EisnerAmper spent a decade crafting its new private equity formula.
In August 2021, the New York-based Top 25 Firm launched a new era in the accounting profession when it announced that it had taken on a groundbreaking strategic investment from PE firm TowerBrook Capital Partners — almost 10 years after its first internal discussions around the possibility of a new ownership structure and accessing new sources of capital.
"We put years of thought into what structure we thought would be appropriate to keep us sustainable, relevant and important," said CEO Charley Weinstein. "We had a potential transaction in 2012, and we had another potential transaction in 2014. We had another potential transaction in 2019, and none of those structures were right. And when we came across a private equity partner who shared our thoughts about structure and opportunity — and the stars aligned, the marketplace aligned, and we were able to move forward."
Informed as it is by deep expertise in private equity — the firm has over 500 PE funds as clients — EisnerAmper's formula and others like it have become templates for firms looking to take on similar partnerships to provide much-needed capital for investments in M&A, technology and people, as well as unlocking value for current and future partners. They have also unleashed enormous interest among firms of all sizes that are looking to fuel strategic growth, or to solve problems with their business and partnership models, like a lack of younger partners, and unfunded retirement benefits.
It is a difficult formula to solve, however, and not all firms should necessarily attempt it — but for those that do, it has the potential to unlock much greater levels of value than the traditional accounting firm model, and it is already changing the landscape for the entire profession.
Formula 1
At its core, the PE formula is fairly straightforward: Accounting firms sell a controlling stake to a private equity investor, getting cash and equity that they can distribute to the current partners. (To comply with state rules around the ownership of audit firms, the firm's original attest function is split off into a separate entity that is owned by the original CPA partners and operates in an "alternative practice structure," a model from the 1990s that has been proven over time by firms like UHY and is largely transparent to staff and clients.)
The PE partner then provides capital for the accounting firm to pursue mergers and acquisitions, to invest in technology and personnel, to launch new service lines, and to otherwise support their growth strategy. While the holding period for investments varies, the standard is for PE firms to look to exit after five to seven years, most often by selling their stake to another investor.
For the accounting firms that have pioneered partnerships with PE, money to support their growth plans has been a chief attraction, not least because in the past that sort of money had to come out of partners' pockets.
"The profession has been capital-starved for a long, long time," said Weinstein. "There's a real balance between the profits that you need to take out over the course of the year, so partners are happy, and the amount of investment that you can leave into the firm. And that's a year-by-year decision that firms make. When you have patient capital, when you have a capital base, that enables you to make those investment decisions in multiyear periods."
EisnerAmper has used its capital for investments in new technology, new service lines like an environmental, social and corporate governance offering, and almost a dozen acquisitions, including one of a fellow Top 100 Firm, boosting its revenue by almost $200 million since 2021.
Similar investment priorities drove Florida-based Top 100 Firm Schellman's deal with Lightyear Capital in September 2021, according to CEO Avani Desai: "When we decided private equity was the right move, we worked out a very exciting value creation plan that aimed to expand our core services, add new service lines — which we did in 2022 with digital and crypto — increase our global presence, embrace automation and innovation, and continue to attract and retain top talent."
But investment wasn't the only consideration: The firm's founder, Chris Schellman, had been looking to retire in 2027, but the deal allowed him to recapitalize his ownership interest and exit the firm six years earlier than planned.
That ability to release the value that has previously been locked up in partners' ownership stakes is another core attraction of the PE formula. For older partners, it can alleviate concerns about the viability of their retirement plans, while offering younger partners a chance to access the value of their partnership interests much earlier in their careers.
"We're now able to offer an ownership model that says every four or five or six years, we're going to have another liquidity event, and as a young partner, you can participate in that," explained Weinstein. "You don't have to wait until you're 65. So come with us, you can see the value for your hard work materialize much more quickly than in a traditional ownership model."
PE-backed accounting firms also now have a number of equity-based tools at their fingertips to reward and incentivize partners, which Weinstein said has been helpful in attracting young talent — particularly lateral hires — as well as M&A candidates.
For Atlanta-based Smith + Howard, capital to support its 10-year "Vision 2030" strategic plan was the main driver of its November 2022 deal with Broad Sky Partners — but not the only one.
"Obviously the capital is the main resource," said CEO Sean Taylor, "but Broad Sky Partners is an organization born out of leadership that had previously been with the Carlyle Group, and so there's a lot of experience, a lot of connections and networks that we think are going to be very valuable in our growth effort."
"There's an experience factor that they have with certain things that we're doing on the technology side that's very attractive to us," he continued. "They're contributing in a steering committee way, if you will. We've got some members of our management team and some members of their executive team putting their heads together to come up with an even more improved foot forward. So I think it's a combination of their expertise, their capital, and their networks that are really what drew us to partnering with Broad Sky."
Ascend, a platform launched by PE firm Alpine Investors to partner with entrepreneurial CPA firms, takes the combination of capital provision with shared expertise to another level. To start, it supports the firms it takes on — which most commonly range from $10-$30 million in revenue — in pursuing their own independent growth strategies.
"Some people are more interested in developing advisory capabilities," said founder and CEO David Wurtzbacher. "Some people want to develop CAS capabilities. Some people think what they're doing is just fine, they just need to do more of it — they have got clients banging on the door. Some people want to do their own tuck-in M&A, their own mergers in their market. So there is a pretty big variety of vision."
But Ascend also backstops all of them with serious back-office infrastructure. "At a baseline level, we have pretty deep shared resources," explained Wurtzbacher. "Think of things like accounting, human resources, banking, insurance, and negotiating for lower costs for suppliers. We're trying to free the managing partners in the partner groups of the management burden that they face, so they can just focus on growing."
In particular, Ascend is developing talent acquisition resources to help its accounting firms find the staff they desperately need.
Formula 2
Private equity, perhaps obviously, pays attention to very different aspects of the formula than an accounting firm will.
"The way that private equity works is that you buy the business, and you're growing EBITDA over that whole period," explained Keith Campbell, a senior partner at digital services and consulting firm West Monroe. "Then when you exit that business, whether you're selling that to another private equity sponsor or you go public through an IPO, you are generating, hopefully, a positive internal rate of return on that investment."
With those priorities in mind, PE firms are drawn to accounting firms for a number of reasons, starting with the fact that they are extraordinarily stable and regularly throw off money that can help support the debt that PE firms take on to make their acquisitions in the first place.
"You've got to have lots of cash flow, and that cash flow really needs to be very stable and predictable over time," said Ascend's Wurtzbacher. "And accounting is fundamentally checking that box, right? It's a cash-flowing business, recession-resistant, it's stable. I hear CPAs refer to it as the annuity revenue stream. Your customers come back every single year. A lot of it is government-mandated services. So there's a lot to like."
What's more, the profession is highly fragmented, offering plenty of opportunity for PE firms to use a strategy they have deployed successfully across a wide range of industries, from veterinary practices and insurance brokerages to HVAC services and dentists' offices: the roll-up.
"Right under the Big Four, there is a big opportunity where you've got a lot of regional players, and this is a playbook that private equity has proven," said Campbell. "This is really no different — accounting is a market segment where there is a labor shortage and you've got a bunch of regional players that don't have scale but do have good downside protection with their audit and their tax businesses."
Depending on the PE firm's individual model, they might be funding an anchor firm like EisnerAmper to go out and acquire a number of smaller firms, or rolling up smaller accounting firms themselves with the aim of creating their own large firm, but either way, the goal is to pursue scale in a number of areas.
"From a pricing perspective, there are advantages because there's a lot of pricing capture elasticity in what a regional firm charges and what the Big Four charges," said Bryan Crutchfield, partner for value creation at West Monroe. "And so if you're aggregating the talent across these regional firms, those lower-priced engagements now have a chance to go from $500 an hour up to a $2,000 an hour, where you're getting things priced at the Big Four level, instead of maybe $500 to $600 per hour. … I think that's one of the investment theses that private equities are looking at — they realize that there's a big gap between regionals and the Big Four."
That they're using a formula they've used in other industries doesn't mean that PE firms aren't alive to the unique characteristics of CPA firms. They appreciate the trusted advisor position that accountants enjoy, and the stickiness of their clients, and the integrity that CPAs bring to their work and their partnerships — but they also believe that accounting firms aren't as profitable as they should be, and could do a lot more for their clients than they currently do.
"For every dollar of non-attest services that a CPA firm provides, there's one to eight dollars of extra revenue to capture," said Phil Whitman, CEO of Whitman Transition Advisors, who works with both accountants and PE firms. "If you look at the P&L of your clients, professional services is one of the smallest line items on there; there's tremendous room for growth."
At the same time, Whitman noted, PE firms know nothing about running CPA firms. They are looking to partner with accountants with strong strategic visions and growth plans that they can get behind (for now, at least — that may change as more private equity money enters the profession and the choicest firms have been snapped up).
Terms and inputs
As with any complex formula, it's wise to make sure you understand all your terms and that your inputs are correct; there are a host of caveats to bear in mind when considering potential private equity investment in your firm.
To start, PE firms are making investments and they expect returns; they aren't just handing out free money to make sure older partners can retire comfortably.
"The CPA firms that are doing it for the money — 'Hey we have this huge unfunded chain letter [of partner retirement payouts]; PE will come in and write a check and it'll all go away. Oh, and we can then grow the business' — I don't think those are going to be home runs," warned Allan Koltin, the president of Koltin Consulting Group, who regularly advises accounting firms on M&A and PE deals.
In fact, Ascend's Wurtzbacher warns partners that they may be subject to what's called a "compensation scrape." Partners' compensation is a combination of salary and of distributed profits; those profits are what the PE firm is relying on to justify its investment, and so after receiving cash for the acquisition, partners may find themselves actually taking home less money each year.
"If you're on the younger end of the spectrum, it's not very wise to change the compensation. In some cases, it gets increased — not by a lot, but by some. If you're on the older end of the spectrum, though, you should absolutely expect a compensation haircut," he said. "Most of the EBITDA that the private equity firm is looking for comes from compensation reductions."
As with any formula, time spent checking the individual elements is critical: A single wrong input can unbalance the whole equation.
"One thing I learned about the private equity process that I didn't fully appreciate going into it was the level of dedication and focus that it required," warned Schellman's Desai. "The process of negotiating and finalizing a deal is complex and time-consuming, and it is important to have a management team that can balance the demands of the transaction with the ongoing operations of the business."
One crucial part of the due diligence is making sure that the PE firm is fully aligned with the CPA firm's goals and strategies — and that it's a good cultural fit.
"Our first three priorities in this were culture, culture and culture," said Smith + Howard's Taylor. "We in no way, shape, or form wanted to partner with a group where there would be constant battles and disagreements on approach. And so we spent a lot of time on really getting to know the individuals. Did we like them? Did they like us? Was there a good flow of conversation? Did we do little things like find ourselves finishing one another's sentences? Was there a nice harmony or rhythm between us? That was substantially what we were looking for."
Taylor also recommended that firms understand their own nonnegotiables — the things that would make them walk away from a deal. "For instance, we wanted our leadership team to remain in leadership," he said. "We wanted to continue running our business. We wanted an equity partner, not an operating partner, and that was really near the top."
"Protection around the CEO is important," added Koltin, "because a lot of the partners do this because they trust the CEO." He recalled a recent back-and-forth where a PE firm wanted the ability to unilaterally remove the accounting firm's CEO — because they had once been unable to remove the CEO of a company in their portfolio who had developed dementia — and the accounting firm partners pushed back hard, because their CEO was the reason they were interested in the deal in the first place. Once both sides' concerns were understood, provisions and protections were created so that everyone was comfortable. (See more on the
Since their PE partners will eventually aim to exit the investment, CPA firms may also want to look at ways to make sure they have a say in who that stake gets sold to, including strong representation on the board.
More broadly, accountants who partner with private equity must be prepared to think differently about their businesses.
"It requires a different mindset," said Weinstein. "Having a business partner is very different from the way most firms operate. And so if you want to become a platform company for a private equity sponsor, understand that there's a different mindset around it and you have to be willing to embrace it."
On to the next formula
EisnerAmper has embraced PE, as have Schellman, Smith + Howard, Citrin Cooperman and Cherry Bekaert, and many others are considering it. With so much interest, PE is bound to leave its mark on the profession — and over a relatively short period of time.
"The one thing CPA firms have to be very cautious of, just as in other industries, is that PE goes in — and then they go out," said Whitman. "We're 18-24 months into this since EisnerAmper announced their transaction — it's a three-to-five or a five-to-seven-year window usually, so we probably have another five years of opportunity with PE in this space."
By the end of that five years, it's likely the profession will look very different.
"We'll have about 24 or 25 PE-sponsored firms, and they'll be of all sizes; some of those billion-dollar firms will go the way of PE, and we'll have some as small as $10 million in revenue," predicted Koltin.
The PE-sponsored accounting firms will represent about 6% of the Top 400 Firms, he estimated, and they will merge in 12% to 15% of the rest. That will leave roughly 80% outside the realm of PE — but not unaffected, by any means.
For one thing, these changes will spark a boom in new-firm creation, according to Whitman: "One thing I'm already seeing — not just from private equity but also from the megamergers that are going on — is a group of two and three partners parachuting out and saying, 'I left the Big Four to come to a true middle-market firm, and now I'm back in that larger-firm environment and I didn't sign up for it.' There's already a resurgence of smaller firms getting started — an audit partner and a couple of tax partners going out and starting their own business."
For some, not partnering with PE will become a badge of honor, he added: "Some firms are starting to use that in their marketing, saying to clients, 'Why would you want to go with a firm like that? They sold out. They were just looking for a retirement benefit. Why wouldn't you stay with an independent firm like ours?'"
Perhaps more important, once the initial private equity group finishes its hold period and starts selling their stakes, a whole new cadre of firm owners could emerge.
"In terms of the 'who,' we all thought it would just be a bigger private equity group," said Koltin. "We now realize that with the alternative practice structure, anybody can own tax and consulting … and anybody can participate in the alternative practice structure. When you look at it that way, I would offer up that the future buyer might be a PE firm, or it could be a sovereign wealth fund, or it could be a family office. I wouldn't rule out that Microsoft or Elon Musk could be the ultimate buyer."
Pension funds looking for steady, predictable earnings are another possibility, as are wealth management firms looking to add more services for clients, and some PE firms could even exit through stock offerings — and all those varied owners will have their own ideas about what an accounting firm should be. (For more, see "
"This is going to take a whole different look to what we know today," said Koltin. "Private equity is in Version 1.0."
Balancing the equation
Feelings about the entry of PE into accounting are mixed; some worry that it will damage CPA firms' reputations or weaken their integrity, while others see it as a critical lifeline to firms in desperate need of capital.
"I have a client who does $4.5 million in revenue, and the response I got from him was, 'I've seen this happen in many industries for my clients, and I was always hoping it would come to public accounting, and I'm glad it's here,'" said Whitman. "Then there are other people who say, 'I've seen this happen with my clients, and what a nightmare it created for them.'"
It's still early days in the first tests of the formula, so it's impossible to gauge the long-term impact of private equity, but for now, it has captured the imagination of the profession — and seems poised to transform it.
"It's not right for every firm," acknowledged EisnerAmper's Weinstein. "But for those firms that believe that they can put that capital to good use, who think that they will have better opportunities for their people as they grow their businesses, for those firms that have a plan for the capital, it can be a great thing."
