Even as more and more accounting firms are partnering with private equity, many are resisting the trend: Enter the "fiercely independent" firms.
Top 75 Firm
"From a financial perspective, it could be lucrative, but our view is that there are many cons, and the tradeoffs are probably not worth the potential extra liquidity that might be available to partners," said Jeff Call, CEO of Bennett Thrasher. "We believe that having a legacy firm, remaining independent and the entrepreneurial spirit that we have is probably more powerful than the external capital would be."
Call noted that some clients actually prefer to work with a firm not owned by private equity.
"We have seen that a little bit, where some of the clients want to deal with a company that's independently owned by the partners versus private equity," he said. "There's probably a slight bit of distrust toward private equity — that they're going to be pushing hard to increase the economics, raise fees and other things like that — because they're on the fast track to try and exit the business again in four to six years."
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"You have an advantage," said Paul Peterson, CEO of Wiss, a Top 100 Firm based in Florham Park, New Jersey. "You have these relationships in place, so the question I think you have to ask yourself is, 'Do we have enough depth of services that we could compete against a PE firm?' We're playing aggressive defense, I would say, and really staying close to the customers that we have."
Some employees prefer to work for an independent firm as well. And in a profession with an ongoing labor shortage — fewer students studying accounting, getting their CPA license and staying till they make partner — recruiting and retention needs to be a top priority for all firms.
"It will be interesting to see what PE does — does it further exacerbate it, or will it be reduced over time?" Peterson said. "We've picked up incredible talent over the past two years that we never could have touched if this didn't happen."
Wiss ranked No. 5 among Accounting Today's 2024 Best Large Firms to Work For, and Peterson says the firm's employees are a huge reason why they haven't taken PE money. "I think we'd lose a lot of people," he said. "Retention has always been high, we've always had a lot of great qualities, and I feel like we would be backstabbing our people that have been very loyal to us."
"I do think that there are a lot of positives with PE," he said. "And it's all great when it's good, and so the challenge is when it's not."
But firms like Bennett Thrasher and Wiss are increasingly a rare breed. "We're going to see less and less independent firms by far," as PE-backed competition outmatches them, said Bob Lewis, president of The Visionary Group, a consulting firm. Talent will get poached by firms offering outsized salaries that independent firms can't match.
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"I think what's going to happen is the really large firms are going to start going in and picking out all the superstars and overpaying them," Lewis said, and those top performers will leave holes in the firms they leave.
Firms that are unwilling to make investments in new technology and talent "end up kind of standing still and getting run over. And I think that's what's happening right now in this market," he said.
Yes, there is value to staying independent, but it comes with great risk.
"You can't stand still doing what you're doing," Lewis said. "You have to understand, if your competition is getting bigger, you've got to make some investments in people. You've got to make some investments in technology. You have to establish some kind of industry or service niche. You have got to get more aggressive on pricing because the cost of labor is going to continue to go up. You can't make the margin you need to make by keeping your prices the same and doing the same work. And if you don't get on track, you're going to end up in a power bid with all the other dinosaurs — we say, 'You're sliding into the tar pit.'"
Already, firms are digging into client niches with specialized services, and professionalizing business development. If independent firms can find ways to compete with PE-backed firms, then private equity will ultimately accelerate the diversification of the professional market.
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"We see incredible opportunities on the horizon, irrespective of PE," Peterson said. "For me, I'm looking at it more as a Renaissance. … The homogeneity of accounting is changing. There's going to be more variety in accounting and how firms are. There's this wave that we've been on for a long time where it's been very incestuous. A lot of the learnings that you get are from other accounting firms — you belong to alliances, you share ideas, 'Oh, what are they doing? We'll do it' — and I think that is going to start to break. I think that we'll start to see firms that are packaged differently, how they service, how they go to market."
"Historically we have not either had the need or have been unwilling to invest in the business," said Allan Koltin, CEO of Koltin Consulting Group, who advised firms on deals of all kinds. "That has changed. So I don't worry about the fiercely independent firm that finds a different way to capitalize their business. I worry about the firm that's got their head in the sand — and that's probably 50% of the profession — and thinks that they can grind and grind and they'll be able to do it forever. That's a big mistake. Technology is going to be the big bad game-changer, and firms that are stuck in the mud, it'll be a rude awakening."
"But that doesn't mean go out and do a PE deal," he was quick to add. "It means figure out a strategy of how you'll differentiate yourself, how you'll continue to be a value-added resource to your client. And the most important thing is, what's your mousetrap to recruit, retain and grow people?"
"Eventually everything changes," Lewis said. "Right now, this industry is in such massive change. People are having a hard time coping."
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