In the dynamic landscape of finance and accounting, the relationship between private equity and CPA firms has transformed unlocking opportunities for wealth creation for partners of CPA firms. This article explores why private equity is attracted to CPA advisory firms and how strategic investment can greatly benefit the firms and their partners.
By way of background, we are private wealth advisors at a fully independent registered investment advisor. Previously, we were partners of a Top 10 public accounting firm and co-led their wholly owned RIA. We’ve completed hundreds of financial plans for partners across tax, assurance, and consulting.
Our takeaway: The whole industry is ripe for change.
At the heart of many CPA firms lie the pervasive challenges of talent acquisition, deferred compensation, and slowing organic growth.
Talent acquisition
It’s no secret that the ability to attract talented young people to the profession is struggling. On July 31, 2024, the National Pipeline Advisory Group, an independent advisory group convened by the AICPA’s Governing Council, released its final report of its recommendations to address the profession’s talent shortage. Their six recommendations were as follows:
1. Address the cost and time of education;
2. Make the academic experience more engaging;
3. Enhance the employee experience, particularly in the first five years of employment;
4. Prioritize strategies to expand access to the profession for the underrepresented at every stage;
5. Provide better support to CPA Exam candidates; and lastly,
6. Tell a better story to young adults thinking about which career to pursue on the impact accounting has on businesses, communities and economies.
It’s clear the intense, demanding nature of “busy season” that can occur several times throughout the year depending on where you sit within the organization, combined with staff turnover and increased pressure from management teams to drive organic growth, are dissuading many from pursuing careers in the field.
This comes at a time when tax and audit compliance are getting more complex. The once idolized image of becoming a partner at a CPA firm has lost its luster among the younger generation after considering the time it takes to earn partner status following graduation (approximately 10-15 years). Instead, they are considering other career opportunities that utilize the same skill sets.
Deferred compensation
The path of partnership is more palatable for people who’ve been in the profession for some time already. They’ve seen how deferred compensation plays out in the end from watching others retire and receive benefits. They know they will work till (or almost till) mandated retirement age to accumulate length of service and other compensation awards that will be deferred till after retirement.
Each firm will use a different formula, but generally, it is one that pays a multiple of the partners’ average last few years salary distributed over a fixed number of years. For example, let’s say a partner earns an average salary over their last five years of service of $500,000. This can get a multiple of two, which equals $1,000,000 in deferred compensation paid out over 10 years, so $100,000 per year in retirement.
In practice, this structure has worked well. Senior partners retired and transitioned their book of business to younger partners. The younger partners then grew that book of business until they retired and so on, with each new class of partners’ success contributing to pay the firm’s deferred compensation liabilities. The cycle continues.
Fast forward to today, and the profession has evolved. Deferred compensation liabilities have become larger as more and more partners retire. Demographically, a significant number of firm partners are eligible for retirement now, and one can’t help but wonder how many members retired earlier than planned due to the pandemic. This model begins to falter if you are not regularly ushering in a new generation of rain makers.
Whether you are investing in new technology or looking to fuel growth through M&A, these initiatives all come at a cost. Decreasing business investment due to capital being allocated to deferred compensation liabilities can lead to a business losing its edge over time.
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