Private equity is giving me the feels

Hi. My name is Amber. I was trained as an accountant. Which means I was taught to be professionally skeptical. As much as I believe accounting firms would benefit from an evolved business model, I feel trepidation about the surge of interest in private equity (PE). This month I will share perspective on how we got here, my optimism, my skepticism, and how to consciously navigate the evolving landscape of our industry.

How We Got Here

It is estimated that ten of the 30 largest US accounting firms could soon be in private equity hands. Shift happens. So why am I nervous about PE? I made a point to attend Alan Koltin’s session at the AICPA Engage conference. Koltin said “If I was a quality-of-life firm, I wouldn’t do PE. PE is for profitability.” 😳

Yet we need change. The common narratives I hear from equity partners includes:

Working harder than ever- 7 days per week during busy season is a theme, not an anomaly

Employee turnover continues to be high

Boomers are ready to throw in the towel

Gen X are wondering how they are going to make this work for ____more years

I can’t see a way out of this

It’s as if our profession is having an existential crisis- a period of life when there is inner conflict, confusion about one’s identity, and a nagging feeling there should be more to life. If only accounting could get a divorce and buy a sports car to feel better about all of this. 😝

My Optimism

The world has changed but the business model of accounting firms has not. Younger workers are less likely to stay with one employer for more than five years, and they don’t necessarily want to become a partner when they grow up. Private equity can help shake things up in a much needed way.

I listened to an episode of Randy Crabtree’s podcast, The Unique CPA that gave me hope. In it Tim Petrey, the CEO of HD Growth Partners, shared about his firm’s “strategic partnership with Ascend.” Tim is a younger partner who aims to grow his firm with an influx of cash. That sounded different than what I am hearing about more often- a show me the money campaign with books being sold at wildly inflated purchase prices.

What I mostly appreciated hearing is how Tim’s managers are now part owners in the firm. Back in 2006, I had an opportunity to study at the Mondragón Corporación Cooperativa in Spain. We learned how their companies balanced the individual and organizational needs, as well as the dignity of the person and work. All of their entities were co-ops, where every single employee was an owner.

Back then I wondered: How might CPA firms be different if staff accountants and managers had real skin in the game? Now I am wondering:

Can we create an evolved business model and stay sovereign?

My Skepticism

In addition to the Koltin commentary that sent shivers down my spine, my skepticism was amplified after hearing about another firm’s collaboration with Ascend. Fellow psychonaut Scotty Scarano interviewed Steven Hoffman in his Accounting High podcast. Hoffman is one of those uncredentialed C-suites that PE brings in to manage the firm. I certainly see the value of a) having a much stronger operational structure and b) bringing diversity of experiences into accounting but c) this guy did not resonate with me.

You see, coaches are trained to listen for what someone is not saying. Hoffman said nothing about how PE improved the employee experience. He claimed Ascend is mission driven and my boy Scotty countered with, “the mission of PE is to make money.” Which is the crux of all of this.

“PE only cares about numbers. It is the antithesis of humanity.” At least that is what Mathew Rushing had to say. Matthew worked with PE – a space that he described as being filled with Harvard MBAs who will say anything to make a deal. The deals usually entail sacrificing important stuff to eek out specific margins so the business can be sold in five years. Rushing said “PE often runs things into the ground over the long term.” This meme from Reddit backs up Rushing’s commentary.

Consciously Being with Change

Whether we are skeptical of it or excited for it, private equity is here. Times like this call for us to take a coaching approach and ask thought-provoking questions. Here are some places to look:

Groupthink- Most of our profession has never read The Abilene Paradox, and it shows. Our current discomfort cannot be solved by money alone yet we are overly hyped on the cash PE brings. Shouldn’t we evaluate other ideas? What if it was as simple as keeping the partnership model but cascading equity to all staff and offering liquidity events before retirement (e.g. downpayment for a house)?

Partner buyouts might be too high- If a partner group built an unsustainable practice- one that isn’t adequately staffed and doesn’t have the right leverage- why would a younger partner group pay a premium on a poorly performing asset? I heard about a younger partner group that chose sovereignty and renegotiated the partner buy-out with the retiring partners. Things that make you go hmmmmmm.

Exercise due care- Talk with your clients, your equity partners, and your future firm leaders to understand what would be a reasonable way to act under the circumstances of your firm. What does staying true to your values look like in your firm?

Constructive vs. Extractive Capital- Dr. Bronner’s defines this as “the idea that the purpose of business must extend beyond personal financial gain and instead be for the benefit of humanity and the planet.” You know, that triple bottom line that was a fad a few years ago. By all accounts, PE is extractive. What would be possible if our profession embraced constructive capital instead?

Final Thoughts

PE seeks to maximize profitability. This can involve aggressive cost-cutting measures, increased pressure to meet financial targets, and reduced investment in longer term development initiatives. For goodness sake, I heard Citrin Cooperman stopped paying for some employee’s cell phone bills while simultaneously increasing expectations on client work. 🫠 And I have heard good things, like PE money being used for leadership development initiatives 🥳

I believe employer accolades, like being a Best Place to Work, are going to the wayside. Prospective employees are going to want to know the firm’s stance on PE because their employment experience will be impacted by it. Sophisticated job hunters will ask PE backed firms what has changed for the better and the worse.

Ain’t nothing wrong with grinding and going for the money. That will attract some. But others, like me, know the concept of enoughness and value quality of life. And on that note, you may not hear from me for a month or two. I am taking August off to rest and it may take me another month to get back on track. #rolemodel #practicewhatyoupreach