how much? faster than the rest of the economy.
by terry putney
the rosenberg map survey
editor’s note: every year, the rosenberg map survey asks the industry’s top consultants to share their observations from cpa firms across the country. how do you think the next 12 months will unfold? also, how would you assess the last 12 months?
the private equity model is still unproven in the minds of many cpa firm partners as there are no examples of a secondary market for the investors of cpa firms. private equity investors in other professional disciplines like veterinary, dental and engineering have experienced success with attracting secondary and tertiary investors.
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until we see that happen in accounting, there will remain some skepticism about the viability of this business model. it is not my skepticism. but accounting firms that are considering private equity are expressing that as one of their concerns.
there is also a lot of skepticism regarding how this private equity-backed model will work for the next generation of leaders in firms that didn’t benefit from the initial investment. the diminished opportunity for the next generation of firm leaders that did not cash in with the initial sale in the late ’90s and early ’00s as a result of the consolidation model is a primary reason that approach didn’t work for the most part. i believe private equity and the leadership in the firms they have invested in understand this issue and are doing a good job of creating long-term incentives for the next generation of firm leaders. again, this is a concern among firms considering that type of investment and creating skepticism for many.
the profession is well positioned to continue to grow at a faster pace than the economy as a whole. the combination of rapid deployment of new technology and the infusion of capital – not only from outside investors, but also from internally generated capital in some firms – are going to help drive this growth. i believe alternative ownership structures are going to allow for organizational structures that will create much more dynamic firms than those that historically were limited to traditional compliance-based tax, accounting and attest services. the availability of capital and the willingness of firms to use it will continue to transform the profession.
private equity and other alternative investors into the cpa industry have disrupted the market substantially. we are seeing alternative investors from wealth management, pension funds, family offices and even public companies (in addition to cbiz). firms are modifying their governance, owner agreements and compensation structures in response to how private equity evaluates firms. we are seeing a shift from the partnership model to a more corporate model at some larger firms. virtually every firm in the top 250 has been approached by multiple alternative investors. many firms are taking a pass. however, there is a lot of new thinking about how to manage their firms within firm leadership as a result of the observations they have made about the effect of alternative investors.
in the m&a world we are seeing new approaches to deal structure, and much more attention than has been used in the past paid to the relationship between value, profitability and the upside potential of target firms. more capital/cash is being deployed in deal structure than has been used historically. there is also a lot more attention paid to strategic fit when assessing acquisition opportunities. the vast majority of firms are shying away from firms with heavy tax compliance in favor of more niche-oriented services. the message from the profession’s leadership that compliance-based services will diminish in value in the future is definitely taking hold. the interesting thing is many alternative investors want that firm with compliance-based practices as long as the current value and potential value of the clients is high enough.
we are seeing a lot of growth in firms because of expanding advisory service offerings. in some firms, virtually all of the growth is in non-traditional service offerings. it is not unusual to see 25 percent growth and higher within advisory practices. we have seen firms willing to deploy a lot of capital (compared to historical trends) to finance startup niche practices.
clearly, the lack of available talent remains the number one struggle firms have. there doesn’t appear to be any hope in sight with respect to domestic recruiting as the profession continues to see shrinking numbers of accounting graduates. the trend is toward seeking talent overseas and non-accounting professionals. for now, those alternative sources are making up the difference. my observation is, because those are suitable replacements for talent sources, for now, the profession is not doing enough to fix the underlying issue of making an accounting career more attractive. it remains to be seen if this band-aid approach will have long-term negative consequences.