Investors eyeing opportunities in accounting firms

As technology and other factors transform the accounting industry, a growing number of firms are turning to private equity investments to help them keep up with the pace of change.

It’s an emerging trend in the accounting industry, which traditionally has not needed—or been interested in accepting—outside investment.

But the past few years, accounting firms across the country, including several in the Indianapolis market, have begun doing deals with private equity firms to secure the funding they need to invest in things like technology and talent acquisition. The funding can also help provide liquidity for accounting firm partners who are eyeing retirement.

One of the most recent examples involves Chicago-based Baker Tilly US LLP, an accounting firm with 6,700 worldwide employees—including 158 people who work in the firm’s Indianapolis and Mishawaka offices.

On June 3, the accounting firm closed on an investment topping $2 billion from two San Francisco-based private equity firms: Hellman & Friedman LLC and Valeas Capital Partners. At the time it announced the deal, Baker Tilly described it as the largest private equity investment to date in the U.S. accounting sector.

“We determined that we needed an outside partner with access to far more capital than we would have as a stand-alone entity, and that’s really what drove us towards this transaction,” said Chuck Droege, Baker Tilly’s Chicago-based chief operating officer.

Droege said the private equity funding will allow Baker Tilly to invest in technology and talent and to grow through the acquisition of other firms.

Growth and technology upgrades, Droege said, are necessary so Baker Tilly can keep up with the midsize companies that make up the firm’s client base. Over the past 15 years or so, he said, some of these clients have begun doing business internationally, increasing the complexity of their accounting and tax needs. They may have added new lines of business or integrated technology into their operations in new ways.

This all means that Baker Tilly, and accounting firms in general, must invest in their own capabilities so they can keep up with their clients, Droege said. “Accounting firms across the country are seeing that pinch. If they’re not able to invest in that, they’re falling behind, and their clients are asking them for things that they cannot deliver.”

Allan Koltin, CEO of Chicago-based Koltin Consulting Group Inc., said he sees the same situation from where he sits. Koltin’s firm specializes in the accounting and financial services industries.

“For the first time ever, CPA firms desperately need capital,” Koltin said.

The first private equity investment in an accounting firm came in 2021, he said, when New York City-based EisnerAmper LLP accepted an investment from New York City- and London-based TowerBrook Capital Partners LP. Since then, private equity has invested in more than 20 firms—either accounting firms or those firms’ related wealth management firms.

In addition to Baker Tilly, a few other accounting firms with Indianapolis operations have also done private equity deals.

In May, Chicago-based Sikich LLC announced it had received a $250 million minority investment from Boston-based Bain Capital LP. Sikich has more than 1,900 global employees, including 51 in its Indianapolis office.

And in January, Springline Advisory—a firm created by Dallas-based private equity firm Trinity Hunt Partners—made an investment of an undisclosed amount in Indianapolis-based accounting and advisory firm BGBC Advisory LLC.

The technology factor

Technology is playing a big role in accounting firms’ need for capital, Koltin said.

Artificial intelligence and other technology can now handle some of the number-crunching that used to require human effort, he said. As a result, firms might be investing in such technology to become more efficient. They might also be looking for new revenue streams by adding lines of business such as consulting, business advisory services and wealth management—perhaps by acquiring other firms.

Sikich CEO Chris Geier said the firm’s acquisition plans were what drove it to seek outside investment. “In order for us to be competitive, we need that type of capital [in order] to be one of the consolidators in the industry rather than be one that is consolidated.”

Sikich earns about half of its revenue from accounting services, Geier said. The other half comes from the firm’s other offerings, which range from business consulting to site selection to forensic investigations. The Bain Capital investment will enable Sikich to grow through the acquisition of both accounting and non-accounting firms.

Initially, Geier said, Sikich intended to quietly seek outside investment without making a splash about it. But he changed his mind after realizing that publicizing the deal could create a competitive advantage for his firm. “I did a total 180 on that thought process—we need to tell the world that we have this money so that sellers are aware that we are a capable buyer that has capital.”

Acquisitions in the accounting industry traditionally have been structured in the form of equity swaps that do not involve cash, Geier said. The payout for the seller came years later, when they retired.

But once private equity entered the picture, he said, acquiring firms had the ability to offer a significant percentage of the deal’s total value in cash upfront, creating a more appealing offer for sellers.

Now, Geier said, sellers have come to expect that cash will be part of the deal. “Anybody that comes to the table with an offer to buy your company has to have cash as an option.”

An attractive target

From the investor’s side of the table, the accounting industry offers a lot to like.

For one thing, accounting is generally a low-risk industry with predictable revenue streams. Clients need financial reports and audits completed on a regular basis, and if an accounting firm does a good job, the client is likely to stick with it for years.

“Private equity looks at that, and they say, ‘Wow!’ They salivate over that,” Geier said.

The accounting industry is also fragmented, consisting of many firms that could be potential investment targets.

“There are only a few industries left where private equity hasn’t led consolidation,” said San Diego-based Anthony Arnold, who leads Indianapolis-based law firm Barnes & Thornburg LLP’s mergers and acquisitions and private equity practice.

Accounting is also part of the larger business services industry, which Arnold said began to attract interest from private equity firms in the past five to 10 years.

Accounting firms can also be attractive because of their business connections, said Faraz Abbasi, managing partner at Indianapolis-based private equity firm Centerfield Capital Partners.

Investment firms are continually on the lookout for new investment targets, Abbasi said, and an accounting firm’s client list might include some promising leads. If a private equity firm invests in the accounting firm, it could tap into that client list. “It could be an automatic deal-flow build, a pipeline build.”

Historically, Abbasi said, private equity firms were leery of investing in professional service firms, whose main assets are its people. “If one or two people leave from those businesses, you can have a lot of chaos.”

But in recent years, he said, private equity firms have come up with ways to mitigate those personnel risks by creating compensation structures that encourage key employees to stay with the company. A deal, for instance, could offer deferred compensation packages that don’t pay out until the private equity firm exits its investment in several years.

Centerfield hasn’t yet invested in an accounting firm, Abbasi said, but is open to doing so if it finds the right deal.

Saying ‘no thanks’

Some accounting firms, though, say they’re not interested in accepting private equity investments.

Tim Cook, CEO of Indianapolis-based Katz Sapper & Miller, said he receives queries every week from private equity firms.

“Every firm that’s our size, and smaller and bigger, they’re getting the same phone calls,” Cook said.

KSM is one of the city’s largest accounting firms, with 360 Indianapolis-based employees and more than 560 employees firm-wide. The company also has offices in Evansville, Fort Wayne, New York City and Oklahoma City.

Cook said private equity’s interest in accounting firms seems to be growing, with deal activity—and rumors of upcoming deals—accelerating over the past year.

But outside investment comes with strings attached, he said, especially if that outside investor takes a majority ownership stake.

“Right now, we have complete autonomy on how we’re running our firm,” Cook said. “Our ability to have that autonomy is super important to what our strategy is.”

Last month, KSM acquired Cassady Schiller CPAs & Advisors, a 70-person firm based in Cincinnati. KSM declined to disclose financial terms of the deal, but Cook said private equity was not involved.•