A Big Story in Accounting: Private Equity’s Influence
The recent partnership between EisnerAmper, a top 20 CPA firm, and a private equity firm has the industry buzzing. Paul compares this trend to his own experience at Latham’s in the UK, where a similar private equity-backed buyout occurred. For many firms, private equity is seen as a way to inject capital and grow, but Paul cautions that it isn’t always a straightforward solution.
Key Insights from Paul’s Experience
Paul shares that when his firm was bought out by a private equity company, the primary motivation was the high valuation offered, not a need for capital to expand. Latham’s was already profitable and didn’t require external funds to build advisory services. Instead, the buyout served as an exit strategy for senior partners who were ready for a transition.
- High Valuation – Private equity firms often overvalue accounting firms, which can make buyouts financially attractive to partners.
- Exit Strategy – For partners looking to step back, private equity provides a way to monetize their equity.
Do Firms Need Private Equity for Growth?
Paul emphasizes that firms don’t necessarily need private equity to expand into advisory services. He argues that transitioning to advisory is more about strategic hiring than capital infusion. With today’s resources, like virtual family offices, firms can access a network of specialists without needing full-time hires, allowing them to offer expanded services without additional funding.
- Advisory Growth – Moving into advisory services can often be done with strategic hires and doesn’t require private equity funding.
- Leveraging Virtual Expertise – With a virtual family office model, firms can bring in experts on demand, only hiring full-time if demand justifies it.
Lessons Learned: The Importance of Structure and Leadership
Paul’s experience highlighted that structure and leadership are crucial for successful integration in private equity deals. In his case, the acquiring firm struggled to merge the newly acquired regional firms, leading to a fragmented culture. Paul underscores that:
- Unified Structure and Vision – To attract investment and operate effectively, firms need a clear, cohesive structure.
- Strong Leadership – Without solid leadership, private equity investments often fail to yield the expected results. Money alone doesn’t ensure success.
Why Cash Isn’t Always the Solution
For firms considering private equity, Paul advises caution. In his experience, cash alone didn’t drive success for the acquiring firm; leadership and a shared vision were far more critical. Many firms might be tempted to think that a cash infusion will solve their challenges, but Paul’s message is clear: a unified team and proper structure are more valuable than capital.
Building a “Proper Business” Structure
To position for growth, Paul recommends restructuring firms to have a clear equity system instead of the traditional profit-sharing model. This approach gives each partner a vested interest in growing the firm’s value and aligns everyone toward a common goal. At Latham’s, this structure led to rapid growth and made the firm attractive to private equity.
Benefits of a Unified Equity Structure
- Motivates All Partners – With equity tied to firm value, partners are incentivized to grow the business.
- Improved Performance – Paul observed that after restructuring, his firm’s profits doubled within two years due to increased motivation and a shared growth mindset.
Conclusion: Is Private Equity Right for Your Firm?
Private equity offers opportunities for growth and liquidity, but it’s not a cure-all. Accounting firms should focus first on building a solid internal structure and strong leadership. If firms are aligned and motivated, they may find that they don’t need private equity at all to succeed.
