Traditional CPA firms need new capital to lure talent, invest in technology and be buyers in the merger game.
By Kelly Phillips Erb, Forbes Staff
Jeff Ferro, chief executive of Baker Tilly, the nation’s 10th largest accounting firm, had reached an uncomfortable conclusion: To stay competitive, his firm had to invest more in technology, mergers and new hires than its 570 partners, many nearing retirement, could or would cough up. The nine-decade old Chicago-based partnership needed an outside investor. “Over the last decade, we did a really nice job building up our balance sheet, putting more equity into the organization,’’ he says. “But the landscape got more complicated, more competitive, and it got more expensive to run the firm and to achieve our strategy.”
So in late 2022, Baker Tilly hired investment banker William Blair & Co, which arranged meetings with 25 potential private equity investors–sessions that Ferro likens to first dates. Finally, this past February, after more than a year of screening potential partners and negotiating with the two it had chosen, Baker Tilly announced a deal. The transaction closed on June 1 with Hellman & Friedman and Valeas Capital Partners reportedly paying a combined $1 billion for just over 50% of the accounting firm.
The February announcement made Baker Tilly, with its 6,700-person workforce and $1.7 billion in revenues (for fiscal 2024 ended May 31), the largest U.S. accounting firm to ever take private equity cash—a distinction if held for all of six weeks. On March 15, Grant Thornton, the 7th largest accounting firm, said it, too, would sell part of itself to private equity–in this case to billionaire Steven Klinsky’s New Mountain Capital, with CDPQ and OA Private Capital making smaller investments.
As the chart below shows, five of the largest 25 U.S. accounting firms, ranked by revenue, have taken private equity money.
Private Equity Plays At The Biggest U.S. Accounting Firms
The accounting firms in green have taken private equity, while those in blue are exploring it. Marcum, in pink, is being acquired by publicly traded CBIZ.
The accountant-PE mating game began in August of 2021, when TowerBrook Capital Partners announced it was investing in #17 EisnerAmper’s non-audit business (now a separate legal entity known as Eisner Advisory Group, though both businesses still operate under the brand name of EisnerAmper). At the time, most in the accounting industry regarded it as an oddity. But as EisnerAmper grew, other firms took notice. The following year, New Mountain Capital acquired a stake in Citrin Cooperman (#19) and Parthenon Capital bought into Cherry Bekaert (#24).
This year, the PE action has reached a new, almost frenzied pace. Another five of the top 25 accounting firms could well announce deals before the end of the year, says Allan D. Koltin, a CPA and CEO of the Koltin Consulting Group, Inc., which has advised on billions in private equity deals and mergers in financial services.
Says Ferro: “I think private equity is going to change the industry for good—for the good.’’
Not everyone is so sanguine about the long-term impact private equity ownership will have on the accounting profession. But there’s no denying that PE dollars are useful in addressing one of the industry’s most immediate and fundamental challenges: attracting talent.
The pool of available CPAs has been shrinking, as Baby Boomers (and soon Gen Xers, too) retire and Gen Zers turn their noses up at accounting, and in particular, the additional training and tests needed to become a licensed CPA. According to the American Institute of Certified Public Accountants’ 2023 Trends Report, 65,305 bachelor’s and master’s degrees were awarded in accounting in the 2021-2022 school year, down 18% from six years before. During the same period, the number of candidates passing the four test sections needed to be licensed as a CPA fell even more dramatically—just 18,847 successfully completed the test in 2022, down 32% from 2016.
In addition, Koltin observes, those earning accounting degrees now have more appealing and lucrative alternatives—in investment banking and other financial services, data analytics, and cyber—to the “mundane, brainless” work of public accounting, with its traditionally back-loaded pay and partnership structure.
Technology, particularly artificial intelligence, can provide some relief, handling busy work that newbie accountants might have previously done, including data entry and routine financial reviews. That frees up manpower for more interesting work, including faster growing business advisory services. But adopting new technologies costs money.
Baker Tilly’s restructuring illustrates how PE cash can be deployed. As part of the investment deal, the accounting firm was split into two partnerships: Ferro, 61, is now CEO of Baker Tilly Advisory Group LP, holding the firm’s faster growing tax, business consulting and other services—which don’t have to be provided by CPAs. That’s what the PE firms took a stake in. A separate legal entity, Baker Tilly U.S. LLP, will continue as a licensed and regulated CPA firm, providing risk and assurance (i.e. audits and attest services). This one has no private equity ownership, “to comply with regulatory and independence requirements,” the firm says.
A good chunk of the new PE cash went to pay off (in a lump sum) the retirement benefits owed to former partners, as well as retirement benefits current partners had already accrued under the old plans. At the same time, a revamped compensation system has been put in place that allows new hires to share in the partnership’s ownership and profits at a younger age. “I became fully vested at 60, where now our deal is you become fully vested after five years,’’ says Ferro. A 35-year-old will be fully vested at age 40. “We cut 20 years of vesting out,” he says with satisfaction. “The 30 to 35-year-old Jeff Ferros of today aren't interested in what I signed up for.”
Some of the PE equity infusion, as well as an additional debt financing, is providing a kitty for growth—hiring, technology and mergers. Ferro expects revenues for fiscal 2025 ending next May to be about $2 billion—a 16% increase—before any mergers. But his goal is to hit $5 billion within five years, through both mergers and organic growth, including new services. “Our strategy is to be the predominant middle market firm in the United States.” (The middle market refers to companies with less than a billion or two in sales.)
The Grant Thornton deal, with private equity firm New Mountain Capital and two other PE investors, also involved buying out the pensions of retired partners and splitting the audit practice off from the rest of the firm—euphemistically known as “alternative practice structures.”
But not all of the accounting industry restructuring involves selling out to PE. The nation’s 6th largest firm, BDO, has taken a different approach to the problem of recruiting and rewarding younger and non-CPA employees. Last year it shifted from a partnership to a professional services corporation and created an employee stock ownership plan. (PE still played a role—Apollo Capital arranged debt financing for that deal.)
More recently, this past July, CBIZ (#11), the nation’s only publicly traded accounting firm, announced plans to acquire the advisory and tax services of Marcum (#13) for $2.3 billion, half in cash and half in stock. Marcum’s tarnished audit business will be acquired by a smaller, traditional CPA firm, Mayer Hoffman McCann P.C. (Last year, the Securities & Exchange Commission fined Marcum $10 million for “systemic quality control failures” including in its audit of hundreds of new special purpose acquisition company clients it took on in 2020 and 2021.)
So far, private equity hasn’t cracked the Big 4. Last year, #3 Ernst & Young turned down a proposal from TPG that would have involved chopping up the company, with the PE investment only going to the non-audit side of the business. Audit partners resisted the idea of a split.
So why would one of the most trusted professions be interested in selling to buyout funds that have long had a reputation for loading companies with debt, slashing costs and then flipping for quick profits?
Besides the obvious liquidity benefits, private equity firms have cleaned up their image. Given that there are more than 2,000 private equity firms competing for the same deals–up from fewer than 500 a decade ago–many PE firms are pitching long-term growth to would-be sellers. Firms like Blackstone, for example, are raising capital from armies of wealth managers in new funds that look more like mutual funds and provide “perpetual capital” because they have no maturity date. That means PE firms are eager to make investments they mean to hold onto and grow. The fragmented accounting business, with its aging founders and ample cash flow represents an attractive target, especially to the extent these firms can be rolled up. Moreover, PE investors can goose the growth of more profitable advisory and tax services, so the accounting firms could prove to be a nicely profitable longer term holding. (It’s similar to the reason PE firms could be looking to gobble up law firms next.)
Even if PE firms turn out to be stable long-term investors, however, traditionalists worry their vast holdings could present conflicts of interest, undermining the role supposedly “independent” CPAs play in auditing public companies’ books. Paul Munter, the SEC’s Chief Accountant, has voiced concerns that accounting firms taking outside capital could be endangering auditor independence, or at least inadvertently sending the message to staff that “complying with professional standards, providing high-quality audits, and fulfilling its public watchdog role are not the firm’s highest priority.”
“It's about public accounting firms wanting to do something more profitable, more fun, more sexy than accounting audits,’’ observes Francine McKenna, a CPA and independent journalist, and currently a guest lecturer at the University of Cambridge. One concern is that auditor independence won’t be sufficiently protected by the alternative structures those taking PE money have set up. But even more concerning—particularly to the partners doing audits—is that splitting off the more lucrative tax and advisory services could starve the auditors of resources, she says.
Eisner Advisory CEO Charles Weinstein insists he’s had no such problems in the three years he’s been living with PE. For 98% of partners, he says, the only noticeable day-to-day impact is that it’s easier to serve clients because they have “lots of additional skilled people” and more services to offer them.
Jody Padar, a CPA and industry consultant who has been an advocate of the need for change in the accounting industry (her books include The Radical CPA and Radical Pricing), says the key is for the AICPA to continue to emphasize the value of the professional credential—even if the industry’s financing model is, by necessity, changing. Meanwhile, the PE funding can offer an attractive exit strategy for aging CPAs who aren't open to change. “We all know many CPAs that will just die at their desks” rather than retire, she jokes. But the lure of cash from private equity has helped move some of the old guard out of the way—by way of a buyout—and is allowing the next generation to have a say. “It’s a sharp kick in the ass for firms to move.”
MORE FROM FORBES
Tax Breaks: Timely tax tips and the latest news delivered to your inbox weekly