The Rise of Private Equity in CPA Firms: Why It’s Not Just for Large Firms Anymore
2 MIN READ
Jessica Kentch, Founding Partner, Ablaze Analytics & Collective
The accounting industry is undergoing a transformative shift, driven by the growing influence of private equity (PE) investments. Historically, private equity was reserved for large firms, but this is rapidly changing. Now, even small and mid-sized CPA firms are attracting interest from PE investors, marking a significant opportunity for growth and expansion in a sector that has long been considered stable but slow to scale.
The Traditional Model of Accounting Firms
Historically, accounting firms, both large and small, expanded through traditional growth methods such as adding services, expanding geographically, or branching into advisory. However, these strategies often required heavy upfront investments, and many firms faced constraints in accessing the capital needed to scale effectively. Additionally, the rapid pace of technological advancements, particularly in AI, has disrupted this stability, creating both challenges and opportunities for the industry.
Private Equity’s Impact on the Accounting Industry
Private equity (PE) firms have traditionally focused on industries like healthcare, technology, and manufacturing, where scaling opportunities are more apparent. However, in the last few years, PE firms have started to show a marked interest in professional services, including tax and accounting firms. The turning point came in 2021 with the announcement of a major investment by TowerBrook Capital Partners in EisnerAmper, a global tax and accounting giant. Since then, the trend has continued, with PE firms investing in some of the largest accounting firms in the world.
The growth of private equity investments in the accounting sector can be attributed to several factors:
Stable, Recurring Revenue Streams: Accounting firms provide steady, predictable income through long-term client relationships.
Fragmented Market: The accounting industry remains highly fragmented, creating opportunities for consolidation and economies of scale.
Complex Regulations: The increasing complexity of global financial and tax regulations has fueled demand for specialized accounting services, driving growth opportunities.
Private Equity’s Interest in Small Firms
For many, the idea that private equity would invest in smaller accounting firms might seem far-fetched. However, the majority of accounting firms are small, and PE firms are beginning to recognize the potential in these smaller players. Small firms, often constrained by limited capital, can benefit immensely from PE funding in several ways:
Access to Capital: PE investments offer small firms the necessary funding to upgrade technology, acquire talent, and expand their service offerings. This infusion of capital can be used to scale operations, invest in modern IT systems, or enter new markets.
Operational Expertise: In addition to providing capital, private equity firms bring valuable operational expertise. They can guide small firms in scaling effectively, improving efficiencies, and implementing best practices, helping firms compete with larger players in the market.
Enhanced Competitive Positioning: With the support of private equity, small firms can expand their service offerings, reach new geographic markets, and target larger clients, positioning themselves for increased market share and revenue growth.
Attracting Talent: One of the significant advantages of private equity backing is the ability to offer competitive salaries and benefits, which can help small firms attract top talent.
Exit Strategy: For founders and partners looking to retire or exit the business, private equity offers a viable exit strategy. PE firms can buy out existing owners, ensuring a smooth transition while allowing the firm to continue growing.
The Role of Analytics in Exit Strategies
As private equity firms look to invest in smaller accounting firms, the importance of robust data analytics becomes increasingly clear. A well-defined exit strategy often hinges on a firm’s ability to provide clear, actionable insights into its financial health and performance. This is where analytics tools, like those offered by Ablaze Analytics, play a crucial role. By leveraging data mining and visualization techniques, accounting firms can present a clearer picture of their operations, making it easier for PE investors to assess the firm’s value and growth potential.
Ablaze Analytics specializes in helping accounting firms tap into their data through advanced tools that provide deep insights into their financials, operational performance, and client portfolios. Our platform can help firms identify key metrics, streamline operations, and create a strategic roadmap for growth—whether the goal is to attract investment, plan an acquisition, or prepare for an eventual exit. By providing a data-driven approach to decision-making, Ablaze Analytics empowers firms to position themselves for success in an increasingly competitive market.
Potential Challenges
While private equity offers substantial opportunities, there are challenges to consider. PE firms typically expect high returns within a short period, which can pressure firms to prioritize short-term financial gains over long-term client relationships. Additionally, the cultural clash between the PE firm’s strategy and the existing firm’s approach can create friction. However, with the right guidance and strategic vision, the benefits of PE investment often outweigh these potential risks.
The Future of Small CPA Firms
The rise of private equity in the accounting sector represents a significant shift in the industry. Small firms now have the opportunity to access capital, operational expertise, and strategic guidance that were once reserved for their larger counterparts. With the right tools, such as data analytics, and the backing of a private equity firm, small accounting firms can now scale, compete with larger players, and position themselves for long-term growth.
For firms considering the prospect of private equity investment, the future looks promising. With the right blend of capital, expertise, and strategic planning, even the smallest firms can achieve sustainable growth and succeed in a rapidly evolving industry.
Would you like to learn more about how Ablaze Analytics can help your firm access critical data insights for growth and investment opportunities? Contact us today for more information on our data-driven solutions designed for CPA firms.