M&A Service Providers, Meet M&A

TowerBrook Capital Partners’ 2021 investment in accounting firm EisnerAmper was the first private equity deal in the industry. Since then, there’s been a flurry of activity in the space—with private equity investing in firms like Citrin Cooperman, Grant Thornton, Cherry Bekaert and Baker Tilly, as well as mergers of firms such as BKD and Dixon Hughes Goodman.

Private equity is attracted to these firms for straightforward reasons. Accounting firms are sticky businesses, with loyal client bases and stable recurring revenue streams. They’re low-risk and largely recession-proof. “People don’t switch their tax provider. And in a good or bad economy, you still need to file taxes and get audits done,” says Andre Moura, managing director at New Mountain Capital, which invested in Citrin Cooperman in 2022 and Grant Thornton in 2024.

Furthermore, the industry is still highly fragmented. There are over 80,000 accounting firms in the United States, according to IBISWorld data, and as of 2020, nearly three-quarters of the CPA workforce had met the retirement age, according to the American Institute of Certified Public Accountants (AICPA).

Retiring boomer accountants is one timely factor, but accounting firms have been around for far longer than private equity. So why are these deals just starting to gain traction? What’s more, this trend isn’t limited solely to the accounting space. Other M&A service providers, specifically law firms, have also been dipping their toes into M&A waters. What are the risks of private equity encroaching on these professional services industries that have resisted outside investment for so long?

The Three Ts

Accountants are famously risk-averse, which partially explains their long-held reluctance to accept outside capital. “It took us over 10 years to get to our deal with Citrin Cooperman,” says New Mountain Capital’s Moura. Koltin, who advises accounting institutions on M&A strategy, recalls New Mountain hiring him around 2011 to reach out to the CEOs of the top 25 CPA firms. “Twenty-two out of 25 said they had no interest. Two of the three I did meet with were from EisnerAmper and Citrin Cooperman, which ended up being first movers in the space,” says Koltin.

Those CEOs were able to see before most others that the ground was shifting beneath them. In the decade that followed, three major factors—what Koltin calls “the three T’s”—ushered in a sea change in the industry and with it this new phase of M&A.

First: talent. The number of people completing bachelor’s degrees in accounting has dropped every year from 2016-2022, according to the AICPA.

With less talent coming into accounting, firms have had to look for a different way to get their work done. Enter the second T: technology. “In 2011, technology was out there, and we knew someday it would rewire the playbook, but it hadn’t happened yet at that point,” says Koltin. Now, investing in AI to increase efficiency is table stakes for today’s accounting firms. But it requires capital.

Same with the third T: transformation, an umbrella term that includes not only tech investments but also growth initiatives like offshoring talent and diversifying to provide advisory and consulting services. “Firms need private equity to fund technology investments in the age of AI, and to create the global operations infrastructure needed to compete today. A small firm with $30 million in revenue can’t have an offshore operation—they need to be part of a larger organization with proper financing. There’s a need for scale to be competitive in the new market reality,” says Moura.

Firms need private equity to fund technology investments in the age of AI, and to create the global operations infrastructure needed to compete today…There’s a need for scale to be competitive in the new market reality.

Andre Moura

New Mountain Capital

Many recent deals have been a resounding success by industry standards. Citrin Cooperman, for example, has completed 22 acquisitions in the last three years with several more anticipated by the end of 2024. Koltin predicts the firm may be the first PE-backed accounting firm to flip, especially given New Mountain’s recent acquisition of Grant Thornton. “They’ll need to take some chips off the table,” says Koltin, who projects Citrin Cooperman’s revenues to be around $815 million this year (up from $315 million at the time of the 2022 deal) and estimates that the investment could trade at around 15x EBITDA.

Confronting Conflicts of Interest

Independence is one of the main pillars of the accounting industry, meaning an auditor must have no ties to or conflicts of interest with the company it is auditing. Regulations also stipulate that CPAs must hold a majority ownership stake in audit practices. To comply, accounting firms taking on private equity investment must adopt an alternative practice structure, splitting the practice into two parts: an audit and attestation unit, owned by CPAs, and a non-attest unit (e.g., tax and consulting), which can be partially owned by outside investors.

The concept of independence still applies. But many worry the presence of an outside investor inevitably introduces complications. “The private equity firm that owns part of the business already has its own other portfolio companies. The accounting firm now must be independent not only of its own clients but also of the private equity firm and quite possibly of all the portfolio companies of the private equity partner. The private equity firm needs to share in this responsibility as well,” says Jey Purushotham, practice group leader of compliance solutions at Intapp. Regulators like the AICPA and the Public Company Accounting Oversight Board (PCAOB) have taken note of the shift in the industry and are keeping a close eye on this dynamic.

Accounting firms can stay compliant by communicating frequently with the investor to stay updated on its portfolio companies and ensure no conflicts of interest or independence impairments arise. But some find it hard to believe that an accounting firm’s audit practice can truly maintain professional independence within such a structure. “Everyone is working so closely together. The more hands-on private equity operators are with an accounting firm, the more concern there is regarding professional independence standards,” says Purushotham.

Furthermore, some fear private equity doesn’t understand the gravity of the professional independence standards. “The ramifications are very black and white. You cannot have even one potential independence impairment that you have failed to eliminate when required, or that you have not safeguarded or reduced to an acceptable level when allowed—and if you do have an independence impairment with a publicly traded company, the consequences can be very high,” says Purushotham.

Law Firms Look for a Roadmap

If there is any industry more often accused of being a dinosaur than accounting, it’s law. As private equity makes inroads into the accounting space, many law firms are looking for guidance on what this might mean for them.

Law firms are attractive investments for many of the same reasons as accounting firms. They’re stable, largely recession-proof, and have attractive margins. “Even inefficient law firms run at 25%-50% margins,” says Tom Lenfestey, founder and CEO of The Law Practice Exchange, a law firm brokerage and consulting company. “Even if firms lose money some years, they have the ability to shift and change with the economic winds. For example, they can go from a lot of M&A deals to a lot of economic workout deals.”

Furthermore, aging baby boomer lawyers need an exit strategy. “Attorneys don’t like to retire,” says Lenfestey. Almost 15% of lawyers in 2023 were 65 or older, compared to about 7% of all U.S. workers, according to the American Bar Association.

Law firms also face the same pressures as accounting firms to invest in technology and grow to meet client needs. “Regional law firms used to rule the day,” says Thomas Cole, chair of law firm Troutman Pepper Locke. Now, clients want firms to be able to help them everywhere, on all matters, which requires scale.

Consolidation is one answer, and 2024 saw a surge in deals, including Allen & Overy merging with Shearman & Sterling to form A&O Shearman in May. Three combinations took effect on Jan. 1: Womble Bond Dickinson and Lewis Roca Rothgerber Christie, Ballard Spahr and Lane Powell, and Troutman Pepper and Locke Lord. What hasn’t been seen, however, is private equity deals—and that’s because 48 out of 50 U.S. states currently bar non-lawyers from owning law firms. Utah and Arizona are the only states that allow alternative business structures not unlike those used in accounting deals.

States like California, Massachusetts and Florida have recently blocked proposals to allow alternative business structures. Still, some predict the tides will eventually turn. “I think it’s inevitable. Every other profession has gone that way,” Lenfestey says. Practice areas like personal injury and others in the plaintiff spaces—which tend to have large law firms with small ownership groups—could lead the way. “It’s a lot easier to get to M&A with a $100 million revenue firm owned by one person versus a similar firm with 30 partners,” says Lenfestey.

Culture Shock

For years, cautious accountants and lawyers have written off private equity deals because they had never been done before. Now, with the accounting industry awash in M&A—and a strong track record for recent deals—that reservation no longer applies. “Many firms said, ‘Let’s wait and see.’ But now it’s three years later and the first two deals were grand slam home runs,” says Koltin.

But while private equity may be a great fit for many firms, it’s not for everyone.

Firms must be ready to make some changes to adapt to their new structures, particularly with respect to integrating their technology systems and data. Some firms have reservations about whether outside investors can understand the human component of their business. They worry about adapting to increased accountability and becoming just another line item on their investor’s budget.

The key is to find the right partner, according to experts. “There are some private equity firms that don’t have demonstrated track records of understanding businesses where the assets go home every night,” says Koltin. “That group is not going to be successful in this industry. The successful ones understand the importance of people.”

Meghan Daniels is a freelance writer and editor based in Dutchess County, New York.

Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.