Several of America’s biggest accounting firms have been exploring the possibility of taking venture capital cash in recent months, as money from buyout funds fuels a mergers and acquisitions boom in the industry.
BDO and Grant Thornton are among those that have considered a deal with private equity, and while neither immediately decided to make an investment, bankers and executives expect a number of smaller companies to do so, using the money to to beat rivals.
Private equity has been drawn to the fragmented U.S. accounting industry for its relatively stable cash flows and consolidation prospects, but selling parts or all of the business to the so-called barbarians at the gate has fractured a sector dominated by traditional partnerships.
“We’ve been partnerships for a long time. Part of the desire of these partners to be here is that they are business owners,” said Eric Miles, president of Moss Adams, an accounting firm based in Seattle, which has been talking to private equity but decided to look from the sideline.
“If private equity is right for the industry, what do you lose by waiting and seeing if it’s true?”
EisnerAmper, a top 20 accounting firm by revenue, electrified the sector by selling a majority stake to TowerBrook Capital last year and using cash from the deal for an acquisition round. Three more companies, Citrin Cooperman, Schellman and Cherry Bekaert, have followed suit with the sale of shares to other private equity groups.
Marcum, the 15th largest by revenue, is also in talks to do a deal, according to sources familiar with the situation, even as rising interest rates complicate private equity financing and near-term price negotiations. Jeffrey Weiner, Marcum’s CEO, declined to comment.
Until recently, accounting executives had largely assumed that private equity would not make inroads into the sector, as US regulators say that accountants cannot be owned by non-accountants. EisnerAmper retained a partnership structure for its audit work but sold TowerBrook a majority stake in a company comprising its tax and consulting services to overcome such challenges.
The structure differs from accounting giant EY’s bold plan to spin off its consulting division as a completely separate company and list it on the stock market next year. Partners on the audit side of the business, who will retain a partnership structure, will receive cash payments of up to four times their annual income. The consulting division will not be able to use the EY brand.
In middle market business, auditing and consulting maintain a close relationship. Charly Weinstein, managing director of EisnerAmper, said it took nearly a decade of talks with private equity to stage a deal, but the new model means profits can be more easily reinvested in the business than in a partnership, where earnings are typically distributed to partners in their total each year.
“We saw the opportunity to recapitalize the company,” he said, calling EisnerAmper a “platform company” to rebuild a fragmented industry.
“Prior to the TowerBrook transaction, we averaged one M&A transaction per year. In the last 13 months, we have done nine transactions and we have a pipeline of very good companies that are considering joining us,” he said.
Wayne Berson, US chief executive of BDO, said he had listened to private equity bidders after years of rejecting calls. Private equity-funded rivals had become more aggressive bidders for acquisitions he wanted to make, he told the Financial Times.
“We need to know what the competition is doing, but that’s not something we’re entertaining today,” he said. “We are far from convinced that this is the right way to go for us. It has to be good for our partners and the jury is still out on how regulators will react, given the need for auditor independence. Small businesses may have an easier time a shop.”
BDO is one of only two accounting firms outside the big four of EY, PwC, KPMG and Deloitte that audit companies in the S&P 500. The other, Grant Thornton, also had talks with private equity earlier this year about selling a stake in its non- company. -revise the business to raise investment funds, according to sources familiar with the rumored deal. In the end no agreement was reached.
A spokesman for Grant Thornton declined to comment.
This year is shaping up to be the busiest in memory for M&A activity among US mid-market accounting firms. With rising labor and technology costs, companies are seeking economies of scale and are also expanding their consulting groups to offer a wider range of services to their clients.
“Accounting firms, starting with the big four, have gradually evolved into not just being your audit provider, your tax provider, but also being your business expert,” said Andrew Nicholas, professional services analyst at William Blair. “Now SMEs also prefer to have a single supplier relationship.”
By early September, analysts at William Blair had counted 64 acquisitions in the accounting sector, making this year on pace to eclipse the previous record in 2019 by about a fifth.
“Three words: off the charts,” says Allan Koltin, a Chicago-based consultant who is the most prolific adviser to middle-market accounting firms. “A couple of months ago it was the calm before the storm. And the storm has arrived.”
Even companies that have not taken venture capital money are increasing business.
“We’ve done 18 deals in the last four years without private equity money,” said Alan Whitman, CEO of Baker Tilly.
“There are two things that scale brings you — intellectual capital, or great minds, and financial capital — and smaller organizations in the U.S. and abroad are realizing that it takes significant investment to remain relevant and competitive.”
Baker Tilly was able to persuade its partners to fund a business war chest, Whitman said, after a 35 percent increase in profits in the last fiscal year, as clients turned to accounting and consulting firms to help them through the pandemic.
Jerome Grisko, chief executive of CBiz, the only publicly traded US accounting firm, told investors last month that competition for business meant prices for accounting firms had “ticked up a bit” but remained good.
CBiz has spent $95.8 million on acquisitions so far this year, already eclipsing the full-year record of $88.8 million in 2020.
William Blair’s Nicholas predicted the deal wave would continue, despite headwinds from rising interest rates and economic uncertainty.
“There’s a chicken-and-egg situation here where the industry is consolidating so then there’s a competitive dynamic to try to keep up with,” he said. “And that leads to more consolidation.”
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