Navigating the profession’s disruption

By Gary Thomson, CPA 

“The more things change, the more they stay the same” is a familiar cliché. To me, however, it is applicable to the state of our profession. 

When I began my career as an associate at Arthur Andersen, our managing partner shared the top challenges facing the profession: the technological revolution; the “war for talent”; and the need to diversify our workforce. Do these challenges sound familiar? Of course, they do. 

While the scope, intensity and speed with which we must address these challenges has remarkably changed, the fundamentals are very similar. We responded then and I’m confident we’ll respond again. I am both optimistic and bullish about our profession’s ability to respond — but we can’t be casual or dismissive about the required response. 

Since AI intrigues me, I asked ChatGPT to identify the challenges facing our profession. The response: technology and automation; globalization; cybersecurity; the need for bigger data analytics; shift from compliance to advisory; leveraging, capacity, and investing in talent; strengthening client relationships; diversifying client base; strategic planning; succession planning & multi-generational workforce; and marketing and branding in a digital age. 

That list can be exhausting to read, much less to think about how we prepare to address these areas. I have the privilege to work with CPA firms of all sizes across the country, and it goes without saying that no one firm can or will address these issues in the same way. The best firms have one thing in common. They explore future challenges and opportunities with three words in mind: perspective, connectivity, alignment. 

Our perspectives are shaped by experiences, generational diversity, geography, size, and a myriad of other factors. Connectivity is about making sure we don’t view practice management and leadership challenges in isolation. Alignment means we look at mission, structure, strategy and culture when making decisions. 

Disruption 

Our profession’s challenges aren’t unique. A simple search identifies a significant number of industries that face acute pipeline dynamics and are trying to keep pace with AI, experiencing regulatory shifts, and dealing with clients’ changing needs. 

There’s an increasing demand and opportunity for services beyond “traditional accounting” as our clients look for higher-level advice in real time.  

Our pipeline challenge has made our traditional “pyramid” staff model look more like a diamond. The need to utilize technology and outsourcing to offset the loss of entry-level personnel has rapidly shifted talent strategy. Training with a different leverage model, especially when many of our professionals aren’t in a traditional office setting, is creating the need for more distinctive career development.  

Adapting to the evolving technological change is not optional. To be relevant, technology is a cornerstone of success. 

The traditional response 

Back to my opening statement. Many responses to a changing environment have been to do what we’ve always done.  

To provide the funding to support the disruption response, firms have used capital resources, whether it be from sources like Paycheck Protection Program funds, or from more traditional sources such as partner capital and retained earnings. Firms have put aside their customary aversion to debt and are utilizing banks and other lending sources to provide much-needed resources. 

Traditional mergers continue to be a strategy and the pace of mergers is dizzying.  

The non-traditional response 

But what generated this article is the more recent approaches like private equity (including family office) and Employee Stock Ownership Plans (ESOP).   

I am fortunate to consult with firms in both arenas. Let’s be clear, I’m not here to advocate for or detract from these tactics, but rather to provide clarity and connection to the future of our profession.  

Private equity 

Considering resources for “future think” has created alternative capital sources, most notably private equity and the use of ESOPs. 

The intrigue of private equity began with the early-stage deals of EisnerAmper and Citrin Cooperman. From the early “large firm” deals, we have recently seen a private equity transaction with a firm under $10 million. The enterprise valuations have created much curiosity and, rightfully so.  

Why does private equity want to invest in CPA firms? Investors see profitable firms with loyal clients who want more of their services. They correspondingly see the retiring baby boomers and a lack of succession clarity. They see how technology and automation can make us even better. They believe they can be better “operators” and allow CPAs to do what they do best: serve clients. They see our traditional governance models as antiquated and believe they can transition us in ways we may not have the will to do ourselves. At the core, however, they see the opportunities to make money for their investors. 

Why have some CPA firms wanted private equity investment? I could say “see above,” but that response is too limiting. Yes, the reasons articulated above have driven firms to private equity. The enterprise multiples offered to firm owners can’t be ignored. The ability of PE to provide us with critical people, technology, growth, infrastructure, and other resources is unparalleled in many ways. 

If you look at the post-transaction activity, you’ll see firms making technology investments, acquiring key talent, making nimble decisions, and focusing on growth — as well as a significant uptick in mergers and acquisitions. This action is unmistakable. 

But you also see a unique approach to people through an effort to provide actual or synthetic equity. While many firms lament the inability to find future owners, private equity firms believe they can motivate employees to loyalty and performance by making them owners earlier in their careers. This approach is a major talking point in nearly every slide deck on “why should we consider PE.”  

Since the focus of this article is more on the “why,” space limits my ability to go deeper into value monetization, the potential cultural elements of working with a PE, the various deal structure options, carryover of equity, etc., all of which are important discussion matters.  

ESOPs 

While ESOPs have been around in business and the CPA firm space, recent decisions by BDO and Grassi & Co. have reignited the interest in this entity type. In my days in public accounting, I had ESOP-owned clients, particularly government contractors. There can be both tax and intangible advantages to a conversion to ESOP.  

The ESOP response combines the need for equity with a culture of employee-owners who are invested more deeply in their firm’s success. I could summarize by saying it’s a strategy for current owners to tax-efficiently monetize the firm, with a predisposition to preserving the firm culture and values. 

This isn’t simply a tax election; it is generally a heavy debt transaction that has caused some to say the ESOP model “saddles” the firm with unnecessary debt that hampers future earnings. While there is truth to this general comment, it’s also true that most firms have a significant off-balance sheet liability for unfunded buyout obligations. So, a firm’s view of this can be remarkably different based on this unfunded obligation. 

The process provides funding for owner monetization, investment in technology and infrastructure, and, as previously stated, allows for a cascading ownership structure. 

Again, space doesn’t allow me to address each nuance of ESOP ownership of CPA firms, but it is my belief the use of this strategy will grow along with other equity-like options for employees.  

Why should I care and what should I do? 

Our profession is at a crossroads. We must evolve to address the market forces reshaping us. That’s why we care about looking at alternatives for the future. 

If you’re a firm partner or leader, your decisions will be specific to your organization. Earlier I mentioned mission, structure, strategy and culture. We must evaluate any long-term decision by demonstrating strategic alignment with those four critical areas. We ought to strongly test ourselves in these dimensions.  

Can we say to our people, our clients and our communities that our long-term decisions have clear alignment? If so, find ways to demonstrate that.  

We must also invest the necessary resources to be ready and we must decide from whom those funds will be provided.  

Optimism for the future 

In the first paragraph, I mentioned optimism. When asked “Would you do it again … Be a CPA?”, my answer is always an unequivocal “yes.” Would I do it differently? Again, “yes.” 

I started my own CPA practice 35 years ago. I was excited about the entrepreneurial opportunities the profession provided me. I was thrilled to see the practice grow, embrace the growth of technology, be joined by generationally different professionals, and be heavily engaged in M&A. This journey informs me that there isn’t an obstacle we can’t overcome and there are many options as to how we find success. 

We can learn a lot from the PE and ESOP conversation. We can choose to respond with different answers. How we respond, however, needs to be supported by an aligned approach.  

Let’s embrace the future by running to it instead of colliding with it.  

Gary Thomson, CPA, owns Richmond-based Thomson Consulting. With more than 38 years of experience, Gary has launched and grown his own CPA firm and now consults with firms of all sizes on practice management, leadership and other topics. He is a former chair of the VSCPA Board of Directors and long-time VSCPA volunteer.