Delivering Dividends: Investing in Accounting Firms
Feb 2, 2024
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Private equity firms are showing interest in investing in accounting firms, with multiple deals being made. The podcast discusses the reasons behind this trend, how to determine attractive accounting firm targets, and the opportunities in the sector. It also explores the challenges faced by accounting firms and presents options for transformation. The chapter on investing in accounting firms discusses challenges, considerations, and the importance of leadership. The podcast also highlights the growing trend of private equity investment in accounting firms and its transformational impact on the industry.
The increasing demand for talent and the need to invest in technology are driving accounting firms to transform from compliance-focused providers to offering a suite of advisory and consulting services, attracting private equity investments.
Potential acquirers of accounting firms need to carefully evaluate attractiveness based on leadership, profitability, governance, partnership agreements, and alignment of vision to navigate challenges and successfully acquire accounting firms.
Deep dives
Private equity investment in accounting firms on the rise
Private equity investment in accounting firms has increased over the past two years, indicating growing interest in the sector as a valuable asset. Researchers project a $1.5 trillion market size for accounting services by 2032, further highlighting the potential for returns. In the past, accounting firms rejected PE partnerships as they believed they didn't need capital and preferred to secure loans from banks. However, a confluence of factors changed the landscape. The increasing demand for talent and the decreasing number of accounting graduates sparked a need for capital to invest in technology, specifically in areas like AI, machine learning, and blockchain. Accounting firms recognized the necessity to transform from compliance-focused providers to offering a suite of advisory and consulting services. Private equity investments also addressed the challenge of offshoring jobs to countries like India and the Philippines, where labor costs were significantly lower. Young professionals' disinterest in traditional accounting career paths, alongside the growing trend of resignations, emphasized the need for capital and strategic partnerships in the accounting industry.
PE interest in acquiring accounting firms
Private equity firms have shown increasing interest in acquiring accounting firms, with recent deals solidifying this trend. While some deals faced delays due to litigation, CEO transitions, or higher capital costs, it is projected that 2024 will see a significant influx of PE firms entering the market. This is particularly true for top 20 CPA firms. However, challenges exist for PE firms looking to invest in accounting firms. Firstly, they need to navigate the conservative and risk-averse nature of accountants during the acquisition process. Secondly, the accounting firm's profitability is crucial, as higher EBITDA is necessary to attract PE investment. Additionally, allocating enterprise value and dealing with potential conflicts between PE firms and accounting firms can pose challenges. Navigating these obstacles becomes pivotal for successful acquisitions.
Considerations for potential acquirers of accounting firms
Potential acquirers of accounting firms need to consider several factors. The leadership of the target firm should possess the ability to sell alternative and transformative approaches to business. Profitability is another critical factor as accounting firms must demonstrate favorable EBITDA figures to attract PE investment. Furthermore, the allocation of funds needs careful consideration, as accounting firms typically lack predefined methods for distributing enterprise value. Collaboration with outside accounting and consulting firms for rigorous due diligence is essential. Another factor to take into account is whether the accounting firm shares the same vision as the PE partner, as misalignment can lead to complications in realizing goals. Overall, potential acquirers need to carefully evaluate attractiveness based on leadership, profitability, governance, partnership agreements, and alignment of vision.
Future outlook: PE investments and M&A in the accounting industry
The future of private equity investments in the accounting industry looks promising, with increasing interest from PE firms, family offices, sovereign wealth funds, and even teachers' pension funds. Accounting firms are deemed attractive investments due to their stability, ethical practices, and sticky client relationships. PE firms are expected to be major players in the industry, not just with the Big Four firms, but also with mid-size and smaller accounting firms. The increasing convergence of PE and accounting may lead to more PE-owned accounting firms and potential IPOs. Moreover, strategic acquirers like wealth management and tax-focused firms are entering the fold, seeking to unlock synergies and create value. Over the next four to five years, the M&A landscape in the accounting industry is likely to witness significant growth, with a multitude of buyers and increasing investments in technology, talent, and transformation.
Since 2020, private equity firms and accounting firms have experienced a mutual attraction with multiple deals making their way to the finish line, and experts say that trend is likely to continue. Allan Koltin, CEO of Koltin Consulting Group, joins the podcast to discuss why accounting firms are transforming, how acquirers can determine which accounting firms are attractive targets, and the opportunities emerging in the sector.
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The Middle Market Growth Conversations podcast is produced by the Association for Corporate Growth. To hear more interviews with middle-market influencers, subscribe to the Middle Market Growth Conversations podcast on Apple Podcasts, Spotify and Soundcloud.
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