This is the second article in our series examining the impact that private equity is having on accounting firms. For part one, click here. The next story in the series will examine PE’s potential effects on the profession at large.
The accounting profession is positively booming. In 2022, the nation’s top 100 firms saw revenues grow by a remarkable 18.55%, on average. In 2023 their revenues grew by 12.88%—less meteoric than in 2022, but still none too shabby.
And yet, even against this backdrop, private equity-backed accounting firms have overperformed. Revenue for three large firms that took on PE investments in 2021 and 2022 has exploded since they made those deals. Eisner Advisory Group (formerly EisnerAmper) went from $488.8 million in revenue in 2021 to $848.7 in 2023. Citrin Cooperman earned $488 million in 2022 and $700 million in 2023. Cherry Bekaert brought in $293 million in 2022; in 2023, it did $585 million, and was the fastest-growing Top 100 accounting firm in the country, with stunning 99.7% growth over 2022.
Behind the boom: How have PE-backed firms been able to achieve such results? According to Accounting Today, in the post-pandemic period, top 100 firms ramped up their consulting and client accounting services practices; grew through M&A, improved working conditions for staff, and became more efficient through automation and better technology.
M&A might be the most striking example of a strategy PE-backed firms use to grow. For instance, Cherry Bekaert made six M&A deals in 2022 and 2023. EisnerAmper made eight. And Citrin Cooperman made 17. Those three firms alone were responsible for 31 of the total 231 M&As among the top 100 firms in those two years.
This emphasis on inorganic growth is part of PE funds’ “standard playbook,” Sabrina Howell, a professor of finance at NYU’s Stern School of Business, told CFO Brew. In fact, one of the reasons the accounting field is so attractive to PE is that it’s one of the few “highly fragmented” industries left, she said. Getting bigger, she noted, gives firms “an opportunity to take advantage of economies of scale.”
A firm transformed: But for an in-depth look at how accounting firms are using PE capital to expand and innovate, look no further than Schellman. The Tampa, Florida-based firm, which focuses heavily on IT audits, was the nation’s 65th largest in 2021, the year it made its PE deal. It’s now the 47th largest, having taken its revenue from $101.9 million in 2021 to $148.5 million in 2023. Over those two years, it amped up its headcount as well, going from 348 employees to 526.
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Schellman was once a founder-owned and -operated firm whose founder, Chris Schellman, bought a piece of Arthur Andersen following its breakup in 2002. Lightyear Capital purchased a majority stake in September 2021 as Schellman began contemplating retirement, the firm’s CEO, Avani Desai, told CFO Brew.
Like many of its PE-backed counterparts, Schellman and Co. sought M&As. It’s acquired three firms in the past three years, Desai said, and more deals are in the pipeline.
But Schellman also pursued organic growth by creating a sales function, something it never had before, Desai said. “I think to be sustainable in today’s industry, you have to,” she said. “Referrals are great, and inbound is great, but we have to have an arm that does outbound.”
A more modern firm: In many ways, Schellman has used PE capital and Lightyear’s expertise to professionalize. The firm implemented a business intelligence system for KPIs that Desai calls “life-changing.”
“I was making decisions before kind of on gut and a little luck, and now we’re still [using] a little gut and a little luck, but a lot of data,” she said.
Experts Lightyear recommended also helped the firm revamp its pricing methodology, which had been somewhat ad hoc, Desai said. The new methodology let Schellman see what the market would bear. In some cases, it’s decreased the firm’s prices.
And the PE money allowed the firm to make a change its auditors welcomed: a “closed-loop system” for audits. Staff once had to toggle between multiple programs, including Word, Excel, and a proprietary system called Audit Source 1.0, to complete audits, something they told Desai they wanted to change.
Schellman spent the last year building the system, which allowed auditors to complete their work within a single platform. “They’re all connected. When you change one thing, everything else changes, and then it automatically goes to get reviewed by your manager,” Desai said.
But what’s next? PE investment appears to have worked out well for Schellman, and it’s led to remarkable growth for several other firms. But how long can the boom last? What will happen once PE funds make their exit? And how will factors like consolidation, the shift away from “core” services, and different governance structures affect the profession as a whole? We’ll examine these issues in a future article.