A rise in private equity investors entering the accounting market is marking a new era for the profession. Is your firm an attractive investment target?
In August 2021, it was announced that TowerBrook Capital Partners had made a strategic investment in Top 20 accounting firm EisnerAmper.
In a statement announcing the move, Charles Weinstein, EisnerAmper CEO, said, “Rather than conforming to traditional frameworks, adopting a new model of ownership facilitates the best structure for the firm to drive growth and innovative solutions to our clients. Our colleagues will be able to chart a course for success in our purpose-built practice structure.”
Just a few months later, Lightyear Capital announced that it was buying into Schellman & Co., LLC.
More recently, in April 2022, New Mountain Capital announced a majority investment in professional services firms Citrin Cooperman.
These investments marked a notable transformation in the profession, with the realization among private equity firms that investing in large accounting firms can yield great returns. For accountants, private equity investments can be a great way to future-proof the firm, fuel growth, and gain a competitive edge.
For firms looking to attract private equity investors, there are several factors to consider and ways to help draw appeal. Let’s take a closer look.
The rise of private equity investments
Private equity has been eyeing the accounting profession for more than a decade, but more recent market changes — such as a greater need for talent, advancements in technology, and desire for strategic acquisitions — have made such deals a reality, as Allan D. Koltin, CEO of Koltin Consulting Group, explained in a Reuters article.
It is a trend that will likely continue to reshape the profession as investors perceive accounting firms to be low-risk, high-reward investment opportunities.
Why? Firms tend to be recession-proof, deliver positive cash flow with low volatility, and are ideally suited for growth as they shift away from compliance-based business models in favor of higher-margin strategic advisory services. Furthermore, accounting professionals are highly trusted advisors.
What are the benefits of private equity investment for accounting firms?
For accounting firms, private equity investments are the infusion that many need to accelerate growth and expand service offerings in today’s complex business environment.
As Weinstein wrote in a recent Accounting Today column,
“Partnering with PE enables accounting firm leaders to accelerate the evolution of their service offerings, boost investment in talent and technology, and expand capacity for both organic growth and targeted mergers and acquisitions.”
Weinstein continued, “The capital provided through PE investors also can greatly enhance the quality and capacity of core businesses (tax and audit) on which firms such as ours were founded. Consequently, PE firms should benefit from the strong growth projected for our industry, with the potential to create solid ROI.”
For EisnerAmper, Weinstein said TowerBrook’s investment enabled the firm to launch new practice areas — such as cryptocurrency, family office technology services, and ESG — while also ramping up M&A activity.
The reality is that many of today’s firms understand the need to evolve their service offerings and invest in talent and technologies, but they may lack the capital needed to effectively fund their growth initiatives. For a growing number of firms, private equity is the capital infusion needed to transform their vision into a reality.
How can firms attract private equity investors?
Private equity firms tend to be attracted to larger sized firms, but also firms that are sustainably profitable. Firms looking to drive greater profitability should consider the following:
Get in the cloud
Firms looking to attract investors should ensure they have the technologies in place to streamline workflows and maximize capacity. This involves leveraging cloud-based solutions. When firms operate in the cloud, it enables anytime, anywhere access to real-time data and also serves as the gateway to greater automation and integration capabilities.
Why recreate the wheel for each client? When firms are able to implement standardized, repeatable processes they can more efficiently serve clients and generate greater revenues. Having standardized processes in place is especially important given the rise in client expectations and the bandwidth constraints facing many of today’s firms.
Empower staff to work efficiently by eliminating as many manual, time-consuming tasks — like repetitive data entry — as possible. This eases the strain on staff and also provides them more time to focus on higher-value, higher-margin services.
Reevaluate pricing models
It is important that firms reevaluate their pricing and pricing models, especially if they are still billing by the hour. Firms must ensure that staff is being properly compensated for the value they are providing clients. This has given rise to firms bidding adieu to hourly billing in favor of value-based pricing. By adopting value pricing, firms can ensure transparency, demonstrate value, and eliminate billing surprises. Clients will pay a premium when they understand the value that is being provided.
Focus on higher-value services
By focusing on higher-value services like strategic advisory services, firms can level out the peaks and valleys of tax season and generate year-round profitability — a factor that private equity investors will certainly find attractive. Advisory services also strengthen client loyalty as they are increasingly seeking more proactive, strategic guidance.
Making your firm ready for the next big investment
Is a private equity investment right for your firm? If you are looking to future-proof your practice, drive strategic growth, and remain competitive, it may be the ideal move for you and your staff.
To learn more about how you can leverage technology to help transform your firm into an attractive investment opportunity, read our white paper “How APIs can help transform your practice.”