Challenges Private Equity-Backed Accounting Firms are Facing and How to Overcome Them

The mantra 'the only way is up' holds true for accounting firms facing pressures to grow amidst an ongoing talent shortage, partner retirements, and costly but necessary tech investments. 

Accounting firms aiming to fund extensive technology and infrastructure investments are turning to private equity firms to fuel their growth, a trend that began gaining traction in 2021 when TowerBrook Capital Partners acquired a stake in EisnerAmper LLP. Since then, private equity investments in accounting firms have increased, providing firms with the capital and strategic partnerships they need to scale.

Private equity investments come with their own set of challenges, however, as private equity firms typically demand robust revenue growth and highly efficient operational performance. Firms with weak sales and operational processes may struggle to meet the revenue expectations their new investors have set for them, paving the way for even more challenges down the road.

Challenges Private Equity-Backed Accounting Firms are Facing

High Expectations

Intense competition and economic uncertainty are pushing private equity firms to demand higher revenues from their investments. To meet expectations, accounting firms are facing a number of hurdles while strengthening their business development efforts, optimizing processes, and synergizing teams across service lines:

• Setting Realistic Targets: Firms often struggle with setting revenue targets due to unclear value assessments and measurements, leading to an average shortfall of 23% between goals and actual outcomes.
• Changing Sales Behaviors: Adapting sales strategies and implementing new sales tools can be slow and challenging without the proper training or incentives.
• Synergizing Across Functions: Boosting operational efficiencies demands effective coordination across departments, managing complex processes, and ensuring team-wide commitment to integration efforts.

Inadequacy of Traditional Business Models

As private equity investments in accounting firms increase, firms are finding that their traditional vertical business models aren’t meeting investors’ evolving demands.

Private equity firms expect quick and nimble strategic shifts, integrated services, broader leadership, and performance incentives, which are often lacking in firms with vertical business models. While traditional firm operations emphasize stability and gradual growth, they lack the resources accounting firms need to scale or modernize quickly.

Moreover, 84% of turnover among accountants is voluntary in the U.S., while a recent UK report found that the attrition rate in the accounting sector increased from 14% in 2021 to nearly 18% in 2022. In both countries, accountants often leave firms due to conventional operational structures lacking incentives for their employees — another challenge associated with vertical business models.

Transitioning to Horizontal Business Models

The total number of firms that moved to an Employee Ownership Trust (EOT) model, which aligns employee interests with the firm's successes while offering tax benefits, increased by 40% from 2022 to 2023.

Meanwhile, RSM International is transitioning to a horizontal business model as a part of its 2030 Global Strategy, which aims for a 100% revenue increase and integrates global services through improved technology and unified methodologies. This strategy has already sparked a 41% revenue growth over three years and an 18% increase in headcount.

Transitioning from a vertical model to a horizontal model not only drives growth but also boosts an accounting firm's ability to connect sales efforts across various service lines and teams. Firms are also better positioned to break down traditional silos, facilitating a more cohesive approach to sales efforts. 

Solutions for Overcoming Private Equity-Related Challenges

Accounting firms backed by private equity firms should consider the following growth strategies to meet revenue expectations:

Cross-Selling as a Proven Solution for Growth

Cross-selling supports firms in meeting revenue goals by maximizing existing client relationships. Clients are less likely to switch to a competitor when their current firm has the ability to support all of their needs. Moreover, effective cross-selling proactively addresses clients’ concerns while deepening relationships, potentially driving up to 20% revenue growth.

Cross-Selling Insights and Strategies

In "The Six C's of Cross-Selling Success," McKinsey reports that fewer than 20% of organizations reach their cross-selling targets. After surveying seasoned M&A executives with cross-selling experience, McKinsey identified the “Six C’s” that can guide firms in assessing and improving cross-selling opportunities in a merger:

1. Complementarity: Align products and services to create solution-driven bundles while understanding how to effectively implement these bundles.
2. Connection: Leverage strong relationships with client decision-makers to boost cross-selling success.
3. Capacity: Evaluate if the sales team can handle new cross-selling efforts without disrupting existing responsibilities.
4. Capability: Provide training on consultative selling to enhance cross-selling skills.
5. Compensation: Use attractive incentives and well-structured compensation plans to motivate sales teams, including non-monetary rewards.
6. Commitment: Ensure leadership prioritizes cross-selling with clear targets and performance tracking.

These efforts are challenging to fulfill without insights and support from reliable B2B cross-selling tech platforms like Propense.ai. By leveraging artificial intelligence to analyze accounting firms’ datasets and provide targeted cross-selling recommendations, Propense.ai enables accounting firms to improve their cross-selling strategies, diversify service portfolios, and boost client retention and satisfaction.

Navigating Merger & Acquisition Activity

Sometimes, mergers and acquisitions (M&A) provide better control, risk management, and exit strategies for accounting firms. Experts have anticipated an increase in M&A activities since 2022, making them an attractive choice for accounting firms seeking alternatives to private equity backing.

Here are some tips to prepare for mergers and acquisitions:

• Understand the Business Context: Compile critical information about both firms and use this data to conduct a SWOT analysis outlining each firm’s respective strengths and weaknesses.
• Identify Key Client Segments and Markets: Perform market research and customer segmentation to uncover optimal growth opportunities.
• Evaluate Existing Resources and Capabilities: To reap all the benefits of a merger or acquisition, you must assess a firm’s financial health, human capital, technology infrastructure, and operational processes.
• Develop a Comprehensive Growth Plan: Establish a budget, allocate resources, and create a communications plan to ensure a smooth transition.

Strategizing for growth doesn't end with a successful merger or acquisition, however. Ongoing success demands proactive thinking and growth-oriented technology.

Identifying and pursuing cross-selling opportunities, refining client interactions, and improving operational efficiencies are continuous tasks. Implementing AI-powered technology is key to streamlining these activities, freeing up time for more complex projects and client advisory services. Learn more about essential post-merger strategies here.

Next Steps

Private equity investments offer game changing capital infusion and accelerated growth opportunities, but they also come with high expectations. Bolstering your cross-selling efforts can help you meet new targets, positioning your firm for long-term success.

Whether you’re backed by a private equity firm, considering a merger or acquisition, or aiming to maintain your firm’s autonomy, Propense.ai can optimize your business development strategies while enhancing your profitability.

For more insights and resources, visit the Propense.ai blog.