Wait, I'm the Rollup?

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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:

There was a really good thread on X from Robert Sterling about why he’s bearish accounting rollups. Our thinking overlapped pretty significantly in this piece.

Humans walk out the door every day. Talent retention is a serious problem, especially with significant change happening across the organization. This is an intangible asset business where your workforce and reputation matter significantly. There are no barriers for a top accountant leaving and opening up their own shop.

Retention: The biggest problem comes with how you incentivize your workforce to stick it out for the long haul. The most talented accounting graduates might stick around 2 years and then dip to the corporate ladder route, with the goal of making CFO (or even CEO). It’s kinda similar to Finance Bros, where a lot of the brightest individuals do their Analyst stint and then go Buyside. Not only is it for a better opportunity, but it’s for a better lifestyle, where you can get worked to the bone in Big 4 (especially during busy season if you’re a tax guy), and want to have more reasonable hours. Private Equity comes in and degrades those long-term incentive benefits.

Accounting has struggled to get junior folks in the door to begin with. Now with PE stomping on mid-level compensation upside, there’s a big problem as it relates to keeping folks happy. Is the Partner path they’ve been working towards even there anymore?

This flows into key-man risk - where so much of your business is tied to relationships that could vanish if someone gets hit by a bus or leaves. What happens if a Partner retires or someone angrily leaves?

Clients can walk too if “the personal touch” dissipates. The industry is so fragmented that it’s arguably too hard to push prices aggressively - it’s a fragmented industry right - why can’t someone walk down the street and find a new accountant? For every 100k city, there’s enough competition to make monopolistic, or even oligopolistic, types of dynamics challenging. The family-friendly, small-business oriented CPAs are too small to be rolled up and happily take on the bandwidth of churning medium-sized businesses. Robert Sterling in his thread made the point that he sees first-hand that executives can’t stand their accountants.

Upsells don’t work: I don’t have boots on the ground thoughts on this, but according to Robert, who does, upsells are actually really annoying for clients. They don’t necessarily want the additional features their CPA is offering.

Arthur Andersen risk: This hasn’t happened in ages but remember that when Arthur Andersen existed, there were a “Big Five” of accounting firms, not a Big Four. But the Accounting Giant’s ties to crooked Enron and WorldCom decimated the Company’s reputation, and the firm quickly collapsed after having to surrender its CPA licenses in mid-2002. A $9.3B revenue business with 28,000 employees (over 2/3 of them left very quickly) fell apart with the snap of a finger. Sarbanes-Oxley is meant to curtail this type of risk, but in a people based business, it’s easy to forget how the poor choices of a handful of people can destroy a significant amount of value. Just look at what Bill Hwang did to Credit Suisse.

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What does the end game even look like? Sell to other accounting firms, sell to another Sponsor, or IPO? 

Why would the Big 4 acquire any of these smaller competitors? Why would they need to go down market at lower rates? The Big 4 kinda have a sweet setup going - they’re a notorious group of four firms who are known for being the highest-quality and most professional (and serious) brands. There’s clearly a bid for lower middle market and middle market accounting firms, the problem though is who is the final buyer supposed to be?

Would this go public? I won’t rule it out but there’s clearly a reason why the Big 4 operates in their current structure and has elected not to go public. I’m not sure I’d want to pay a high teens EV/EBITDA multiple for a scaled accounting firm.

From my research, an IPO or sale to a Big 4 seems hard to pull off - but it seems like there’s money to be made in playing hot potato, or in rolling up smaller players that you sell to a top 30 platform. The exit opportunity and ability to push up-market doesn’t seem as clear within the top 10, despite the improved scale.

The Hamlin Hamlin & McGill (“HHM”) dynamic: If you watched Better Call Saul, you saw the downfall of HHM. One of the first breaking points was when Chuck McGill sued his employer after his peer, Howard Hamlin, suggested Chuck should retire following a major lapse from Chuck. Howard didn’t want to fight Chuck, so he took on significant financial burden in order to pay out Chuck and get him out the door. This same dynamic exists in a way in many partner driven businesses where it’s unclear how the partners want to exit the business.

The Players:

As I brought up earlier, New Mountain and Blackstone have been bigger players in the space, but let’s talk through the Private Equity players in the Accounting rollup space.

TowerBrook Capital Partners investing in EisnerAmper back in 2021 was the start of PE’s attention toward the industry. Eisner has reportedly made at least 14 tuck-in acquisitions since the take private!

Lightyear Capital acquired Schellman & Co in 2021, which at the time was the 65th largest accounting firm and had $77mm of revenue.

In Mid 2022, Parthenon Capital announced its investment in Cherry Bekaert, a Raleigh, NC based accounting. A year ago, Cherry Bekaert acquired Kerr Consulting, an accounting software provider with $20mm of revenue, presumably as a way to become a more tech-enabled player.

New Mountain doubled down on the strategy - getting involved in a platform deal outside of Citrin Cooperman. In mid 2024, New Mountain closed on an acquisition of a 60% stake in of Grant Thornton, an accounting giant with $2.4B in revenue in FY2023. Grant Thornton has been looking internationally, looking to acquire international units in Ireland, the UAE, Luxembourg, and the Cayman Islands

Unity Partners acquired Prosperity Partners, a Chicago based accounting business, in mid 2023. In late 2024, they completed a tuck-in acquisition of Cendrowski Corporate Advisors, a Detroit-based tax, valuation, and accounting firm.

Baker Tilly’s Mega Deal: Earlier this year, Moss Adams, a provider of accounting, tax, and advisory services, has entered into a definitive agreement to be merged into Baker Tilly at a $7.0B valuation, via its financial sponsors Hellman & Friedman and Valeas Capital Partners. EV/Revenue was 5.56x. Deutsche Bank advised on the sale. Combined this is the 6th largest accountant in the United States, leapfrogging BDO. Baker Tilly is a large platform that H&F has aggressively invested in. The initial transaction closed in mid 2024 and was the biggest PE deal at that point, with Baker Tilly being a top 10 advisory CPA firm with $4.7B of revenue at the time.

Private Credit is helping finance the merger, with $1.5B of financing led by Blackstone at S+450, a rate that’s at the tight end for the typical private credit deal. Blue Owl and New Mountain Capital (their credit side, although they’re obviously very familiar with the industry) are also supporting the financing.

It’s Raining Money for Accounting-Specific M&A Advisors: Koltin Consulting Group is among the advisors that have been making a killing - advising accounting firms on more than 70 deals since 2022, with 9 sales to the Citrin Cooperman platform!

When will there be a Private Equity Firm Rollup?

As Finance Bros, we should also think about how this trend could play into our industry. There’s been a bunch of consolidation of flailing strategies in Credit, but what about PE? Should Private Equity firms themselves get rolled up?

Probably. It was reported back in December 2024 that Blue Owl was looking to mush 4 firms it has stakes in into one big PE investment giant. Blue Owl holds stakes in managers such as Stonepeak, I Squared Capital, Vista Equity, Silver Lake, HIG Capital, Platinum Equity, Cerberus, and Clearlake Capital.

Why shouldn’t PE firms, VCs, Consultants, Lawyers, or Lenders see more consolidation? They certainly do to some extent, but it’s a little tougher to manage given personalities and culture. There’s also some legal considerations to make, which was why the ability to consolidate CPAs was initially unchartered territory - now Law Firms are potentially next on the horizon.

Consolidating these high-performer, intangible asset businesses seems hard at first glance though. The only way to incentivize people who are in it for the money, is to continue giving them more money (which is somewhat counter to how some Sponsors operate).

I’m generally of the thinking that if you come in and tell a bunch of really smart people that they’re no longer allowed to expense ____ large expense, or cap their upside, micromanage them, or add bureaucracy and red tape, then you’re not going to be able to keep them and they’ll head off to the next thing following their garden leave.

Concluding Thoughts:

Most of you guys are Gen Z or Millennials who feel like the world left you behind. That so much has been conquered, explored, and built and that the same type of qualities of life or wealth creation opportunities that your parents and grandparents had don’t exist anymore. We’re a generation removed from this crazy thing called “pensions”, but even a lot of the same ladder climbing opportunities that our parents or bosses had seem unattainable for us. And likewise with the ease of being able to buy a nice home.

Unfortunately, Accounting firms getting rolled up into Private Equity firms makes it harder for younger, up-and-coming professionals to get the same slice of pie that their predecessors received.

And this is before we even start to think about how AI is going to change the workforce.

Rollups of service/people-based businesses is hardly anything new - and as I alluded to in my Bending Spoons write up, I just think we’re going to get to a new frontier of having to do rollups in newer, hairer, riskier industries in order to try to generate excess returns.

Separately from the PE-styled rollups, folks are going to have to understand that asset managers will continue to consolidate. This has really picked up steam over the past few years and will only continue to snowball. So I hope you’re able to have granularity around your long-term incentives and get yourself some golden handcuffs (if that’s what you want).

Until next time.

Harry

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