The firm structures of the future

January 31, 2024 9:00 AM

Enjoy complimentary access to top ideas and insights — selected by our editors.

For most of the 20^th century, there weren't many options for setting up an accounting firm, and most firms employed the same few ways to own and manage themselves.

Over the last four years, though, firms have started exploring a much wider range of ownership models and management structures (see our feature story), reexamining older ideas and taking up entirely new ones. While the pyramid-shaped partnership model remains the most common in the profession, rarely have so many firms ventured beyond it to try out new ways of being.

Some address new ways to own firms, others are about how to manage them and make them successful, but all of this experimentation is meant to address a number of the same challenges: finding the talent and next-gen leaderships they need, making the major investments in technology and other areas that are required to stay competitive, and making sure today's partners can retire while allowing their firms to live on.

Below is a glossary of some of the new ways accounting firms are owning and managing themselves.

The alternative practice model

This is the highest-profile alternative to the traditional pyramid model, and involves a firm being split in two — with one entity for attest services and one for everything else — and then bound together by a services agreement.

It's actually not a new model, having been popularized in the late 1990s to allow non-CPA firms to acquire CPA firms, and it's currently a staple of private equity acquisitions.

Platform firms

A common feature of private equity deals, where a large PE-owned accounting firm acts as a vehicle for acquiring yet more firms and bringing them into its alternative practice structure, rather than having overarching PE firm acquire them directly.

The Ascend model

A variant of the PE model, with some important differences: First, each firm that private equity-backed Ascend acquires has its own alternative practice structure, rather than joining an APS that's already been established by a platform firm, so they maintain their individual identity, and the partners all become owners of Ascend stock. Ascend also provides a host of back-office resources to its firms that include recruiting capabilities, technology resources, and much more.

ESOPs

Employee stock ownership plans have been around since the 1950s, but — with a couple of notable exceptions, like Top 100 Firm Katz, Sapper & Miller — they haven't caught on much in the accounting space. That changed in 2023 when Top 10 Firm BDO USA announced that it was becoming an ESOP, and when Top 100 Firm Grassi made a similar announcement later in the year, it sparked interest in the structure among a number of midsized and large firms. They are a great tool for employee engagement, but generally require capital to establish the plan initially. They can also leave the current management structure in place.

Going public

At the moment, CBIZ is the only firm in the space that trades publicly, but Ernst & Young was considering floating its advisory arm as part of its plan to split the firm in two, and experts say they could easily see the Big Four going in this direction — and they could also see public companies coming in to acquire accounting firms. Either way, that would likely mean firms moving to more of a corporate form of governance and management.

Selling off to wealth management

Businesses in the wealth management space — including RIAs and family offices — have discovered an interest in acquiring accounting firms, often to bring their accounting and tax expertise in house to offer to their clients.

Post-private equity ownership

Another possible ownership structure that we have yet to see, because the first PE pioneers in the space haven't reached their first "turn" (when they sell off their stake in an accounting firm to realize their investment). When they do, though, experts expect a whole range of new entities to come in to buy those stakes, including, potentially, pension funds, sovereign wealth fund, and many more.

Non-equity partners

As the profession has struggled to attract the next generation of partners, many midsized firms have added a tier of "non-equity" or "income" partners, who don't have to buy into the firm but receive a share of its profits and fulfill the management and client-service roles of a partner. In many cases, it's a stepping stone toward full equity partnership; in others, it's a way of retaining top talent that isn't interested in partnership, or isn't ready for it.

Lines of credit

Not technically a firm structure, tapping a traditional line of credit from a bank or other lender can help firms solve the same problem that many of the new structures firms are exploring are designed to fix: the need to access capital to make investments in technology, talent and new service lines.

Selling off a wealth management practice

Again, while not strictly speaking an ownership structure or management model, selling off their wealth management practice has been a tactic a number of large firms have taken in order to raise capital for other priorities.

The corporate model

The partnership model often makes it hard for firms to make quick decisions, to hold individuals accountable, and to ensure widespread alignment with firm goals and processes.

That's why many midsized and large firms are moving to more of a corporate model, where authority is pushed up to smaller and smaller subgroups of partners, and ultimately to a managing partner who acts more like a CEO. Lines of business are treated like corporate divisions, with appropriate reporting and accountability structures.

The diamond-shaped firm

The traditional accounting firm structure promulgated by Arthur Andersen in the mid-Twentieth century involved a broad base of inexperienced labor coming into firms straight out of college, being managed by a smaller cadre of more experienced, veteran accountants, who are in turn employed by a smaller group of partner-owners at the apex of the pyramid.

With the pipeline of accounting students coming into the profession leaking badly, firms are likely to move from the pyramid shape to more of a "diamond-shaped" or "fat middle" firm, where the largest cohort of staff is that group of experienced accountants in the middle, many of whom will have to be recruited from industry or from other firms, since the intake of entry-level accountants will be reduced to the bottom "point" of the diamond. The grunt work traditionally done by those entry-level accountants, meanwhile, will be outsourced or automated.