This is the third article in our series examining the impact that private equity is having on accounting firms. Read the first article here and the second here.
Private equity-backed firms have been engaging in a wave of consolidation, snapping up dozens of smaller accounting firms over the past few years. In many ways, the investments have been a boon to the accounting profession.
“Private equity is often well-positioned to create value in industries that are facing change and distress,” Sabrina Howell, a professor of finance at NYU’s Stern School of Business, told CFO Brew, “because they can respond with applying technology and new management practices quickly, and potentially be more nimble than the previous owners.”
And accounting firms have used PE capital to address one major source of distress the profession is grappling with: the talent shortage.
Jey Purushotham, who works with many accounting firms that have gotten PE investment in his role as practice group leader for risk and compliance at professional services software company Intapp, told CFO Brew that he’s seen firms offering “better compensation packages” and investing in “technology to make a lot of that grunt work go away” to be more attractive to young candidates, he said.
Firms are also using PE money to branch out from compliance work, Lisa Simpson, VP of firm services at the AICPA, told CFO Brew.
Many firms are moving into consulting, a broad term which can encompass anything from client accounting services (CAS) to M&A or technology consulting, she said. Offering consulting services gives firms “a way to diversify your revenue opportunities, and create a more continuous connection point to your clients” rather than only reaching out to them at tax time, Simpson said.
But the PE boom is also reshaping the profession as a whole, and perhaps not all the changes are positive.
Is the Main Street CPA a thing of the past? Although the Big Four garner most of the headlines, accounting is an industry dominated by small firms. In 2024, only the top 470 US firms brought in more than $7.5 million each in revenue, the cutoff at which a non-manufacturing business is generally no longer found “small,” according to the Small Business Administration.
Often, small firms’ size allows them to build stronger relationships with their clients and communities.
Accounting “is so relational, still. It just is,” Paul Peterson, CEO and managing partner at accounting firm Wiss, told CFO Brew.
However, Peterson is concerned about what PE consolidation might do to the client and accountant relationship. Clients’ trust could be “eroded,” he said, if their firms are bought out by PE and undergo a cultural change that sees them “running by the numbers,” he said.
News built for finance pros
CFO Brew helps finance pros navigate their roles with insights into risk management, compliance, and strategy through our newsletter, virtual events, and digital guides.
Will accounting firms “start to turn into more financial institutions and operate more like banks?” he wondered.
Trading control for capital. The nature of governance necessarily shifts when PE enters the picture. PE firms have “a different way of approaching the way decisions are made,” the AICPA’s Simpson said. Partners are no longer fully in charge.
Some observers believe that’s a welcome change. Allan Koltin, a broker to many deals between PE funds and accounting firms has questioned the viability of the partnership model itself.
“So as long as these models continue to exist, firms won’t be able to make the tough decisions they need to make,” Koltin told Accounting Today. “They’re in essence crippled strategically in what they do.”
Others are made uneasy by the prospect of ceding control to a PE fund. Wiss, for instance, has been approached by PE firms but prefers to “self-fund,” Peterson said.
“For us, our independence has been pretty paramount in our decision-making. We feel our best days are still ahead of us,” he said. “We did a lot of work over the past decade… creating a stronger culture and community. That’s become somewhat of a differentiator for us, and we would be hesitant to do anything that could potentially jeopardize that.”
Relinquishing control over a firm might not be as much of an issue for partners heading toward retirement, but those who plan to stay in a firm long-term could have concerns.
One reason Wiss hasn’t agreed to a deal is that it has a “younger” partner base without “significant buyouts coming,” Peterson said. He expressed concern that PE deals brokered by partners intending to cash out could leave the next generation of a firm with debt.
What happens when PE exits? Then there’s the question of what will happen to the profession just a few years down the road, when PE firms exit their investments. Typically, PE funds only hold on to an investment for five to seven years, Koltin told CFO Brew, but he predicts the first accounting exits might come even sooner. He thinks it’s most likely the firms will “flip” or sell their shares to another PE firm.
If that happens, the onus will be on the new buyer to increase revenues even more—a daunting task, given that the “first wave” of PE investment saw so many efficiency gains and so much consolidation.
PE firms aren’t going to “run out” of firms to invest in, but “the profile of the accounting firm [they invest in] might change,” Intapp’s Purushotham said. They’ll start looking at smaller firms, he predicted.
Simpson cautions that, whatever happens, accounting firms “always have to maintain that focus on quality and ethics and independence.”