Let me start by saying, I’m no expert on private equity (PE). But it doesn’t take one to see that PE investments are transforming the accounting world. For decades, accounting firms relied on reinvested earnings and deferred compensation to fuel steady growth.
Now, with PE money flooding in, the rules have changed, and the pressure is on to use it wisely.
Here’s the accounting world’s version of Risky Business—a dive into how firms are (or should be) putting their PE windfall to work, what it means for those playing it safe, and how the competitive landscape is shifting faster than you can say, “Sometimes you just gotta say, what the [bleep].”
Replacing the Deferred Compensation Model
The traditional deferred compensation model, where partners receive payouts at retirement, is becoming obsolete—much like the golden pension plans of the 1970s. Private equity (PE) firms are shifting away from this approach, opting instead to buy out these obligations upfront. This strategy offers partners immediate liquidity and frees up cash flow for reinvestment. ICPAS
For partners in their 40s, this shift is a wake-up call—why hang onto a decades-long runway when you could cash in now and potentially have another payday in five years? After all, waiting until you’re ready for shuffleboard isn’t exactly the PE vibe.
This transition makes firms more attractive for future sales or public offerings, aligning perfectly with PE’s growth-driven mindset. It’s less about slow and steady and more about getting to the finish line before the next market shift.
Investing in Technology
Accounting firms are using PE funds to close the technology gap, investing in tools like AI-driven audit solutions, integrated client dashboards, and cloud accounting systems.
However, the key isn’t just buying the best tech—it’s ensuring that systems integrate seamlessly to enhance productivity. A fragmented tech stack can be just as problematic as outdated tools.
Scaling Through M&A and Building Advisory Practices
PE funding fuels aggressive growth strategies, but the big question is: Should firms build capabilities in-house or buy strategically through acquisitions?
- Building In-House: This allows firms to create tailored solutions aligned with their processes, but it’s time-intensive and resource-heavy.
- Buying Strategically: Acquiring niche firms or Acqui-hires—especially in high-demand areas like ESG consulting, data analytics, and cloud accounting—offers quick access to expertise and revenue streams.
Micro-acquisitions, where firms buy small, specialized practices, are becoming a preferred strategy. These smaller purchases are easier to integrate, offering scalability without the risks of a massive merger. Success hinges on seamless integration to create cohesive solutions that add client value.
- Personally, I think this is one of the smartest moves firms can make. Why roll the dice on a blockbuster acquisition that could implode under its own weight when you can cherry-pick niche firms with laser-focused expertise? It’s like assembling a dream team one player at a time—small moves that, when done right, can change the game entirely.
Revamping Compensation Models
PE-backed firms are shifting away from traditional partner distributions toward performance-driven incentives. This approach includes equity-based compensation, retention bonuses, and payouts tied to clear growth metrics. Some firms are even promising returns of up to 5x within five years, offering money upfront and a significant payday on the backend. This shift fosters an entrepreneurial culture that prioritizes results, motivating employees to actively drive the firm’s success.
Strengthening Leadership and Talent
Private equity (PE) funding often exposes a critical gap in accounting firms: leadership. While the team that secures funding may not always be equipped to deploy it strategically, the role of the current CEO should remain central. After all, it’s their vision and leadership that secured the funding in the first place. The CEO’s continuity is critical for maintaining the firm’s direction and credibility with both employees and external investors.
However, a strong visionary CEO cannot succeed alone. To execute effectively in a PE-backed environment, they must build a capable leadership team around them. This team should complement the CEO’s strategic vision with expertise in scaling operations, managing growth, and achieving measurable results. The ability to lead a PE-backed firm hinges on balancing big-picture thinking with operational precision.
To thrive, firms should:
- Keep the Visionary CEO in Place: The current CEO provides the continuity and strategic insight needed to guide the firm through its next phase of growth. Their role is pivotal in sustaining the momentum that secured PE investment.
- Upgrade Leadership around the CEO: Recruit experienced leaders who can drive operational efficiency and growth under the unique pressures of private equity. As noted in the:
“Private-equity firms are often complex, and accounting firms should carefully investigate all entities associated with private-equity firms they partner with to avoid possible threats to independence.”- Journal of Accountancy
- Build Advisory Boards: Leverage external expertise to guide critical decisions. Advisory boards composed of seasoned professionals can offer strategic insights and help the CEO navigate the complexities of rapid growth.
- Focus on Results: Ensure leadership teams prioritize measurable outcomes over traditional practices. Performance-based metrics and accountability structures are essential to align the firm’s objectives with PE expectations.
By keeping the CEO as the visionary at the helm and surrounding them with a skilled leadership team and external advisors, firms can capitalize on PE funding to drive sustainable success. This combination of continuity and enhanced execution positions firms to thrive in an increasingly competitive and rapidly evolving accounting landscape.
What About Firms Avoiding PE?
Not every accounting firm is embracing the private equity (PE) trend, and for some, that’s a calculated decision. Firms opting out of PE funding often point to concerns about cultural upheaval, the loss of independence, and the intense pressure to deliver rapid returns. As one leader aptly put it:
“We deal with private equity a lot, and their goal is to get a return on their investment. You have to realize that, when you take that type of capital.” – Brian Becker source: ft.com
However, opting out of PE comes with its own set of challenges:
- Competing for Talent: PE-backed firms can offer enticing packages, including higher salaries, equity, and bonuses.
- Financing Innovation: Without PE dollars, firms must get creative to fund tech upgrades and expand service offerings.
- Staying Competitive: As PE-backed firms scale aggressively, those avoiding outside investment must carve out a niche—such as deep specialization or superior client relationships—to maintain relevance.
For firms that choose independence, managing deferred compensation obligations remains a looming challenge. The traditional model, where younger partners fund payouts for retiring ones, is becoming increasingly unsustainable. Those choosing to forgo PE must now figure out how to address these internal liabilities without external funding—a conundrum that even the largest firms are grappling with.
You can almost hear managing partners saying, “Thanks, PE, now we have to solve this ourselves.”
For these firms, success lies in embracing their independence as a competitive advantage. By doubling down on core values, focusing on long-term stability, and presenting independence as a selling point to both clients and employees, these firms can thrive on their own terms—even without the boost of private equity.
How Will the Top 10 Firms Evolve?
The current top 10 accounting firms in the U.S. are dominated by familiar names like Deloitte, PwC, EY, and KPMG, with a mid-market leader holding the fifth spot at $4.0 billion in revenue (Financial Times). However, the competitive landscape is shifting as private equity fuels rapid growth among ambitious challengers.
- CBIZ & MHM: With its $2.3 billion acquisition of Marcum, CBIZ has a combined revenue of $2.8 billion and aims to break into the top five.
- BDO USA: Generating $2.9 billion in revenue, BDO is expanding its advisory and tech investments (Financial Times).
- Grant Thornton LLP: With $2.4 billion in revenue, Grant Thornton’s partnership with New Mountain Capital is driving aggressive growth.
As private equity reshapes the profession, the battle for dominance is heating up. Whether defending positions or climbing the ranks, firms must adapt to an industry undergoing rapid transformation.
Final Thoughts
Private equity funding presents accounting firms with a Risky Business moment—an unprecedented opportunity for growth, but not without significant challenges. For PE-backed firms, success depends on making strategic investments, scaling effectively, and ensuring leadership is aligned with bold, forward-thinking objectives.
For those opting to avoid PE, the challenge lies in leveraging independence as a competitive advantage while staying innovative and attracting top talent.
The profession is evolving at breakneck speed, and whether firms embrace private equity or not, one thing is clear: adapt or risk being left behind.
What’s your take on this PE revolution in accounting? Is it a golden opportunity or a gamble not worth taking? Let’s discuss!
