The intense M&A environment in the accounting space–expected to continue for about five to ten years–is driven at heart by a desire for (what else?) revenues. But, according to a set of panelists at the Scaling New Heights conference in Orlando, it is not just the quantity of revenue but its quality that makes the real difference to buyers.
Ben Bisconti, the co-founder of private equity firm Red Iron, said that the reason his industry has been so interested in accounting firms lately is that they tend to have recurring revenues from a consistent client base. This is the case for both global firms with billions in annual revenues and smaller local firms with perhaps $10 million in revenues. Historically, private equity has been less interested in these smaller firms, so the level of attention even they are receiving right now is indicative of the moment that accounting is currently having within the M&A space.
“I think in the next 5-10 years we’ll see more activity in this space because these are good businesses, because these are businesses that have recurring [revenues] and customers. It’s a very fragmented market and PE firms love a fragmented market: organic growth plus acquisitions can consolidate that fragmented market by helping build phenomenal firms that do a great job with their customers. If you can do that in this business, you can build enduring relationships with customers, build out service portfolios and have more revenue to profit off those relationships,” he said.
However, from his perspective, just as important as revenue is how exactly that revenue was acquired. More than just a good number, he said, potential buyers want a good pricing strategy, a good ideal client profile, a good risk profile, a good delivery of service, and a good culture to back it all up. Reducing things to metrics, he said that “we focus entirely on P&L” versus the balance sheet, which he said can be worked out later in the transaction. While the balance sheet is certainly important, he said revenue quality is the starting point. He noted that they also tend to look back at least three years, because there’s not much that can be revealed with only a single year’s figures.
Jason Slivka, a corporate development partner with Top 25 firm Citrin Cooperman, raised similar points. His firm, which has lately had quite a lot of acquisition activity, said that revenues are of course important but that the number alone doesn’t fully communicate what they want to know when evaluating a potential purchase. Instead, there is a much more holistic approach, starting with culture.
“We will want to understand how they have managed their business throughout its course, so we can understand its culture and people… The second thing we look at is, really, what is the fit? We look at the services they’re providing, the geographies they’re in, the industry verticals, the target client size. Is it a good fit?” he said, before adding that “finally, we do look at the financial metrics of the organization.”
Bisconti from Red Iron said that, despite its reputation, a private equity firm is not necessarily looking to change everything once they buy an accounting firm because, oftentimes, it is what the firm is already doing that’s led it to being an attractive prospect in the first place. In this respect, he said, firms should not fear private equity. In his case at least, he said he wants to work with firms on the goals that make sense to them.
In the last 15 months, he said, his company has made several major investments in this space, each with different outcomes. All were founder-run. One wanted to be part of a larger platform and continue to contribute, and so he is now the number two executive there. Another wanted to exit, so his company put together an exit plan that let him keep his team. A third, meanwhile, wanted growth capital to do some acquisitions of his own while continuing to run the business.
“So, everyone can have different expectations. In our case, our investments almost never depend on cutting costs. We didn’t do any layoffs. The board didn’t recommended, it wasn’t part of the investment strategy,” he said.
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