Private equity in accounting: 3 common pathways to explore
Private equity investment in the accounting profession is moving rapidly. Discover the three most common types, including examples from firms across the globe.
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Depending on your firm’s situation, you may have considered acquisition by a private equity investor. Anyone who has been through the process—or even just considered it—will tell you that it’s not a simple decision.
Your firm may be lightning-efficient or could be experiencing some kind of dissonance. It might be traditional, or it might be modern.
Regardless, private equity (PE) investment into the firm can bring a wealth of benefits and improvements—it’s just about finding the best type of acquisition for you, based on your firm’s nuances.
A great place to start is with understanding the current landscape of private equity in accounting so you can decide if it’s a path you want to pursue.
Why is PE interested in accounting firms?
In a recent webinar, Founder and CEO of Thriveal CPA Network, Jason Blumer, shared valuable insights into the global rise of PE investment in the accounting industry.
He started by clarifying that accounting is just one of many industries that investors have set their eyes on.
“This is not something we are dealing with and navigating alone. New operators, new capital, new ideas; it’s this kind of competition that levels us up as a profession,” he said.
So what makes the accounting profession so attractive to investors?
According to Jason, it comes down to three factors:
Accounting firms are low-risk businesses. They are recession-proof and generate profits that are generally stable, recurring, and predictable.
Accountants, and the profession itself, are aging. In the past, founding partners would build their firms into large businesses and have younger partners stay for 20-30 years and buy into the firm. This would fund the retirement of the founding partners, and so on. The new generation of firm owners has no intention of doing so—and the older generation of owners now need to sell.
An alternative practice structure avoids regulatory limitations. In this structure, a CPA firm’s nonattest business and other assets are transferred or sold to a new nonattest services company, and PE investors then invest in that new nonattest services company. Advisory firms are even more attractive, as these initial limitations don’t apply to them.
Three common methods of PE acquisition in accounting
From his own experience, Charly Weinstein, CEO of Eisner Advisory Group acknowledges just how long and challenging it can be to proceed with PE investment.
“You have to be committed to seeing the benefits if you’re going down this path,” he said.
Charly also points out that it may not be for every firm—but if you’re forward-thinking and comfortable with change, it can be a great option. Jason shared a similar sentiment:
“There is no one-size-fits-all, and you can't just say it's bad or good. Everybody has different experiences and it all relates to what you want and what your goals are.”
Here are three types of PE investment to consider. It’s important to note that this isn’t the entire PE landscape, but instead, some common scenarios happening in accounting right now.
1. PE firms purchase and modernize large, traditional, partner-based firms
Allan Koltin, CPA, CGMA, and CEO of Koltin Consulting Group has been at the center of some of the largest recent investment deals in the US. He states that “Of the top 20 public accounting firms, more than half are in some type of transformative discussion—and a big part of that involves private equity.”
With the resulting injection of funds, PE may be the perfect catalyst for change in a traditional firm looking to modernize its systems and processes and tackle the accounting industry’s biggest challenges: growth, talent, and technology.
According to Jason, PE investment into large firms usually plays out like this:
PE firms target the largest, most profitable firm ($10+ million revenue)
Upon purchasing, they lower partner pay and restore some of the firm’s profitability
They then ‘lean out’ the firm by cutting staff, clients, and resources
Firms that have gone through this type of investment include Grant Thornton and Baker Tilly.
With $2.4 billion USD in revenue in the financial year ending July 2023, Grant Thornton is the seventh largest accounting firm in the US after the Big Four, RSM, and BDO.
An investment from New Mountain Capital will be used to prepare the firm for growth, returning capital to current partners, buying out retirement obligations to former partners, and building a war chest for investment.
“We’ll enjoy greater scale, resources, and agility, while better positioning the firm to make targeted investments,” said Seth Siegel, CEO of Grant Thornton Advisors LLC.
Top 10 advisory firm, Baker Tilly, agreed to a $1 billion USD cash injection from PE firms Hellman & Friedman and Valeas Capital Partners. As part of the investment, Baker Tilly was restructured into two entities: Baker Tilly Advisory Group LP (business advisory, tax, and other services) and Baker Tilly US LLP (attest services).
“With this transaction, the firm will be in an even stronger position to grow and invest in our business to create new opportunities for our talented team members and valued clients,” said Jeff Ferro, CEO of Baker Tilly Advisory Group LP.
2. PE investors purchase firms and allow them to retain independent brands
Maybe you are happy with the way things are going in your firm. You operate efficiently, have a satisfied team, and have enjoyed healthy levels of growth. You may be asking yourself: why would I entertain the idea of PE investment? Jason explains:
“Some [firm owners] want investment but still want to own, some are fiercely independent, wanting to maintain their partnership with their group, lead themselves, and not be owned.”
If this resonates with you, you may be open to PE investment. In most cases, firms can maintain independence and operate on their own, while enjoying the added funds, strength, and effort brought to them by their new investors. Added funds typically mean:
More appropriate pay for owners
The capacity to purchase and implement robust technology
Breathing room to diversify service offerings
Jason wraps up the segment with some reassurance:
“Sometimes these PE investors will retain these firms rather than bundling them up and selling them off, which is what we saw from PE initially,” he said.
Acquiring independent firms is a longer-term investment, allowing the parties to grow with the profits and removing the upheaval that comes with other kinds of acquisition.
For example, PE firm Alpine Investors, launched Ascend, a platform that invests in and supports the best regional CPA firms in the US. The model seeks to retain the firms’ independence while providing them with access to capital for investments in talent, mergers and acquisitions, technology, and other elements of their growth strategies.
Ascend’s investment in Opsahl Dawson, an accounting firm in the Pacific Northwest, saw the firm split in two: Opsahl Dawson & Co. PS, an independently owned and licensed CPA firm that provides attest services, and Opsahl Dawson & Co. Advisors LLC, which provides tax and business advisory services in an alternative practice structure.
"With Ascend as our partner, we can now expand our reach," said managing shareholder Aaron Dawson. "I am confident that we will far exceed any growth goals I had ever envisioned achieving alone and this will translate into wonderful career opportunities for our current and future team members. It will be a thrill to team up with the best firms in the country, break barriers and lead accounting into the next generation together."
3. Investors purchase a main, strong firm, enabling that firm to absorb smaller firms
“Our industry is set up to burn people out, but over the last decade, it had gotten to its max peak—before we even hit the pandemic. Now it’s gone through the roof.”
This quote from Jeff Phillips, CEO of Padgett Business Services and founder of the recruitment firm Accountingfly, emphasizes how intense the workload can be for smaller accounting firms—especially for firm owners in the $500,000 revenue range. In Jason’s words, they are simply “worn out”.
These are the firms that are ripe for acquisition by slightly larger firms approaching $2-5 million in revenue. Investors likely want a majority or whole stake in these slightly larger firms, providing a healthy cash injection to help in the acquisition of the smaller, overworked firms.
If you own a firm approaching the $800,000–$1,000,000 revenue range and want to pursue this type of private equity, it’s time to start operating like a larger entity. Establishing leadership roles, your tech stack, and processes should be at the forefront of your expansion planning.
An example of this PE pathway is Platform Accounting Group.
Platform Accounting Group is a collection of professional services firms designed to “preserve the dynamics of small firm cultures while incorporating the technology and connectedness of the 21st century”. In early 2024, the group secured $85 million USD in funding led by Cynosure Group.
With these additional funds, Platform are continuing their mission of preserving the dynamics and autonomy of small office cultures, while providing them with staff, enterprise-grade technology and processes, and best-in-class operational support.
Hear what industry experts have to say about PE in accounting
The decision to move towards PE isn’t a simple one. It has its pros and cons, and different people have had diverse experiences with the process—so why not hear from them directly?
In this video, Jason is joined by Karbon’s Ian Vacin. Together, they cover the topic in greater detail, with expert commentary from professions with direct experience in private equity in the accounting profession:
Reyes Florez of Platform Accounting Group
Gretchen Robers of Red Bike Advisors
Chris Williams of System Six