The CPA industry's changing landscape: Succession, private equity, and the future

by Laura Berry, MBA, CPA-GA

Like many industries during the pandemic, CPA firms witnessed a wave of early retirements as owners chose to exit the business world. The Great Resignation impacted companies significantly, and for an industry already grappling with succession challenges, an early mass exit by the baby boomer generation set the stage for a dramatic shift in ownership, potentially up to 49 percent in the coming years.

As we observe this transformation, there are similarities to the roll-up strategy within the banking industry that swept the nation in the 1990s. During that time, numerous larger banks acquired smaller local banks and streamlined their process to achieve economies of scale; it was a running joke that people couldn't keep track of their banks because the names changed so often that you needed a scorecard to keep up with all the new names. Although in 2024, we are nowhere near needing a scorecard to recall your accountant's name, the underlying strategy appears to be a rinse-and-repeat of the roll-up banking era.

Succession challenges at CPA firms

Over the past decade, CPA firms have faced a growing succession challenge; fewer individuals are entering the profession than exiting, leaving many firms lacking the talent to drive forward for the next generation. This gap continues to widen as soft-skill training has dwindled, and many senior professionals have retired formally or informally. The reduced in-office presence and lack of hands-on mentorship have left future leaders without the development they need to successfully lead a firm. With the departure of so many senior team members, the remaining management teams are now confronting a critical issue: who will fund these retirements, and how can they ensure they receive their payouts when it's time to retire?

Private equity's promising value and alignment

Enter Private Equity (PE). One of the hottest industries in business today, PE, fueled by MBAs, debt, and cash, targets a wide range of sectors. Services providers, like CPA firms, are no exception. PE firms typically share one common interest: a love for an excellent recurring revenue model – the cornerstone of a CPA firm. Recurring revenue provides the stability of cash flow, which helps fund an investment and offers scaling opportunities. When paired with high-value, high-margin projects, it becomes a winning formula with the potential to drive growth in both the top and bottom lines.

Tax compliance, audit services, and bookkeeping are the bread and butter of CPA firms, and this client base often presents opportunities for high-value projects that generate high-margin profits—perfectly aligning with PE investment criteria. PE firms are attractive to CPA firm owners because they are cash-rich, able to retire existing debt, fund former partners' retirement packages, and help firms grow to the next level.

Once a PE firm acquires its target, it streamlines operations by cutting overhead, implementing efficient processes, introducing newer technology, and incentivizing cross-selling both within departments and across portfolio companies. The strategy is straightforward: acquire a platform company (typically a larger firm), add bolt-on acquisitions (smaller firms), implement efficiencies across the platform, and let them compound over five to seven years. The firm is then repackaged for a secondary buyout, where a larger PE firm may step in to continue the growth or prepare for the next stage. Although the CPA industry has yet to see significant secondary buyouts, many are closely watching to see what happens next.

PE firms are not the only ones taking advantage of this opportune time; well-capitalized, larger CPA firms and banks are also eager for their slice of the CPA market, driving up the value of local firms and leading to historically high valuations and multiples. Mass retirements and heightened competition are shaping a landscape where selling to the highest bidder and exiting sooner rather than later becomes the norm. For sellers and buyers, this is a win-win situation. But for the remaining staff and long-standing clients, there's an air of uncertainty. Once a national giant absorbs a firm, the familiar environment may no longer be the same.

Potential challenges remain for successful acquisition

CPA firms face numerous challenges post-acquisition, with cultural adaptation often being the most significant hurdle. CPA firms, notorious for operating in silos due to their partner-driven book-of-business model, tend to develop multiple subcultures within a single firm. Breaking down those silos is difficult enough, but after an acquisition, the complexity increases as firms now must navigate silos by practice area, location and legacy cultures. Aligning teams and promoting a unified culture can be a significant challenge in the integration phase. This doesn't mean it can't be done—successful integration is possible—but it requires a significant investment of time, effort and resources. Aligning firm culture, training in new software/processes, and navigating buyer expectations will be critical to making the integration work.

An additional concern for surviving partners is how their compensation will be modeled after an acquisition. Historically, partners' bonuses have been tied to firm performance metrics. With new ownership, will this structure change, and how might it impact strategic decision-making within the firm? For example, will there be a shift towards prioritizing short-term profits at the expense of long-term strategy?

The future of CPA firms – Balancing integrity with returns

A key question facing the CPA community is whether this new ownership structure diminishes the value of the profession. In his article "Private Equity and the Ethicsof a Profession," published in the July 2024 issue of The CPA Journal, Richard H. Kravitz explored concerns that private equity investments in CPA firms may conflict with ethical obligations, particularly around objectivity and independence. Could these external influences shift focus from public service to profit, leading to a loss of public trust and increased regulatory scrutiny? As the industry appears to have finally recovered from scandals like Enron and WorldCom, could this new ownership wave be a downfall or a positive force for growth?

Although only time will tell, the future of CPA firms seems increasingly likely to involve outside investors, particularly through private equity, in shaping the industry. However, CPAs themselves must be the ones to balance preserving the profession's integrity—rooted in ethical responsibility and public service—and delivering returns for those external investors. Maintaining this balance will be crucial for ensuring that the profession continues to thrive while embracing new financial opportunities.

Laura Berry, MBA, CPA-GA, leads Windham Brannon's Advisory Practice, drawing on her extensive experience in transactional and strategic advisory services. As a trusted advisor, she concentrates on complex restructuring situations and financial due diligence for both buy-side and sell-side transactions. Laura earned her Executive MBA from Vanderbilt in 2023 and holds a Master of Taxation (2012) as well as a Bachelor of Business Administration (2004), both from Georgia State University. Laura devoted eight years to GSCPA's Professional Ethics Committee and took the lead as chair during the 2018/2019 term.

Reprinted with the permission of The Georgia Society of CPAs.