What Does Private Equity See In Accounting Firms

Other professions have partly or completely succumbed to corporatization – think dentists, optometrists, medical doctors, engineers – so what makes accountants (and lawyers) special that they have avoided the corporate wave (ownership limitations aside)?   

The only thing I can think of is because of the personal relationship – in both cases knowing lots about the client should mean you get a better answer for them, and they come to rely on your advice.  It can be very personal.  Other professions are more transactional – even doctors (except your GP).   

This process is not about using AI to automate bookkeeping and accounting.  Sure AI might help, the future of the profession is in advice, not processing.  There’s a limit to how far you can leverage that personal relationship – how many clients can a firm owner manage?  It depends on the size of the client, but maybe 300 tops if you want to meet quarterly? 

PEs main interest in your firm is the quality of your bench.  If you have a talent pipeline to replace the owners who are looking to exit then they are interested.  They don’t want your book of business – acquiring new clients is easy!  Firms with lots of partner chargeable work, and no bench depth are of zero interest and potentially zero value. 

The issue for PEs coming in is how do they lock in the good talent coming through.  Existing partners are locked in anyway.  Welcome to non competes and share options.  Works everywhere else – why not in accounting? 

PEs look for efficiency and put up prices for sure – but importantly they will also expand the service offerings – insurance, wealth management, real estate (?), mortgages (?), legal (?).  So the accounting and tax is only part of the client relationship.  If you do this already – great.  If not, but the bench is good, there is lots of upside available for PE and they will be keen. 

When they sell it will likely be to buyers looking for steady income.  Pension funds etc.  Or it could be a float.  Accounting firms provide great stability of earnings in a larger portfolio. And of course buying at 11x EBITDA and selling at 15x a higher EBITDA makes a good investment!

There will inevitably be some attrition.  Some of the best advisors might leave – either early (because they don’t like the constraints they see), or later (because they are famous enough), but most won’t – so you’ll have ‘good enough’ partners locked in.   If PEs don’t do a good job of incentivizing their younger talent to stay they might see them leave and start their own firms. 

Niche highly technical firms and small neighborhood firms will still have a place.   

This is a window of opportunity to sell out if the fit is right.  The ability to sell out later might be reduced when PEs have what market share and positioning that they want – especially for mid-sized firms.  PE will reach a point where they will figure they can organically grow.   

The value of remaining firms will depend entirely on their attributes.  Those who want to work long hours with minimal bench can make lots of money on the journey – but don’t expect much on exit.  New partners coming in won’t want to pay large sums (as they shouldn’t now – it’s crazy paying for lots of goodwill when you can develop it yourself easily). 

There will be some disasters for sure – but that usually depends on the people.