Whitepaper
Assessing the Attractiveness of an Accountancy
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This is an excerpt from a more detailed whitepaper. For the unabridged version, please reach out to Stuart Ferguson from Pointe Advisory at sferguson@pointeadvisory.com.
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What can accountancies offer?
The role of the CFO has greatly evolved over the last 10-plus years. The modern CFO is responsible for everything from financial reporting to corporate development to systems selection and implementation. This expanding purview has enabled service providers to expand into new, higher-growth areas to better serve the overall CFO function.
In particular, accountancies are proving to offer an attractive access point for investing in the growth trajectory of the expanding purview of CFO-related business services.
You have the potential to capitalize
on the expanding purview of the CFO.
Accounting firms offer unmatched degrees of freedom to serve the highest growth areas of the CFO.
Accountancies have moved beyond attestation-only models and are emerging as
full-service advisory firms.
Accounting firm theses are grounded in the TAM's scale, its fragmentation, and the degrees of freedom firms have to accelerate organic growth.
01 ORGANIC GROWTH POTENTIAL
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Accounting TAM comprises a wide array of services and competencies, including services linked assurance, tax, risk, technology, M&A, etc., and some targets are better positioned to capitalize on growth trends
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Evaluating platform investments based on exposure-weighted growth is an important criterion (and has an overweight impact on base cases)
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02 ACCESSIBLE ADJACENCIES
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Customers value multi-service providers, which presents opportunities for firms to develop new areas of expertise (services, sectors) and cross-sell
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Firms have several complementary growth vectors – services, regions, sectors, customer types/sizes – that together support cross-selling strategies
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03 CONSOLIDATION OPPORTUNITIES
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TAM landscape is broad, diverse, and highly fragmented; this structure provides significant opportunities for inorganic growth
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The accounting firm market has a wide variety of potential targets for bolt-ons; however, not all firms have the market credibility to consolidate horizontally
04 VALUE CREATION LEVERS
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Firms across TAM vary in the maturity and efficiency of workflows, which creates opportunities for process optimization via automation, offshoring, etc. that can greatly expand EBITDA
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Some services comprise “repeatable” tasks that offer cost-saving potential via optimization efforts
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05 LACK OF EV FOCUS
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Accountancies are frequently organized as partnerships (or a comparable structure); these firms tend to optimize for distributable earnings (not EV)
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Partnership models prioritize annual earnings/dividends; this reduces the likelihood of investments in longer-term value-creation initiatives, undermining a firm's potential EV
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06 LIMITED DOWNSIDE RISK
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Accounting TAM has historically proven resilient; however, the downside beta varies by service line, with compliance-related services tending to be less risky
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Firms with compliance-related services (e.g. external audits) or countercyclical offerings (e.g., restructuring ) reduce downside risks
Key Thesis Elements for Investing in Accounting Firms
The first wave of investments by PE firms
Since 2021, the accounting market has seen the first “wave” of investments by PE firms; assets coming to market have ranged in revenues from $20M to $2B
2021
TowerBrook acquired EisnerAmper
2022
NMC acquired Citrin Cooperman
2021
Lightyear Capital acquired Schellman
2022
Parthenon Capital acquired Cherry Bekaert
The Five Pillars of Attractive Investments
The Five Pillars of Attractive Investments
01 SERVICE MIX
Current & Future Sub-Service Line Mix/Exposures
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​Accounting firms sit at the center of the expansive CFO’s purview, which provides credible access to a broad array of growth vectors.
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"Better" investment opportunities serve key demand trends and orient a service mix to heighten exposure to industry-leading growth areas.
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02 PROFITABILITY
EBITDA Profile
Accountancies have historically focused on distributable earnings, which has supported strong margin profiles for the industry.
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However, how earnings are distributed varies within the organization; attractive targets have clarity around where an EBITDA "scrape" will be derived.
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03 LEADERSHIP
Leadership's Strategic Vision & Ability to Execute
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An "investable" accounting firm will have an ambitious yet achievable vision that requires capital to execute.
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Key tenets of a good plan include new/expanded services and capabilities, new geographies, new industries, etc., with clear linkage to the firm's core and unique positioning.
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Service Mix
Current & future service mix
is oriented to heighten growth exposure
Profitability
Clarity around an EBITDA "scrape" is attractive and preferred
Leadership
Leadership has a strategic vision and ability to execute
Firm culture
Strong firm culture creates employee retention
Enablement
Maturity of enablement functions
04 FIRM CULTURE
Firm culture
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Accountancies are confronting supply side shortages, which makes talent acquisition and retention a strategic imperative.
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Firms must develop strong culture to enable peer-leading employee retention; strong culture will also enhance/support step-wise firm growth.
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05 ENABLEMENT
Maturity of Enablement Functions
Accounting firms historically prioritize distributing earnings and overwhelming lack of "reinvestment" into the business (in lieu of prioritizing distributing earnings) offers immense opportunities.
Key EBITDA accretive enablement functions include technology and offshoring.
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Why now?
A confluence of factors are contributing to a sense of urgency amongst accounting firms as they seek to ensure they ride this wave of change, instead of getting washed away by it.
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What's the key driver?
Disruptive pressures and the pace of change are triggering an "arms race" across the industry. Firms require access to capital as they push to expand capabilities and fund investments in new technologies and operating model changes (e.g., offshoring).
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Why does it matter?
Accounting firms have a long list of accretive projects—new technologies, offshoring, new service, etc.—to deploy capital. The base case returns potential on these investments is empirically high.
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01 IMMEDIATE NEED FOR CAPITAL
02 REGULATORY "ACCEPTANCE" FOR ALTERNATIVE PRACTICE STRUCTURE
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What's the key driver?
Emergence of alternative practice structure, which separates attest business from tax/consulting, has opened the door for private investment by circumnavigating required majority ownership by CPAs.
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Why does it matter?
Alternative practice structure provides deal makers with a viable plan towards buy-out transactions with relatively low risk of regulator pushback.
04 GENERATIONAL SHIFT APPLYING PRESSURE TO MODEL
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What's the key driver?
Next generation of firm leadership are disenchanted by the "golden egg" of a partner pension and are pushing for a meaningful change to the model.
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Why does it matter?
Investors intended redesign to operating models, company cultures, etc., is a welcomed iteration by the industry, which reduces investment risk.
05 ACCELERATING DISRUPTIONS ACROSS INDUSTRY
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Why does it matter?
Disruptions are catalyzing an industry-wide re-think, allowing innovative players to develop new unique selling propositions and potentially gain market share.
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What's the key driver?
Expanding interest in tech-enablement, "right" shoring, adjacency expansion, etc., which, when combined with supply-side constraints (alongside the emergence of generative AI), is changing the landscape.
03 EXPANDING NUMBER OF EXIT OPTIONS
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What's the key driver?
The range of potential exit pathways is expanding beyond only targeting larger sponsors. The emergence of acquisitive strategics (e.g. ACN, B4, etc.), RIAs, etc. as well as several plausible carve-out opportunities (i.e., sell pieces separately), is enhancing the viability of competitive exits.
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Why does it matter?
Sponsors have an expanding number of viable options for exits, which increases the probability of positive outcomes (and provides improved flexibility for timing).​
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Still have questions? We can help!
Stuart Ferguson, CPA
Partner, Pointe
+1 540-850-8059
Stuart Ferguson is a Partner in Pointe’s Private Equity Group and has nearly 10 years of specialized experience in inorganic growth, with M&A expertise across a wide range of sectors, including accounting services. Stuart has led diligences on eight accounting services firms in the US since 2020, including several of the largest transactions in the space (e.g., TowerBrook’s acquisition of EisnerAmper and Parthenon’s acquisition of Cherry Bekaert).
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Prior to joining Pointe, Stuart led diligences in Bain & Co’s Private Equity Group. Before that, he was an accountant at KPMG, specializing in hedge fund accounting and tax.
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Stuart holds an MBA with distinction from the University of Virginia Darden School of Business and graduated magna cum laude with a BBA from the College of William & Mary. Stuart is also a Certified Public Accountant (CPA) in Virginia.
Allan Koltin
CEO, KCG
+1 312-662-6003
Allan is a Senior Advisor to Pointe’s Private Equity group for Professional Services deals. Allan has more than 30 years of experience advising professional services firms.
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As CEO of Koltin Consulting Group, Allan specializes in supporting professional and financial services firms in areas of practice growth, practice management, human capital, and mergers and acquisitions. Allan is also a nationally recognized speaker and industry analyst and has been named by Accounting Today as one of the Top 100 Most Influential People in the accounting profession. He has appeared on multiple television networks and is quoted frequently by national and international news outlets.
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Allan is also the author-editor of three books for professional services firms: CPA Firm Merger Strategies That Work, CPAs That Sell, and the AICPA’s Marketing a Consulting Niche.
Fredy Irizarry
Principal, Pointe
Fredy Irizarry is a Principal leading Pointe’s Private Equity Group. He has over 10 years of experience in commercial due diligence, corporate strategy, and strategy consulting for both private equity and corporate clients across industrials, automotive, aerospace & defense, manufacturing, chemicals, energy, utilities, and financial services.
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Prior to joining Pointe, Fredy spent over five years at Bain & Company leading PE commercial due diligence and delivering growth strategy projects for public and private companies. Fredy has also been the Chief Strategy Officer of a $1.4B regional retailer, and an analyst at Capital One.
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Fredy graduated from Harvard Business School with a MBA, Duke University with a Master of Engineering Management, and the University Of Maryland as a Mechanical Engineer.
Michael Inserra, CPA
Independent Advisor
+ 914-673-8548
mjinserra@gmail.com
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Michael is a Senior Advisor to Pointe’s Private Equity group for Professional Services deals. Michael has more than 30 years of experience as a leader of EY (including >5 in a C-suite-equivalent role).
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During Michael’s tenure at EY, he served as the Senior Vice Chair and Deputy Managing Partner of EY Americas and a member of the EY US and Americas executive boards. His primary responsibilities were driving the operations across the Americas, including organic and inorganize activities. Previously he served as the Vice Chair of the Financial Services business.
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Michael currently serves as a senior advisor to Private Equity firms in a broad array of business services transactions. Michael is also a certified public accountant and a Qualified Financial Expert.
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