Thriving without Private Equity: What It Takes to Stay Competitive

Private equity is becoming a regular topic of conversation for CPA firms of almost all sizes. But as we get deeper into PE’s entrance into the industry, it’s becoming clear that not all firms want to adopt the PE model. PE is raising the competitive bar for CPA firms, and firms that wish to remain independent must rise to the occasion.

What must your firm do to remain independent long term in the face of PE?

(1) Strategy

Without private equity, your firm must define a vision for what it wants to be and a strategy to get there. Ambling forward with too many “cooks in the kitchen” as the leadership approach is increasingly becoming a liability for firms as the pace of change accelerates in the industry.

One of the best questions you can ask right now is “What would our customers say we are legitimately number one at?” If you don’t know, define what you want to be number one at, then align your strategy around that. There will always be room for small, medium and large players in the market if they are savvy about honing their unique competitive advantage. Small firms can move faster and be more personal than big firms; big firms can outspend on things like AI and serve huge clients; medium firms can serve the middle market or certain industries better than anyone.

An important advantage your firm can lean into as an independent firm is a strong culture. The PE business model is focused on relatively short-term financial returns in order to return capital to investors. In your strategic planning process, getting very clear on firm values, mission (why you exist) and culture can yield major dividends by giving partners, staff and clients alike a well-defined sense of purpose. This alone has been meaningful enough for many firms to want to stay independent.

(2) People

Even with AI, we are in a people business. A major hurdle your firm needs to clear to remain independent is a viable succession plan. Admittedly, this has been an Achilles heel for many firms even before PE entered our market. Firms that don’t have future leaders don’t have many options at the end of the day. Invest in grooming the next generation of owners and be continuously looking at the numbers to make sure the math will work (e.g., there are enough people willing and able to lead and who will be available at the right time).

If you’ve cleared that hurdle, capacity is the next staffing challenge. Fortunately, firms have increasing options to drive both efficiency and to build people capacity. Staying within the world of what’s known (e.g., all local hires all in the office all the time) will likely run your firm into a capacity crunch. Progressive firms are experimenting and finding some (albeit mixed) success with remote/hybrid work, outsourcing, offshoring, and AI/automation. There is no silver bullet here, but firms that are going to survive must continuously invest in building enough capacity to do the work.

(3) Clients

This list wouldn’t be complete without mentioning the people who bring us revenue! Sustainable firms need to stay close to their clients to keep their business (and, hopefully, expand it or get referred to more great clients). Your clients are likely experiencing a great deal of change in their personal lives or businesses just like you are. Listening to their needs, pain points and hopes on a regular basis creates a treasure map to the services they want most from you.

Firms that make sure they are offering highly valuable services that solve their clients’ highest needs will always have a place in the market. It’s also a time that savvy firms can play up their independence and fill any gaps that PE firms may have in their client experience (e.g., cracks in culture, impersonal delivery or too high pricing).

Many firms are still trying to understand the changes PE is bringing to the market and deciding how they want to proceed. If you need help defining your firm’s strategy to stay independent or go PE, we can help.

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(4) Financial

A major area that must be addressed to remain independent is financial compensation and reward for owners. One of the major promises of PE is to deliver more money to owners now and in the future than the traditional model. Firms that wish to remain independent need to be aware of the potential economics in a PE model and be clear about what the economics are of remaining independent. Many firms who look at that math still choose to remain independent. Autonomy has a high value for many CPA firm owners. That said, your ownership group needs a shared understanding of what the financial tradeoffs are and be on board with that choice or adjust the economics of staying independent accordingly (e.g., increase growth, profits or buyout).

An independent firm also needs a clear strategy around growth and profitability. How will the firm drive revenue growth? How will target margins be achieved? How much capital is required to keep that pace – and where will it come from? You don’t need PE to get there, but you do need a plan.

(5) Operations

Finally, PE often promises to streamline internal operations by centralizing and professionalizing resources. While your firm likely doesn’t need a world-class centralized AR person to survive, this is an opportunity to take a page from the PE playbook and make sure you are investing in efficient operating processes. Keep your billing and collections humming, measure and report on the metrics that move your business forward, and build out a strong admin team. This good hygiene will free up partner time to be spent on higher-value activities – and also take worries off your mind.

When I worked with venture capital firms at the start of my career, I learned the saying, “There’s always money for good firms,” meaning in good times or bad, there are always people who want to invest money into profitable, growing, well-run firms. The parallel is that there are always staff, leaders and clients for a well-run CPA firm. People want to be a part of a winning organization – create it and you will have no shortage of options, clients and profits. Private equity promises to enhance many of the above items, but – with or without PE – the firms that execute on the above will earn the right to be successful long term.