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Accounting firm rollups are on the rise - with Private Equity pouring money into the space. We’re going to talk about nerdy accountants and how the non-Big-4 Accounting industry is getting consolidated (and whether it’s even a good idea that they’re consolidated).

Here’s the high-level breakdown of why this is happening:

• Older partners at Accounting firms are retiring, part of the silver tsunami taking place throughout the country. How exactly Partners and Retirees are going to exit at robust terms is less clear - creating a capital need that PE is filling

• Accounting firms are highly fragmented - with reportedly over 40,000 U.S. firms, with a negligible amount producing >$10mm of revenue

• Client relationships are very people dependent and can last decades. The switching costs of changing accounting firms are a really annoying nuisance.

• Accountants do more than just audit - a lot of the guys I went to school who work at accounting firms also do consulting work, advisory, CFO-level functions, forensic accounting, and other services.

• There are AI tailwinds that speed up efficiency and increase bandwidth. In an industry that’s a relative commodity, the companies that become more tech-enabled will have more efficiency, higher margins, and merit higher multiples

Multiple expansion: Transaction Comps show that a smaller Accounting may be worth 6x-8x EV/EBITDA. Meanwhile, Blackstone’s $2B+ acquisition of Citrin Cooperman valued the company at 15x EBITDA, up from the prior 11x EV/EBITDA multiple that New Mountain Capital valued the business at when it acquired it for $500mm in 2021. Citrin Cooperman has grown rapidly, with revenue growing from $350mm to $850mm over 3 years.

Why is this attractive for Sponsors? Beyond being “a new frontier” ready for consolidation, scale, coupled with AI benefits can be really compelling for Sponsors. Any business where someone can continue their same exact day-to-day, with higher operating revenue, is incredibly accretive. Likewise, for any companies where there’s duplicability.

Think about Newsletters for example, whether this newsletter has 5,000 subscribers or 25,000 subscribers, it’s still the same amount of work. But the associated advertising or subscription revenue will be a lot higher.

There’s the same type of pressure in asset management, especially as it relates to fee pressure and the rise of asset aggregators. A $2B shop with 4 CLOs needs 6-8 analysts (let’s say 8). A $10B shop with 14 CLOs plus some other stuff can live with 8 analysts.

Venture Firms are getting involved too: Yes, VCs are investing in Accounting firms in a bet that they can leverage AI to make them more efficient. They’re hoping they can roll up accounting firms and then automate a lot of the workflow so firms can take “twice as many clients”. We’ll get into all the smart PE guys getting involved in the space - but the Venture optimism towards the space gives me a little bit of hesitation…

 The Problems:

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