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Private equity firms are increasingly involved in the accounting industry today, leading some firms to restructure their practices and seek advice from law firms on how to set up their assurance processes to unbreakable. director
Hunton Andrews Kurth, a law firm in Richmond, Virginia, has assisted in a number of transactions, including investment from Parthenon Capital in Cherry Bekaert in June and from Light Years at Schellman & Co. last year. Another deal involved A-lign, a CPA firm specializing in cyber security audits rather than financial audits, which received investment from FTV and last year from Warburg Pincus.
“We’re definitely seeing interest across the board,” said Hunton Andrews Kurth partner Matthew P. Bosher. “We’ve seen private equity gains in the largest firms and firms outside of the Accounting Today Top 100. You’ve got private equity firms and private equity firms in the middle of the market. enterprises, small enterprises and medium-sized enterprises.”
“There’s a lot of interest from individuals considering these professional services firms and getting their foot in the door at these professional services firms,” said Hunton Andrews Kurth partner Kevin Georgerian, who also leads the accounting group. M&A. “Some of the interest will come from the fact that it’s new and innovative, so there’s an early opportunity to get in here. The idea is that the industry might be consolidated, and if you invest in it in the program and then you grow that base, it’s a real tail for the investment.”
Private investors view CPA firms as good investments. “They are loyal partners and generate returns,” Bosher said. “You don’t have a lot of debt and opportunity for growth, especially in non-profit advisory services. You combine the return history with the opportunity for growth and consolidation through technology, it will be a good advantage.”
In some cases, PE firms have called accounting firms, and CPA partners have also discussed the need they are seeing.
“The list of PE firms that want accounting firms — and it’s a very long list, by the way — is known to accounting firms,” Bosher said. “I think that the list of accounting firms that are interested in a partner is also known. There are also investment banks that specialize in this area, and we have seen in some cases that large accounting firms start by partner with an investment bank. bring investors to the table.”
In some cases, CPA firms must separate their audit and certification activities before other parts of the industry agree to invest, especially on the consulting side, as they did last year. EisnerAmper received funding from TowerBrook Capital and when Citrin Cooperman sold a stake in the firm to New Mountain Capital.
“If there’s work involved, whether it’s audit work or SOC work, that business should be handled by a licensed CPA firm,” Georgerian said. “In New York, a licensed CPA firm must be 100% owned by individual licensees. Invest outside, in a CPA firm that demonstrates performance. So in all of these practices there is a degree practice, and remain in a licensed CPA firm. Non-representative practice involves a new entity, and that new entity has outside investment – whether it’s a private equity fund or another outside investor. – he has the power.”
Some accounting firms are reluctant to accept PE financing because of concerns about giving up control or under pressure to cut costs.
“I think culture is important, and the culture of some accounting firms may not be the same as the culture of some PE firms,” Bosher says. “There’s no doubt about it. We’ve seen accounting firms overestimate whether the culture and business model of the PE firms they’re interested in is good, but they’ve probably misjudged the right individual in a monolithic. that is.”
Convincing all the friends to come along and do it is also difficult.
“Obviously, the accounting industry is a human capital industry, with many owners, so those owners have high profits,” Georgerian said. “They often have the ability, and maybe some obligation, to ‘walk away’ if they don’t like the transaction, so the buyer wants to make sure they don’t walk away before closing. Associates are empowered in All our experience with the management teams of accounting firms, their main interest is to manage the work in a smooth and logical way, where the correct reporting in the relationship, the partners are there to ask the questions that are on their mind and really understand what the transaction is doing for them from a day-to-day management perspective, so there is a lot of focus on not only choose the text of the contract, but explain the process. to the general relationship.”
The roles of the managing partner and CEO may change if the firm separates the audit and advisory sides during the transaction, and the board may be restructured.
“At the beginning, after the closing, the functions are the same in the sense that they are the Head of the advisory, but the advisory function is managing the business in addition to the pure audit work, which is held by accountants at the accounting firm,” Georgerian said. “Most of the business is in advisory, so the role of the CEO is the same, and it goes down to the other leadership of the accounting firm. You have a board or other governing bodies that are broad more than just accountants, including some members of the private sector, so there is a new management committee involved in foreign investment.”
Corporate governance also changes. “The franchise business and the new non-exam company have independent management, independent owners and independent boards,” says Bosher. “The difference from the old model is that those lines of business don’t all report to a managing partner or a board because the brand business is completely separate from the non-trust business. Some service providers non-CPA principals who are not technically the owners of a CPA firm, when a new non-profit business is formed, such individuals may become partners in the new non-exam entity by the fact that the new non- The disclosure entity is not a CPA firm, it is not yet a legal entity. It is not a CPA firm. So the titles and ownership are different. So the main thing is that the firm ensure that the organization is separate and independent from the non-profit new business.”
Based on these PE investments, some adjustments should be made for the members of the firm.
“Usually when you take a CPA firm and split it in two the certification firm stays in the same entity, and the non-profit business and all the employees go into a new company, and you think there are some management challenges in there. for a while,” Bosher said. “We think that these challenges are very possible, and we have seen some of the challenges. But in an industry, when you split in two, all the employees move to a new independent entity, which has control, there is a real short-term employment challenge.”
Firms must also be aware of the SEC’s specific rules when agreeing to a PE investment, and that will specify the separation of audit and reporting parties. SEC deputy chief accountant Paul Munter weighed in some guidelines in August which helps explain some of the issues.
“The SEC special rules do not contemplate this structure, so for a long time the parties will be left to make decisions about how to apply the SEC special rules in a situation like this,” Bosher said. “The SEC issued high-level guidance, but guidance, on how the Office of the Chief Accountant should apply SEC special rules in this context. That’s new, and it’s a helpful road map in some ways for groups that consider setting up a different approach. regulatory structure where there is an SEC review process. Clearly that guidance is relevant where there is an SEC review process and specific SEC rules apply, but it is a map way of helping like never before.”
The SEC guidance will help other accounting firms understand how the SEC views such practices, although there are some caveats.
“I wouldn’t call it a deterrent because what you had before was uncertainty and confusion,” says Bosher. “That guidance eliminates a lot of uncertainty, and I think it creates a road map for parties to follow in applying the SEC specific rules in this structure. I see that as helpful. A word warning the parties to make sure they pay attention to the rules, reminding the parties to make sure they’re following the rules. But what you’ve had in the past is uncertainty, and I think Eliminating much of that uncertainty will help teams close deals rather than block them.”
Some firms have received funding from investment firms outside the PE world, eg Warren Averett worked last year in his property management business. In these cases, the rules are different.
“You don’t need a different operating structure to sell your wealth management business,” says Bosher. “The business isn’t about that much.”
His law firm has not yet filed such cases. “The legal issues there are not the same as the legal issues and the different job structure transactions that we’re dealing with,” Bosher said.
And for PE firms buying into the accounting firm, the trend doesn’t seem to be slowing down anytime soon.
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