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(For details on the BDO deal — and why it's not a PE deal at all —
In a traditional firm, an executive committee is elected to make day-to-day decisions. In smaller firms with one owner or a few equity partners, they are not elected, but that choice is their only default path due to their size. In a corporate environment, a board governs the day-to-day decisions with a default mechanism for a wider ownership group to vote on decisions extending beyond the authority of the board. This is no different than the executive committee inside a firm where they need the majority approval of the other equity owners for decisions extending beyond the day-to-day actions the committee has approval to independently decide.
Operationally there is no material difference once you extend beyond the firm with just one owner or a few partners. There are controls that provide checks and balances in the decision-making process. What outside ownership really comes down to is the perception of what that ownership will do and the perception of the financial impact of that ownership model. Plus, there is an emotional aspect of losing control. The liability to report to and provide a financially successful entity for the outside investors is the same responsibility the current leadership team has to its partners and staff.
If an outside investment group is involved, it is just a different group you need to report to, but reporting is not the critical function. The critical function is you still need to run a profitable entity whether you own the majority interest or not. That does not change.
Let's take apart the financial ownership aspect of being partially owned by an external party. The current owners will receive a pre-payment from the outside investors. Their future compensation likely will not match the prior ownership compensation they had been receiving because of the pre-payment. The aspect of outside ownership that may be misleading is there will not be enough money left to incentivize the next wave of leadership to grow the firm.
No matter what happened with the funding that transferred hands with the existing leadership, every business needs to have the financial infrastructure to compensate future leaders. The outside investors in the accounting firm, like any company who accepts outside investment, will adjust the compensation of the next generation of leadership to incentivize them to manage and lead.
Here's a well-kept secret: As well-educated and funded outside investment groups are, they rely on the professionals with knowledge of the sector they invest in to continue to run the businesses or, in this case, the accounting firms they have made material investments into.
The "discomfort zone" is the transition time and the perceived change that can occur. It's the change to the unknown that is the concern, and the unknown is what makes everyone create the negative thoughts or draw upon the worst experience they encountered or read about when an outside investment group took over. Also, remember that news of successful transitions never hits the media. Only failures hit the media.
In addition, we are stereotyping outside investors into one pool. They do not all operate the same. I am sure there are some PE groups that are bad choices, just like there are some companies run by leaders who turn out to be not the best selection. It's a question of finding the right group just as when you try to develop the right culture for your firm.
The challenge in the accounting world with outside investment is that it is breaking the norm. The norm has been to operate with the partners or shareholders depending on their firm's structure. That traditional group controlled every decision, including compensation, spending and the firm retaining all the profit. Then, repeat the process every year until retirement and either sell or merge or receive your buyout from the firm's deferred compensation program. This is the comfort zone most accounting firms operate in. This may be the primary concern in the concept of outside investment.
There is disruption in any change just like when a firm changes managing partners or two firms merge or even when a less emotionally impactful event occurs, such as the introduction of new technology. Then time passes, sometimes with some pain, but that disruption levels out and a new, perhaps slightly revised method of operating settles in. That disruption could force change that creates a new and better way of operating.
We are back to the unknown again, though. What if outside investment could create a better way of running a firm? Will I like it? Do I even have a choice? What if my unfunded deferred compensation program is making it unattractive for the next level of leadership to want to join my firm? It is not a bad idea for accounting firms who are a business with the opportunity to take investment to either profit or to rectify and realign the way retirement funding evolved in their firm, or perhaps a blend of those elements or other factors.
Technology, artificial intelligence, offshoring, and remote workers are daily examples of change inside accounting firms that are now commonly accepted. Imagine trying to operate the firm you have today with the technology you had 20 years ago. It would be slow, not cost-effective, and likely result in a lot of lost business combined with low profitability. Outside investors are just a new element of change — one you should explore because it might be the right move for your firm.
