The intense M&A environment in the accounting space — expected to continue for about five to 10 years — is driven at heart by a desire for (what else?) revenues. But, according to a set of panelists at the Scaling New Heights conference in Orlando, it's not just the quantity of revenue but its quality that makes the real difference to buyers.
Ben Bisconti, co-founder of private equity firm Red Iron, said the reason his industry has been so interested in accounting firms lately is they tend to have recurring revenues from a consistent client base. This is the case for both global firms with billions in annual revenues and smaller local firms with perhaps $10 million in revenues. Historically, private equity has been less interested in these smaller firms, so the level of attention they are receiving right now is indicative of the moment that accounting is currently having within the M&A space.
"I think in the next five to 10 years we'll see more activity in this space because these are good businesses, because these are businesses that have recurring [revenues] and customers," said Bisconti. "It's a very fragmented market and PE firms love a fragmented market: organic growth plus acquisitions can consolidate that fragmented market by helping build phenomenal firms that do a great job with their customers. If you can do that in this business, you can build enduring relationships with customers, build out service portfolios and have more revenue to profit off those relationships."
However, from his perspective, just as important as revenue is how that revenue was acquired. More than just a good number, he said, potential buyers want a good pricing strategy, a good ideal client profile, a good risk profile, a good delivery of service and a good culture to back it all up. Reducing things to metrics, he said that "we focus entirely on P&L" versus the balance sheet, which he said can be worked out later in the transaction. While the balance sheet is certainly important, he said revenue quality is the starting point. He noted that they also tend to look back at least three years, because there's not much that can be revealed with only a single year's figures.
Jason Slivka, a corporate development partner with Top 25 firm Citrin Cooperman, raised similar points. His firm, which has lately had quite a lot of acquisition activity, said that revenues are important, but the number alone doesn't fully communicate what they want to know when evaluating a potential purchase. Instead, there is a much more holistic approach, starting with culture.
"We will want to understand how they have managed their business throughout its course, so we can understand its culture and people... The second thing we look at is, really, what is the fit? We look at the services they're providing, the geographies they're in, the industry verticals, the target client size. Is it a good fit?" he said, before adding, "finally, we do look at the financial metrics of the organization."
Another panelist, Steven Roderick, has taken these lessons to heart. While his firm is eventually looking to sell, it has taken steps in the meanwhile to make itself a more attractive purchase in the long term. For example, he said he spent the last 16 months examining his firm's pricing structure and found there was more room to raise fees than originally thought. Over time, he said the firm has managed to increase increased revenue substantially without increasing the customer base. As the firm brings in new clients, it will be able to bring them in at that higher price point.
"I started meeting with clients, talking about some new rates, how we needed to change and [they] told me it was about time, that we'd been undercharging. So we increased revenue over two years by… price correction," he said.
Another panelist, Deborah Defer, director of CAS consulting at Woodard, noted that when her old firm, BDO, would evaluate "expansions" (she said they don't call them acquisitions because they're "coming into the family") it was crucial that their tech stack was consistent. A firm that has a disparate set of solutions scattered across multiple offices will be hard pressed to find a serious buyer, as it directly impacts its future growth.
"It is critical that the technology and processes were documented and there was standardization around that platform… Without that standardization, you cannot scale," she said.
Bisconti from Red Iron said that, despite its reputation, a private equity firm is not necessarily looking to change everything once it buys an accounting firm because, oftentimes, what the firm is already doing led it to be an attractive prospect in the first place. In this respect, he said, firms should not fear private equity. In his case, he wants to work with firms on the goals that make sense to them.
In the last 15 months, he said, his company has made several major investments in this space, each with different outcomes. All were founder-run. One wanted to be part of a larger platform and continue to contribute, so he is now the number two executive there. Another wanted to exit, so his company put together an exit plan that let him keep his team. A third, meanwhile, wanted growth capital to do some acquisitions of his own while continuing to run the business.
"Everyone can have different expectations," said Bisconti. "In our case, our investments almost never depend on cutting costs. We didn't do any layoffs. It wasn't part of the investment strategy."
