For decades, the accounting industry has operated on a simple model: Licensed professionals founded certified public accountant (CPA) firms, operated them as partnerships and passed them down through internal succession as founding partners retired.
The cycle of growth, maturity and transition was kept mostly within the profession. But today, something is disrupting that model – private equity.
Trip Farmer, a partner at HHM Certified Public Accountants in Chattanooga, has been watching the shift unfold. He says the trend is both new and significant: private equity firms are buying CPA firms.
“The model has always been that CPA firms merged with one another,” Farmer says. “You earn a CPA license, you launch a firm and you begin filing tax returns and doing audits. Then, eventually, you join forces with others who have followed the same well-worn path.”
A new kind of buyer
Consolidation of CPA practices has historically involved firm-to-firm mergers. When a senior partner approached retirement, they could sell their share of the practice internally, often in exchange for retirement payments made over time. The deal wasn’t about cash upfront but about stability and continuity.
“Those that take over your practice take over your client base and pay you a retirement payment over time,” Farmer explains. “So, when there was consolidation, you’d merge with another firm, and the buyer wouldn’t make any upfront payments; rather, they would bring you on and you’d have a similar or better retirement plan.”
Private equity introduces an entirely different model.
“Private equity has been around a long time,” Farmer says. “A fund goes out and raises millions of dollars from investors. Individuals, family offices, institutions, pension funds and so on give money to a management team to invest in different businesses.”
Some private equity firms take a broad approach, acquiring a variety of companies across industries. Others aim for focus, building what they call a platform – a core business that serves as a base for further acquisitions in a specific field.
“They’ll say, ‘We want to buy 20 plumbing companies in a region,’” Farmer says. “And they’ll pick one as the platform and then add other ones to create a big plumbing business. Once they have 20 companies, they can turn around and sell it for eight or 10 times the earnings.”
Until recently, the accounting industry had been largely untouched by this model.
“No one had ever done that with accounting firms,” Farmer says. “In the past, accounting firms were like law firms; the partners own the firm and take the earnings. But somebody eventually said, ‘We want to buy CPA firms.’”
Appeal and trade-offs
The shift hinges on redefining how CPA firm profits are viewed. Traditionally, the partners took home any profit remaining after expenses. With private equity, those earnings become a commodity – something to be bought and sold.
“The only way a private equity firm will buy a CPA firm is if it’s going to pay the partners less,” Farmer explains. “So, with CPA firms, no one ever thought there were earnings left over because they were always taken. Now private equity firms are thinking, ‘We’ll pay the partners less,’ so the seller can sell the earnings.”
In short, private equity is betting that firms can be restructured to generate profits at the top – profits they can then leverage for growth, investment and ultimately resale.
The motivation for selling is shaped by pressures within the profession. Farmer says several forces are converging.
“One, we have a talent issue,” he says. “I want to say we’re graduating 80,000 students a year and the need is 125,000 a year across the industry. There aren’t enough people coming in.”
The shortfall has led many CPA firms to look overseas, particularly to India, to meet staffing needs. Technology is another growing expense.
“Technology is continuing its onward march. There’s more and more technology and more and more need for technology. And it’s expensive.”
Finally, demographic shifts are at play. Many CPA firms have senior partners nearing retirement, but the next generation of leaders isn’t always willing to shoulder the financial commitment that comes with internal buyouts, says Farmer.
“Some younger partners have become more risk averse in assuming their retirement payments. So, that makes a sale to a private equity firm appealing.”
Once a firm is purchased, the changes are immediate. The acquired firm becomes a platform, tasked with expanding by purchasing other practices – often with debt provided by the private equity backer.
“Before, these firms would have merged and not taken big cash; now they can get cash. The private equity firm is spending money on debt to buy them.”
As more firms accept private equity investments, competition among buyers has increased. Everyone is looking to grow, which creates pressure – and opportunity – for smaller firms.
“If there are 30 CPA firms owned by private equity, they’re all looking to grow and they’re all looking to acquire other companies. And so there are more potential buyers of a practice.”
Choosing a different path
Reactions within the industry are mixed. Farmer says many peers who have gone through private equity deals report positive experiences.
“I have a lot of friends in the industry who have gone through this transaction and are fairly positive about it. It’s put a new pep in their step. They have some cash and they’ve become more professional in terms of having a C-suite of people dedicated to strategically growing the business.”
Still, he cautions, not all firms are the same.
“There are great private equity groups out there. Some are better than others; some are managed by a spreadsheet, some are more than that.”
At HHM, the partners have decided to go a different route.
“HHM has no interest in private equity,” Farmer says. “Instead, we’ve gone from 30 to 250 people in Memphis, Cleveland, Pensacola and Chattanooga.”
The firm has built a diversified portfolio of services, including a wealth management group that oversees $1.4 billion in assets. And instead of turning to external investors, they’ve focused on culture, amenities and long-term relationships to attract and retain talent.
“We want to attract people and we want them to stay,” Farmer says. “We have a cafeteria and a chef that cooks lunch. We have a fitness center and locker rooms. And we allow everybody to use those at a low cost. We want to create amenities that people would enjoy and that would make them think twice before leaving.”
Farmer attributes much of HHM’s culture to its founders, Donnie Hutcherson and Carl Henderson, who remain involved after more than 40 years.
“They’ve done a great job of creating an atmosphere that allows everybody to grow. They’ve had open hands and they’ve given long leashes to allow people to fail.”
Farmer himself benefited from that openness early in his career.
“Early on, I had quarterly meetings with Donnie. I’d ask to take him to coffee. He’d pay and we’d talk shop.”
Though Farmer says he’s developed some specializations over time, he’s also maintained a generalist’s mindset.
“I like to be able to talk about and work with lots of different businesses. And that’s worked for me.”
While HHM stands firm in its decision to remain independent, not every firm in Chattanooga is taking that path. Market Street Partners, a younger CPA firm in the city, recently merged with Smith + Howard, an Atlanta-based firm that had received private equity investment from Broad Sky Partners.
As part of the deal, Market Street became part of a broader platform looking to expand across the Southeast. The move represents what Farmer sees as a growing divide within the profession – between firms seeking scale through private capital and those building through traditional growth.
“I’m sure we’ll see more private equity firms buying CPA practices,” Farmer says. “But there will also be plenty who choose not to go that route. I’m curious to see how it all plays out.”
As the accounting industry adjusts to a new era of ownership and growth strategies, the ultimate outcome remains uncertain. What’s clear is that the arrival of private equity has brought new energy, new questions and a fresh set of challenges to an industry long known for its steadiness.