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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?
Accountancies offer an attractive access point for investing in the growth trajectory of the expanding purview of CFO-related business services.
At a high-level accounting firm, theses are primarily oriented around several consistent economic principals. PE firms are increasingly able to capitalize on opportunities with accountancies due to recent innovations around deal structures.
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You have the potential to capitalize
on market growth trends.
You can evaluate and become a multi-service provider, giving firms new and upward development.
Access investment in the exponential growth of your business and beyond
Thesis Elements and Key Economic Principals
When it comes to capitalizing on accountancy opportunities, innovation matters.
01 ORGANIC GROWTH POTENTIAL
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Accounting TAM comprises a wide array of services and competencies; some targets are better positioned to capitalize on market growth trends.
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Evaluating platform investments based on exposure-weighted growth is an important criteria (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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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; process optimization via automation, offshoring, etc. can greatly expand EBIT
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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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TAM has historically proven resilient; however, the downside beta varies by SL, with compliance-related services tending to be less risky
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Firms with compliance-related services (e.g. Audit) or countercyclical offerings (RST) reduce downside risks
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​
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2021
Acquired EisnerAmper, ~2900 person (~$614M rev.) tax and audit firm
2022
Acquired Cherry Bekaert, 1280 person (~$290M rev.) audit, tax, and advisory firm
2022
Acquired Citrin Cooperman, ~1900 person (~$490M rev.) accountancy
2023
Acquired lower middle market accountancy and Chicago-based accounting and tax firm, NDH
The Five Pillars of Attractive Investments
The Five Pillars of Attractive Investments
Firm culture
Strong firm culture creates employee retention
Enablement
Maturity of Enablement Functions
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 Sub-Service Line mix/exposures
are 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
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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04 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 accounting firms are demonstrating to ensure they ride the wave of change, instead of getting washed away by it.
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What's the key driver?
Disruptive pressures and pace of change is triggering an "arms race" across the industry, which is pushing firms to seek access to capital to fund intended technology and model investments.
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What's the importance?
Accounting firms currently have a long list of accretive projects—new technologies, offshoring, new service, etc.—to deploy capital.
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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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What's the importance?
Alternative practice structure provides deal makers with a viable plan towards buy-out transactions with relatively low risk of regulator pushback.
03 EXPANDING NUMBER OF EXIT OPTIONS
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What's the key driver?
Potential exit pathways is expanding beyond larger sponsors to include large strategics (e.g. ACN, B4, etc.) RIAS, etc. as well as several plausible carve-out opportunities (i.e., sell pieces separately)
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What's the importance?
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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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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What's the importance?
D 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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What's the importance?
Disruptions are catalyzing an industry-wide re-think, allowing innovative players to develop new USPs 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.
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