Private equity and its increasing interest in the world of accounting is a fact. In particular, there’s a lot of talk about private equity’s purchased stakes in five of the top 26 accounting firms in less than three years. I’m not here to talk about that specifically, but more about what it represents and what it could mean going forward. It is highly likely that if you own a firm, you will be approached in the next few years regarding an acquisition opportunity (if you haven’t already). Now is the time to decide if you are going to evolve your practice and reap the rewards, or let an acquirer do it.
To begin, it’s important we ask the right question: What attracts private equity? To put it simply, they are looking for business models that are seasoned, and predictable, with significant opportunities for enhancement through newfound efficiencies.
In other words, they’re looking for businesses that, while successful, are not optimized. That optimization can be pricing models, infrastructure, technology, expense profiles, and everything in between.
It won’t stun anyone that accounting fits the bill here and finds itself in the private equity crosshairs — and it therefore continues to see growing private equity action. So far, most of this investment has occurred in the upper tier of the market. This makes sense, as it’s a space where small changes can have a massive impact on the operating model, and thus, profitability. There is, however, a greater likelihood that this continues to move down the market into mid-market firms, and perhaps even further with time.
This isn’t a “big prediction” or news to most stakeholders — we’ve seen the model get applied to rollup strategies in the past, even outside of traditional private equity. The question firm partners need to ask isn’t “When will it end?”, but rather “Why should they reap the benefits of optimizing the way firms operate?”, and “If someone is going to benefit, why not me?”. To answer this, we need to dive deeper into the fundamental differences between private equity firms and accounting firms.
Private equity is filled with people who are experts in their domain — and so are accounting firms. So what makes private equity firms more ‘equipped’ to drive change, efficiencies, and revenue compared to accounting firms? Do they see something that accountants don’t see? Not at all. They both know the opportunities that are there.
The difference: Private Equity Firms build businesses, whereas many accounting firms build lifestyles. Albeit, great, profitable lifestyles, but not always ones that have adapted to the times. It’s not from a lack of wanting to or knowing they should, but it’s a lack of time to be able to solve the problem.
The constraints are currently (among others):
Let’s lump time and people together. More people would solve for time and if you had more time you wouldn’t need more people - to sum it all up: it’s a business model problem.
Core business model components for a firm are its revenue, the construction of the revenue, pricing, expenses, cost of acquisition, the average size of your customers, and the resulting margins. Whether it’s accounting, another professional service, or manufacturing, the general principles are the same. Private equity is coming for accounting because they see an opportunity. Opportunity to impact revenue the construction thereof, pricing, changing the expense profile, and, once again, the resulting margins.
At this point, we can only speculate how private equity firms will achieve this feat. But generally, private equity will be running the acquired firms like a true business, driving for efficiency (often through technology and automation), standardization of processes, and very likely some degree of change to the overall “partner” model.
Accountants can make a concerted effort to resolve the problem themselves and succeed at it. But only those looking to the future and wanting to be part of the solution come out winners. The true winners, in this case, will win twice. A more profitable and powerful practice, with every opportunity to successfully exit in the future, and be at the front of the line when they do so. Accounting firms who have the right tools, and are courageous enough to use them will be the big winners.
Author: Trevor Greenway