Accounting Firms With Private Equity Funds Need Focus to Succeed

Private equity is changing the face of the tax and accounting industry. It’s supercharging growth through acquisitions and investment in artificial intelligence and other technology, and rewiring the governance model that’s been in place for many decades. What once was a slow drip of firms considering outside capital is now considered by many a “must do” to remain competitive.

Taking on external capital is neither right nor wrong, but it puts pressure on a firm’s culture, structure, and strategic execution in exchange for funding and growth.

Move too fast, and the slightest misalignment of strategy, expectations, and investment can bog down a firm with a complex client and acquisition portfolio, a wide range of partner performance, and a laundry list of initiatives. Move too slowly, and well-funded competitors will saturate the private equity market before your firm gets a chance.

Private equity funding allows firms to achieve more success and profitability but requires them to be better organized, operated, and led. It demands a new approach to targeting and winning clients; to developing the experiences, skill sets, and collaboration strategies needed across the career model; and to building the governance structures that enable it.

Leaders must rethink how they approach target markets and potential acquisitions and how they reshape the talent portfolio to take full advantage of the technology and AI platforms in which they have invested.

Firms with external capital partners should consider making the following moves to outpace their competitors:

Build the narrative on medium-term value creation for partners. After external capital comes into the picture, partner rewards are no longer a cash-only model. Leaders must make a clear and compelling argument for the equity or equity-like value creation vehicle.

Partners need to understand where the cash goes. Draw a direct line through the cash they were given up front, the lower (but still guaranteed and variable) cash incentive available now, and the potential equity value over three to five years.

Make the future equity value believable and clarify what must happen for the enterprise to achieve the assumed multiple that unlocks that value in three to five years.

Tie what needs to be true for the enterprise to the individual contributions required to reach it. Share with partners and managing directors simple versions of financial models that show how enterprise value increases with various business growth indicators. Let the accountants kick the tires, and make the models a regular talking point in every partner-only forum.

Reconfigure the leverage model, particularly at the bottom. This is where AI and technology can help immediately. Start thinking about how to reduce the number of campus recruits. AI and technology can handle a significant portion of the rote tasks that make up some of those roles.

Don’t do this just to free up cash, but rather to push enterprise thinking about how to beat others to a leverage model that can bring junior talent up to the manager level more quickly through accelerated problem-solving and developing client relationship skills.

Make changes to the overall career model at every level, including partner and principal, and shape the learning and development approach to fit. Think big, start small, and scale fast.

Prioritize technology that delivers value clients can articulate. There is value in experimenting and staying on (or just behind) the cutting edge. But experimenting at the expense of implementing broadly applicable, commonplace AI and technology solutions across the firm leaves too much value on the table.

Use a return-on-investment approach for all AI efforts, not just for the hard-dollar investment but also for the talent hours and opportunity cost each effort requires. AI is advancing at such a rate that any return-on-investment calculations should look no further than 18 to 30 months out.

Acquire quickly but smartly. One advantage of private equity funding is the ability to write a slightly bigger check than independent or less-capitalized competitors without overthinking it. But underthinking too many of these deals will lead to massive write-offs that leaders will wait too long to realize are bad investments.

Be clear on the direction in which the client portfolio is intended to evolve, even if only directionally. Ensure each acquisition and the overall portfolio of talent, capabilities, and services together are helping to move the firm in the right direction.

Put in place the governance structures that force a review of this across the entire portfolio of recent acquisitions and targets.

Treat succession differently than in the past. Sizable firms with significant external funding require vastly different skillsets and experiences to run and lead them.

Mergers and acquisitions, integration, broad technology and AI transformations, and global enterprise efforts are different—and on a different scale—from most independent firms. There may be executive leaders-in-waiting within these large, fast-moving enterprises, but who they are might actually surprise you.

Defining the capabilities of the executive leaders and CEO of the future (which may only be one or two years away) should be a top priority. Current leaders should consider broadly who the next generation of leaders will be and from where they might come.

Done well, it starts by defining the CEO or managing partner role two to three years down the road, identifying five to 10 emerging executive-level leaders, mapping their strengths and development needs against this profile, and designing a tailored development plan for each.

Firms most likely to win will be those that pair growth ambition with organizational discipline. Even if a firm takes on external capital, success depends on clarity of strategy, speed of decision-making, strong governance, and a leadership team willing to rethink legacy assumptions about clients, talent, and the operating model.

Capital can accelerate growth, but it can’t replace focus, alignment, or execution.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Mark Masson is managing partner at Lotis Blue Consulting in Chicago.

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