PrimeGlobal News

There are a range of drivers accelerating PE investment in firms including the greying of the industry, as ageing equity partners look to retirement and exit from their firm, younger professionals are increasingly reluctant to invest significant amounts to buy into firms, there are challenges with staff recruitment and retention, and significant capital is needed to continually invest in technology. PE funds are well resourced and are offering equity partners significant multiples on firm earnings to make acquisitions. This drives up the goodwill value of firms increasing the challenge for new partners to purchase firm equity – making PE sales more likely. With PE offers rising, equity partners must have a clear view on whether this is the right route for them.

Over the last few weeks, I have been so impressed how equity partners I speak to are deeply considering what is the right course to take and view the consideration of PE as a philosophical matter. For some, they feel they have built their firms and now have the right to be rewarded through a PE sale so they can enjoy their retirement, whilst hoping the firm continues to be successful under new ownership. Many, however, feel a deep sense that they are stewards, or custodians, of their firm and it is their duty to pass the firm on to the next generation of leaders who are rising through their firms – even at the expense of their own wealth. They feel that giving up ownership to PE means future ownership of the firm will not be under the next generations’ control and that this loss of stewardship is too big a price to pay. It is undoubtably the case that all PE funds will have an exit plan so ownership will change hands at some point after the sale. As one partner of a top 50 US PrimeGlobal member firm stated, “The key factor for all my decisions is whether the future will be brighter for the people behind me. If the answer is unclear, I won’t do it.’’ For some equity partners, the number one customer is their people – not their clients. After all client services are delivered by the right people with the right skills, if their people leave, there is no firm. All equity partners should consider what matters to them (i.e. their plans and expectations regarding individual wealth and reward) and their stewardship responsibilities for the firm (i.e. their responsibilities to the next generation and the ongoing success of the firm). Equity partners should ensure that they have adequate time together to discuss this weighing up of self and stewardship considerations.

When considering stewardship, equity partners must be clear about what they see as the ultimate purpose of their firm (i.e. its values and impact it has on its people, clients, and community). Firms should have a clearly defined strategy which determines which clients they will serve; what they will offer those clients and what advantages they have compared to other firms. This enables them to develop goals, define what is needed to achieve these, and by when. Once equity partners have this clear sense of purpose, strategy, and direction, considering whether to accept PE investment can be assessed against clear criteria to see if it will enable them to better achieve their firms’ goals.

For some equity partners, the concept of remaining an independent firm where owners can make their own decisions is sacrament. However, many are starting to challenge this, believing the most important factor is to ensure their people and the next generation are supported – which could mean obtaining investment from PE funds. Some also feel there is a distinction between ownership and firm leadership – particularly when some PE funds do empower firm leaders to make day-to-day decisions – albeit with accountability regarding results. Equity partners should discuss how they consider firm independence when establishing their position on stewardship responsibilities.

When completing this strategic and values assessment, firms can identify where they may have challenges and opportunities to achieve their strategy. Often significant investment is needed to support their teams including investing in a CRM, data management system, innovating with AI and ensuring there is adequate staff reward. However, if investment is a challenge PE is only one option, there are other choices available to firms to increase capital including working with other firms to invest (for example, AICPA’s Dynamic Audit Solution was funded by a range of firms), exploring employee ownership models, introducing alternative partnership models which enable investment in advisory services and considering debt arrangements. PE investment is just one option to achieve a firm’s goals.

Some equity partners who complete this assessment do determine PE investment provides the best route to invest in the firm, potentially giving some ownership stake to their people whilst meeting their personal goals as well. However, by defining their strategy and values clearly, they can then assess whether the PE fund is a good fit; for example, one firm identified that PE could expand their ESG offering – and identified PE funds which would support this. Rather than waiting for PE funds to knock on the door, firms with clear goals can proactively assess the fit of various PE investors. The equity partners are then in a strong position to communicate the sale to their team explaining how they considered what was best for the team, and firm, as the key factor in their decision making. This helps to ensure the purchase is seen positively supporting staff retention.

It is vital that equity partners have access to the best advice and learning to help them navigate as the industry transforms. At PrimeGlobal we are running facilitation sessions to help equity partners define their strategy and position regarding their self and stewardship goals. We are also holding firm leadership workshops to consider firm ownership and structure choices so partners can learn from each other. As an association, I believe we should not tell our members what to do, we must however help them understand choices and enable them to make decisions which work for them – recognising that there will be different paths for different firms.

PE or not PE is not the right question to start with. Equity partners should first ask themselves do they have a clear, and aligned, perspective around self and stewardship goals? If the answer is yes – they will know the answer to the PE question.