when private equity blows up the cpa partnership

a new financial model changes everything – from competing for clients and talent, to planning for growth and governance.

by dom esposito and anthony zecca

with eisneramper’s sale of a stake in the firm to private equity investors, many cpa firms may be mulling the same difficult questions, such as:

• how does this change our strategic roadmap?
• what steps should we take if we want to position the firm for a private equity investment?
• how can we compete in a future without a private equity investment?

more on private equity for cpa firms: analysis by esposito and zecca: private equity the new source of growth capital for cpa firms?  |  analysis by esposito and zecca: how outside capital will remake cpa firms  |  exclusive:  ceo charly weinstein explains the private equity deal   |   flash briefing webinar: a “call to arms” after eisner private equity deal, with dom esposito and anthony zecca   |  eisneramper gets private equity backing |

esposito is author of “8 steps to great: driving success at the world’s largest cpa firms and how to apply the lessons at firms of all sizes.” more by dom esposito here.

zecca is the author of “leading from the edge – the new growth handbook with bonus toolkit.” more by anthony zecca here.

editor’s note: dom esposito passed away shortly after this article was completed. more about his life and career here.

the question is: where do you go from here?

first, let’s discuss briefly how private equity will change the landscape within which your firm must compete.

some firm leaders will sit back and say it will have no impact, or that “we are too small,” or “we are strong enough in our market.”

other firms are just not sure what, if any, the impact might be on their firm’s future success and therefore may do nothing but sit on the sidelines.

at a minimum, there will be two significant impacts on most firms from private equity’s entry into our profession:

• competing for talent and
• competing for and retaining clients.

for no other reason than those two, firms cannot afford to sit back and assume their past success will guarantee their future success.

the battle for talent

in an already difficult talent recruitment environment, firms that have private equity investments will be able to offer so much more to attract top talent – not only in compensation but also through ownership options or outright shares.  millennials will be more attracted to a pe-invested firm that can provide significantly better career growth opportunities than available in today’s partnership model.  and in today’s tight talent pool, it’s not just the best talent that will be drawn to pe-backed firms, but most talent.

as difficult as recruitment has been over the last few years for cpa firms, it will only get worse – unless firms re-think their ownership model.  firms now must consider alternate ownership structures, such as phantom stock, esops, or other non-conventional models to provide their top talent with ownership-like models without actual partnership.  a pe-invested firm can provide greater and quicker value creation for its talented professionals when compared to the traditional cpa firm model of work-hard-make-partner and wait for retirement to get full value.

firms need to rethink their governance structures and provide a seat at the table for non-partners. firms need to be creative and offer ownership like benefits and profit-sharing models that will give talent the same potential access to value creation that a pe-invested firm might provide.

it is not easy and there are many aspects to think through, but if cpa firms continue to live within the traditional partnership model, they will lose the battle for talent every time.

the battle for clients

achieving organic growth is a constant challenge and firms that have pe investments can and will be aggressive competitors, particularly within the mid-market. they will be able to offer so much more in terms of services, solutions, and talent.  this will provide existing clients a strong reason to jump ship, particularly if the current firm is simply compliance-focused.

partners have often found comfort in their long-standing relationships with their clients. and the strength of those relationships may defer the timing of a client’s decision to move to a pe-invested firm.  but only defer, as current client ceos and shareholders are aging out, just like many accounting firm partners.

whether the client’s eventual exit is via a sale or a next-gen succession, the fact is pe-invested firms will be knocking on the door, promoting the attest firm with the strong differentiator of the pe-backed advisory services. and they will win more than they will lose.

the right strategy

so, what should your strategic response be to ensure that your firm continues to be successful? the answer depends on the overarching strategic decision regarding how your firm is positioned for a pe investor or not.

regardless of which fork in the road you take, the first and most critical step is to develop the strategic roadmap that will drive your firm’s success.  what do you need to do to make your firm attractive to private equity  what strategies do you need to grow without a pe investment in your future?

the first step is developing a sound, advisory-focused three- to five-year strategic plan, regardless of the road you choose.

whether your firm’s decision is to position for a future pe investment or not, the need to address and develop a long-term strategy focused on building a robust advisory practice is the same.  pe firms will not be interested in a firm that does not have a robust advisory practice.  firms that are not interested in a future pe investment need a robust advisory practice in order to compete successfully for talent and clients.

but launching and building a robust advisory practice is a huge challenge for many firms

first, the firm must break away from the compliance-focused mindset, even though it may have been successful in the past.  then, firm leaders must come to grips with the changes required in culture, talent, motivation, career, compensation, and leadership – all while maintaining one-firm culture.

the bottom line is: you can’t build a successful strategic plan to launch and grow a robust advisory practice by following the old accounting firm compliance model. it just does not work.

re-tooling the firm’s dna

the final challenge is the short-term focus in so many firms that fails to embrace the new investments in advisory leadership, technology, and talent that have a longer return-on-investment than most firms are willing to accept.

the strategic plan must re-tool the entire firm’s dna to position it for success regardless of what the long-term objective is – pe investment or not.  the key to a strategic plan that will position the firm for success regardless of a future pe investment or not is that firms must deliver on value and not just talk about it on their website.

• firms must get the talent necessary to build a truly client-centric firm that actually delivers on the value promise to clients.
• firms must understand that their focus must be on helping their clients be more successful, which in turn will make the firm more successful.

building a strong advisory practice must strategically complement the firm’s compliance services so that value is delivered in every aspect of the firm’s service delivery.

adding value can’t be something extra – it must be lived within the core of everything the firm does if the firm is going to be able to successfully compete for talent and clients.

the strategic plan must address growth, ownership, technology, governance, talent, internal processes, client engagement, service delivery and finally leadership – every aspect of the firm’s dna.

so, prepare yourself for the impact of pe on your firms. long-term strategic planning is no longer an optional exercise for firms that want a future.

even if your firm has a strategic plan, the time is now to re-think that plan in light of the disruption in our profession:

• does your current plan drive the growth of non-attest services?
• does your plan address changes in client wants and needs?
• does your plan effectively position your firm for future success – not based on past success but on a strong grasp of what it takes to be successful in the future world we are entering?

leadership in every firm needs to look to a future landscape that may not look familiar. you cannot rely on the past to create your future success.

• firm leaders need to drive the culture of the firm away from the compliance model to a model that’s advisory-based and value-driven.
• firm leaders need to ensure that there is a strategic roadmap that will optimize the future success of the firm.

so the question remains: where do we go from here?

only time will tell if these pe transactions gain traction and are more successful than in the past.

• firms cannot just sit back and wait to see before they take action.
• firms cannot rest on their past success and ignore the transformative landscape change in our profession.
• firms cannot sit back and believe that all they need to do is to develop a faster horse and not see that a faster horse is not the answer.

the point is: our future will not look like the past.

 

 

posted on september 28, 2021