Focus Article- Richard Shippee

Private Equity Investment in Accounting Firms Elevates Marketers as Key Players

Consolidation in the public accounting industry has accelerated in the past couple of years, with headlines about new business combinations seeming to appear weekly.

But a new factor has emerged on the M&A scene that promises to shake up accounting firm marketing departments — and elevate their positions as key players in firm growth.

Private equity (PE) investment in accounting and advisory firms is on the rise, with the 2021 marriage of New York-based EisnerAmper and TowerBrook Capital Partners marking the highest-profile deal so far.

PE investments in public accounting firms differ from traditional mergers in several ways, most notably in the way the new entities are structured and operated. In most deals, the attest side of a firm is retained as a partnership separate from the tax and advisory entity, in part to satisfy independence requirements. The PE investment is made in the tax and advisory entity, which is operated as a company with officers and employees rather than partners.

Impact on Marketing

The ramifications of PE investment are significant for accounting marketing departments. Since the PE investment model aims to improve a firm’s profitability quickly, significant investments in marketing and technology are key strategies. That’s good news for marketers, but it comes with new expectations.

“PE investment is a new animal,” said Allan Koltin, CPA, CGMA of Koltin Consulting Group. “Large marketing expenditures will require a business plan that justifies the spend, plus an ROI that is acceptable to the PE firm. Quantification will be required, so there will be no more, ‘Hey, let’s go to that conference.’ PE just doesn’t work that way. This will be a shock to the old marketing culture.”

The impact PE investment will have on marketing departments is a prioritization and sharper focus on using automation and technology to improve profitability. This gives rise to career opportunities as there is more focus on specialization within marketing departments. There will be a meaningful change in the skill sets required of marketers as new and more complex products and services are promoted. Marketing departments, if they can justify it to their owners, will have the opportunity to add new talent to their ranks as they find themselves leading the drive to more profitable growth.

What Got Us Here?

Consolidation in the accounting industry is fueled by many factors, not the least of which is the aging population of firm partners. Many are ready to retire, and after years of ushering clients through the PE investment process, they have recognized the benefits for themselves.

The PE investment model offers several benefits over traditional mergers with other firms, most notably cash up front for retiring partners — often as much as 70% — which is taxed as capital gains, no mandatory retirement if they stay on at the firm, reduction of succession risk and the potential for future earnings.

From the PE investors’ point of view, accounting firms represent a stable, profitable industry, but one that has been slow to adopt technology, invest in marketing and engage in innovative business practices. It’s an industry ripe for disruption, said Jody Padar, author of The Radical CPA: New Rules for the Future-Ready Firm.

“PE firms see an opportunity to redeploy money tied up in partnerships, to change things, build value and then exit for a profit,” Padar said, adding that once PE firms acquire accounting firms, their priority is to automate them quickly to enhance profitability. “They’ll make money on the automation, which has been sorely lacking. The impact is incredibly fast and there are lots of opportunities right away.”

The upside for accounting firm marketers is they are uniquely positioned to help meet the demand for revenue growth through new investments in marketing technology and practice development.

Redefining Marketing

Kristen Flasch, vice president of marketing and sales support at Quattro Business Support Services, has seen an “intense focus” on deploying new investments into marketing in the past year since an investment by Trivest Partners L.P. and VSS. Quattro is an accounting and finance outsourcing firm near Atlanta, with additional offices in India.

“In fact, the definition of marketing has completely changed from what I call our old ‘analog marketing approach,’” Flasch said.

Quattro’s outsourced accounting services revenue is growing at nearly 50%. To meet the demand, they’ve added new tools and hired staff in both sales support and marketing to capture new business in segments such as enterprise organizations and health care.

“We were able to pursue these new markets faster with our new automation platform called Spotler, which integrates with our sales CRM system, Workbooks,” Flasch said. Quattro also added more sales support solutions and invested in hours of training on new artificial intelligence tools such as ZoomInfo’s Intent Signals, as well as LinkedIn Sales Navigator’s Enterprise platform.

“This investment has really paid off,” Flasch said. “We can now pull data to identify and then target messages to decision makers, track their expressions of interest and funnel that data to our sales team for a more personalized client-focused approach.”

Flasch’s experience is emblematic of how PE investment impacts marketing departments, said Katie Tolin, owner of CPA Growth Guides in Canton, Ohio, who has been following this trend closely.

“I don’t know if we’ve seen the full impact of PE money yet,” Tolin said, “but we will see an increase in investments in talent, practice development, tech tools, and marketing. Partnerships see these expenses as out of pocket, where outside investors know you must spend money to make money. I see PE-owned firms allocating larger budgets to these areas, and my contacts tell me the desire of PE is to invest in technology as the key to increased profit.”

Padar echoed that view.

“The need for accounting firms to focus on the customer experience and content marketing is clear to PE investors,” Padar said. “Remember, people look online first, so content must be great, relevant and easily accessed through technology.”

Bigger firms need to hire talent to do this. Smaller firms need to farm it out to consultants to develop their brands.

“Partnerships who won’t take money out of their pockets to invest in new market-facing technologies and services won’t survive.”

The Growth Imperative

At EisnerAmper, TowerBrook’s investment in technology is already yielding results, said Michael Mattia, the firm’s partner in charge of marketing.

“EisnerAmper has always been fairly good in developing and implementing technology solutions in-house,” he said, “but TowerBrook’s investment and experience here has truly supercharged our adoption cycle.”

One example is the deployment of a new mar-com backbone called Templafy, a content enablement platform that is used firmwide to handle everything from standardizing pitchbooks and engagement letters to automatically updating content across dozens of templates and systems. The technology investments have lit a fire under the rollout of new products and practice lines.

“We all want to grow,” Mattia said, “but PE really wants to grow! I see it as an accelerator or positive disruptor.”

PE-backed firms understand and accept launching new practices and service lines is capital intensive, as EisnerAmper is doing with its new advisory practices in cryptocurrency and environmental sustainability and governance (ESG) services. What is different now with PE ownership is the commitment to making the investment.

Mario Masrieh, principal with Trivest Partners, the PE firm that invested in Quattro, said the key to making this kind of investment work in an accounting firm is the value proposition and delivery of quality service, which supports high recurring revenues and excellent margins. Noting that Quattro’s marketing department was well positioned to put the new technology investments to work, he characterized the firm as “reinvigorated.”

“There’s no doubt that our private equity investment has re-energized the firm and the excitement results in more wins,” Masrieh said.

Richard Shippee, president, Richard Shippee Communications. Contact at shippeecomm@aol.com.