The rise of private equity investment in tax firms: Trends & considerations

CHICAGO — In recent years, the landscape of the tax & accounting industry has been significantly transformed by the influx of private equity (PE) investments, a trend that is driven by various factors, including the need for capital to scale operations, the desire for enhanced technological capabilities, and the pursuit of strategic growth.

As private equity firms continue to seek lucrative opportunities, tax firms are increasingly becoming attractive targets. I recently attending the Accounting Today: Private Equity Summit which explored this trend and discussed what tax firms should consider if they are looking to restructure their firms and are wondering whether private equity firms are the best path for them.

Why the trend is taking place

Private equity firms have largely been interested in professional services businesses as these fragmented markets, often full of numerous smaller players, can provide stable revenue and significant opportunity for growth. “There is a real opportunity for private equity to drive growth in professional services firms — which are often constrained in terms of capital by their partnership business models — by enabling investment in technology and, through acquisition, business line and geographical reach and expertise,” said James Scott, leader of Freshfields’ UK private equity team.

Indeed, private equity firms’ interest in tax & accounting firms isn’t new, says Allan Koltin, CEO of Koltin Consulting. What is new, however, is that tax firms are becoming more open to engaging with and accepting PE firms’ investment. This shift has largely taken place because as older tax firms partners seek to retire, they’ve looked to cash-rich PE firms to help provide an aggressive exit package and much-needed capital to fund the firm.

In fact, the Summit discussed several reasons that tax firms might want to consider PE firm investments, including

• • • Providing capital to scale operations — One of the primary reasons tax firms are turning to private equity is the need for capital to scale their operations. Traditional methods of raising capital, such as bank loans, may not always be viable or sufficient. PE firms can provide the necessary funds to support expansion, invest in new technologies, and enhance service offerings. This capital infusion allows tax firms to grow more rapidly and compete more effectively in the market.
    • Enhancing technological capabilities & improving efficiency — The tax & accounting industry is increasingly reliant on advanced technologies to improve efficiency and deliver better client services. PE firms bring not only capital but also critical expertise in implementing and leveraging cutting-edge technologies. This includes automation, artificial intelligence, and data analytics, which can significantly enhance the operational capabilities of tax firms.
    • Funding strategic growth & expansion — PE firms often have a strategic vision for growth and expansion, and they can bring a disciplined approach to business operations by focusing on long-term value creation. By partnering with private equity firms, tax firms can benefit from strategic guidance, access to new markets, and opportunities for mergers & acquisitions. This strategic alignment can drive significant growth and better position tax firms for future success.
    • Helping face increased competition — The entry of private equity into the tax & accounting sector has raised the bar for competition. PE firms bring a level of discipline and efficiency that can transform the way tax firms operate. This includes implementing best practices, optimizing processes, and driving performance improvements. As a result, tax firms are better equipped to meet client demands and achieve ongoing, sustainable growth.

What tax firms need to consider

However, there are several important questions tax & accounting firms need to ask themselves before agreeing to a PE firm’s investment, including:

• • • Understanding the PE firm’s vision & strategy — Before partnering with a PE firm, it is crucial for tax firms to understand the PE firm’s vision and strategy. This includes their approach to growth, their expectations for returns, and their plans for the tax firm’s future. A clear alignment of goals and values is essential for a successful partnership.
    • Evaluating the impact on firm culture — Private equity investments can bring significant changes to a tax firm’s culture, and they first need to consider how the partnership will impact the tax firm’s existing culture and whether any partnership would align with the tax firm’s existing values and work environment. It is important to involve both firms’ partners and management teams early in the process to ensure a smooth transition and maintain a positive work culture.
    • Assessing the financial implications — Partnering with a PE firm involves financial considerations, including the terms of the investment, the structure of the deal, and the potential impact on the tax firm’s financial health. Tax firms should carefully evaluate the financial implications and seek expert advice to ensure that the partnership is financially beneficial.
    • Preparing for operational changes — Private equity firms often bring operational changes to improve efficiency and performance. This can include implementing new technologies, restructuring processes, and introducing new performance metrics. Tax firms need to be prepared for these changes and ensure that their workers have the necessary resources and capabilities to adapt.
    • Ensuring ethical & compliant practices — In an era of increased scrutiny, it is essential for tax firms to maintain ethical and compliant practices. This includes ensuring that the PE firm’s strategies align with ethical standards and regulatory requirements. Tax firms should prioritize transparency and integrity in their operations to build trust with their existing clients and stakeholders.

Conclusion

The rise of private equity investment in tax firms is a trend that is set to continue, especially as the need for capital, technological advancements, and strategic growth increases. For tax firms, this presents both opportunities and challenges.

However, by understanding the PE firm’s vision, evaluating the impact on firm culture, assessing financial implications, preparing for operational changes, and ensuring ethical practices, tax firms can best position themselves for successful partnerships with PE firms.

If done correctly, collaboration between tax firms and PE firms not only enhances the financial performance of both parties but also drives innovation and growth in an increasingly competitive industry.

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You can find more about the impact of private equity on professional services here.