accounting firms face up to private equity

it should be a record year for m&a.

by allan koltin
the rosenberg map survey: national study of cpa firm statistics

if the last 12 months was the “calm before the storm,” the next 12 months will be the start of the storm! i think we will see some of the big 4 entering into a “conscious uncoupling” and tax planning and consulting going “left” and assurance going “right.”

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i also think we will see some of the big 4 firms truly coming together as one global firm. today we have global brands but the firms operate as separate partnerships and don’t operate as one firm when it comes to partner compensation or decision making. i think this will change and ultimately a majority of the top 10 firms will in fact operate as global businesses. i also think we will see a majority of the top 20 cpa firms go the way of private equity (that’s not a typo!).

the capital requirements today to transform themselves (think 4th industrial revolution) are beyond that what individual partners can (or want to) contribute as capital. major investments in technology, the war on talent, new products and services, and industry and service line specialization are creating a huge challenge for firms and private equity will be there to fill this void. i’m already seeing the private equity firms moving from partnering with the top 20 to the top 100 cpa firms. fortunately, the alternative practice structure (aps) has proven successful for over two decades (cbiz with mhm and rsm mcgladrey with mcgladrey & pullen (when they were owned by h&r block). i wouldn’t be surprised to see a major technology or wealth management firm start to acquire cpa firms (yes, cpa firms!) in the next 12 months as well.

one should expect to also see a record year for cpa firm m&a – don’t be surprised if more mergers among the top 500 firms take place in the next 12 months than any 12-month period in the history of the profession! the big unknown is if there will be a major recession but one can’t forget we had a recession in the first two quarters of 2020 and ended up having a great year.

i’m not sure the war on talent is going to get any better. i’m already seeing firms “doubling down” in their recruiting strategies (and investments) and in moving “star” talent through the career path to partnership at an exponential rate (the 10- to 15-year “apprenticeship” approach just doesn’t play well today with young talent).

lastly, i think many firms will abandon their unfunded retirement approach or at least restructure it. this was great for the baby boomers but the young kids today simply won’t stay at one employer for a lifetime and large capital buy-ins will get more resistance from the younger generations.

i was gathering my comments in mid-july and would report that for a majority of the 500 largest firms in the country, the first six months of the year were tracking for another record year for profitability. the good news is that many firms finally got “religion” and have doubled (or significantly raised) their rates and shed many of their “c” or low-margin clients. while it took the war on talent to force the (long awaited) move, firm leaders came to realize that burning out a limited supply of talent was a really stupid strategy.

the “old guard” used to “kick the crap” out of employees and bring in low-margin work and claim, “it’s all bottom line.” that strategy has gone the way of the edsel! we have also seen a major spike in the number of firms investing in offshoring. simply stated, the routine and mundane work is being pushed back by the next-gen stars and it goes something like this: “once i did my 15th tax return i knew how to do one, but if you think i’m going to prepare 1,500 of them, it’s not going to happen.” the harsh reality has set in – the younger generation wants challenging work and if you can’t give it to them, they will take their talents elsewhere (sort of like when lebron took his talents to south beach!).

private equity has officially entered the profession with three top 100 cpa firms and a year later, the inaugural class of eisneramper, citrin cooperman and schellman have been doing very well in their alternative practice structures as well as with their new pe structure and partners. these pe-owned cpa firms have also turned the pricing of m&a deals “upside down” and forced many traditional top 25 cpa firms to re-engineer their deal structures and valuations. firms have also been making esg and dei a meaningful part of their strategic planning efforts and more importantly, budgeting “real” money to transform their firms in these areas.

i would be remiss if i didn’t comment on remote and back-to-office strategies. while every market and every size firm have examples of their workforce coming back to the office, the vast majority have moved to remote and occasional visits to the office. as a parent who had two kids starting this summer at top 10 cpa firms (one in transaction advisory and the other one in the legal department), i share the worry many firm leaders (and parents) have. how will the kids get the in-person training, coaching and collaboration that we used to get and how will they build relationships with peers and their leaders? the truth is we can’t grow our kids from their bedroom and we need partners and leaders to set the tone and get back to the office – maybe not five days a week but how about two or three days a week?! you already get friday through monday off so is it asking too much to come to the office for two days between tuesday, wednesday and thursday and when you’re there, spend your time with your younger talent – it’s the best training and learning they can receive!

 

posted on october 12, 2022