the profession and how challenging firm ownership can be. If you are considering this type of buyer, I would urge you to still be concerned with fit, and make sure you feel that the firm has a plan for any capacity constraints.
We have a large variety of private equity firms fielding opportunities with us. We see it becoming more prominent and we are interested to hear your thoughts on this! Send us an email and let us know what you think the pros and cons of private equity acquisition of CPA firms might be.
Brannon Poe, CPA
PS – Want to run a better firm? Apply for the Accounting Practice Academy workshop today. Our final 2023 workshop is open for enrollment until Oct 27, 2023. Check out the details at https://poegroupadvisors.com/accounting-practice-academy/workshop-details/