Can Private Equity Save The CPA Firm From Disruption?

Charly Weinstein, CEO at EisnerAmper, discusses why his firm decided to split off audit into a separate CPA firm while also taking on private equity investment in a new, non-CPA entity that will offer tax and consulting services. While the alternative practice structure is not new, could this be the beginning of a new trend in PE investment in CPA firms? Listen to learn why EisnerAmper is taking the leap.

Charly Weinstein: We're not competing only with other accounting firms. In fact, we're mostly competing with non-accounting firms, and the traditional accounting firm ownership model is, "Hey, join us, work till you're 65. You'll get paid a multiple of your compensation. You'll get paid a retirement amount, and it'll get paid over 10 years with no interest." Now, think about trying to have someone who's 35 and very talented and wants to be an owner join us. We can compete toe to toe with our non-accounting-firm competitors. And we think we offer a better model than the traditional accounting firm. "Hey, work for us for 20 or 30 years, and then we'll give you some value creation over the next 10 years."

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[00:01:22] Welcome and introductions

Blake Oliver: Hi everyone. Blake Oliver, CPA here. And I'm talking today with Charly Weinstein, the CEO at Eisner Advisory Group LLC, previously managing partner and CEO at EisnerAmper LLP, which is pretty much what we're here to talk about today. Charly, I saw the news this summer - I believe it was in August, September that this broke - that EisnerAmper was splitting into two groups, an audit-focused firm - That's, that's the traditional CPA firm - and this new Eisner Advisory Group, which is going to do all of the, the non-audit work, and this was paired with an investment by a private equity firm, Tower Group, or TowerBrook Capital. And this is a- this is a big deal.

Blake Oliver: Now, I've heard about private equity deals happening in the accounting space. In particular, we've seen a lot of new startups in the accounting space that have started as non-CPA firms. We've got firms like ScaleFactor, and Pilot, and Bench on the smaller end of the market competing with small CPA firms, but thus far, we haven't really seen a fundamental change in the model when it comes to larger firms. So, very eager to speak with you today about this deal. Thanks so much for making the time and great to have you on the show.

Charly Weinstein: Blake, it's good to- good to talk with you, and I'm looking forward to our conversation.

[00:02:52] History of the deal with PE firm TowerBrook Capital

Blake Oliver: So, let's talk about this deal. I know it was in the works for a while, or you've been thinking about it for a long time. How, how did it come about? Um, what, what was the motivator for taking on private investment, changing up the traditional firm model?

Charly Weinstein: Can I take you all the way back to 2012? I'll try and run through it quickly if that's okay.

Blake Oliver: Absolutely.

Charly Weinstein: So, in 2012, there were probably a half a dozen CPA firms, ourselves included, who were approached by a private equity sponsor, to launch a, uh, new ownership model for accounting firms, and in a bake-off with the other six firms, uh, they selected EisnerAmper to move forward, and we had some very serious conversations with them. We actually had a very, very attractive valuation offer from them, but their structure wasn't right. The, uh, concepts around which they wanted to build the firm going forward really didn't jive with our strategy and what we thought would be successful in the marketplace, and so, we took a pass.

Charly Weinstein: They came back in 2014 with another attempt at a different structure. Still wasn't right. In 2018, and in early 2019, we were actually uh, approached by a private equity backed firm who would have acquired EisnerAmper, and they made a very, very attractive offer, and we actually signed a letter of intent, although the deal never came to fruition. And then, about a year ago in June, we were approached separately by three different private equity sponsors, all unsolicited. We had conversations with all three.

Charly Weinstein: One of the groups really, you know, had a structure that we thought wouldn't work. We had indications of interest. We had offers from two, and we decided to move forward in the process with TowerBrook because they really had a good idea of what we were trying to accomplish, and they were on board for that. And so, uh, we probably spent about nine months, or so discussing the concepts, negotiating, putting all the documentation together. And so, I would say it took a little over a year, and we closed on July 30th. So, that's sort of the history.

[00:05:27] The partner meeting in 2016

Charly Weinstein: And what I would say to you is that, in 2016, we had a partner- partner meeting; a three-day off-site partner meeting, and the- the topic for the meeting was disruption, and change. And we had folks come in, sort of like Pilot ... It wasn't Pilot, but, you know, disruptors to the accounting profession, disruptors to other industries, like real estate, and we had people come in who were building disruptive companies and talk about change and how the world was going to change, whether we thought that was a good idea or not.

Charly Weinstein: And so, we first kind of socialized the idea of change and disrupt to the entire partner group in 2016, and we were building on that ever since. And, of course, the transaction that we did with TowerBrook, is, is, um, quite different than the traditional accounting ownership model, and you can say, in many, many ways, it's disruptive of the profession.

Blake Oliver: So, you've carved out the audit firm, which has to be done, due to state laws, rules of being a CPA firm. You Different in every state, but what generally - more than 50% of the partners have to be CPAs. You have to have this partner model. The outside investment thing doesn't work so well. So, you- you've carved that out into a separate entity, and that's under separate leadership now. They're totally- they're totally separate, right? Because you have to be, for, uh, independence reasons,

Charly Weinstein: Yeah.

Blake Oliver: But the advisory group is providing services to the CPA firm.

Charly Weinstein: Correct.

[00:07:09] How the non-CPA firm gets managed

Blake Oliver: What can you tell me about how much TowerBrook invested? How much control do they have? Are you taking partner votes anymore? Is it a corporate model? How- how does the firm get managed now?

Charly Weinstein: So, it's interesting. We followed the traditional alternative practice structure, and that's been around for more than two decades. And the first alternative- alternative practice structure, at least that I'm aware of, was when American Express, a public company, bought Goldstein Golub Kessler, which was a New York- based accounting firm, and that was followed by UHY, CBIZ, followed by Centerprise, and ultimately, uh, McGladrey, and H&R Block.

Charly Weinstein: And so, this concept of alternative practice structure has been around for over two decades, and it's been followed well by a whole host of firms over the years. And there are many other firms that operate in an alternative practice structure just by their own choosing, for liability reasons, or, or otherwise. They're not necessarily private equity backed, but they operate in a- in an alternative practice structure.

Charly Weinstein: What that means is the firm that does CPA services, EisnerAmper LLP, is owned by CPAs. It's independently governed, and independently managed, and the non-attest businesses that were formerly part of the CPA firm have been spun off into a separate end entity called Eisner Advisory Group, LLC, and that is the entity that received the investment from TowerBrook.

[00:08:55] All the partners maintain an interest in both firms

Blake Oliver: So, how many partners are in each of these firms?

Charly Weinstein: Without sort of getting into all the numbers, what I would say is that all of the partners in the LLC, in the non-attest business- non-attest businesses, those are partners who were partners in EisnerAmper LLP, and they spun out with the separate entity, EisnerAmper LLP partners continue to be partners in Eisner Advisory Group LLC.

Blake Oliver: So, they're partners in both.

Charly Weinstein: They're partners in both. That's correct.

Blake Oliver: Okay. Got it. Got it. Okay.

Charly Weinstein: That's the traditional alternative practice structure.

Blake Oliver: And to give people context, I think you have something like 200-plus partners, 2000-plus staff.

Charly Weinstein: We do. Yes.

Blake Oliver: That's the general idea. Okay.

Charly Weinstein: aideal Yes, and this year, our revenues will be a little over $500 million.

Blake Oliver: So, getting to this topic

Charly Weinstein: Okay.

Blake Oliver: this of disruption, which is very exciting, there's a lot of disruption going on right now in accounting, and it's interesting to see it coming to the top 100, top- Eisner is a top-20 firm, right?

Charly Weinstein: Yes, mm-hmm.

[00:10:11] Why EisnerAmper changed to the alternative practice structure

Blake Oliver: So, what is that disruption that you mentioned? What does it look like at the top-20 firms, and how does this deal help you adapt to it?

Charly Weinstein: So, I can tell you why we partnered with TowerBrook, and what the changes are. And in that partnership lies the disruption. And so, what we were seeing in the- in the marketplace was a whole bunch of- a whole bunch of trends. The need to invest in technology, significant amounts in technology. Uh, last year, our technology budget was $26 million. This year, it's going to be even higher. Growth in, uh, advisory businesses- advisory businesses were growing much faster than traditional compliance businesses, and they were adding more value to clients.

Charly Weinstein: And, in effect, when accounting firms compete for talent in the advisory business lines, we're not competing only with other accounting firms. In fact, we're mostly competing with non-accounting firms, and the traditional accounting firm ownership model is, "Hey, join us work till you're 65, and then, when you retire at 65, you'll get paid a multiple of your compensation and it'll be, you know- you'll get paid a retirement amount, and it'll get paid over 10 years with no interest. And so, you'll get your last payment when you're 75. Now think about trying to have someone who's 35, and very talented, and wants to be an owner join us, thinking that they have to wait until they're 65, and then get paid out between 65 and 75 to see any value creation that they've brought to a business.

Charly Weinstein: And so, now, we compete- in our non-attest businesses, we compete more like a traditional business, and so we can offer ownership possibilities. In private equity, as probably everyone is aware, the idea is every four to six years, you have another value creation event where you capitalize the earnings of the business, and you create liquidity for the owners. And, and so, when we're out talking to talented people and in advisory businesses, we can compete toe to toe with our non-accounting-firm competitors, and we think we offer a better model than the traditional accounting firm, "Hey, work for us for 20 or 30 years, and then we'll give you some value creation over the next 10 years."

Charly Weinstein: In addition to that, trying to get capital from accounting firm partners is difficult. We were an extremely well-capitalized firm, and we had great financial results for a long time, but in a partnership model, partners like to take home their earnings at the end of the year and put them in the bank. In more of a corporate model, which we have now for our non-attest businesses, we're business owners. We own stock in the company, and creating value in the business, and increasing the value of our stock is really a big driver for partners now. And so, we're able to focus on creating value, and we're able to, um, have in mind liquidity events, so, that's a- that's a big differentiator, as well.

Charly Weinstein: And say that our M&A strategy is definitely broadened and then enhanced by the access to capital that we have and all the free cash flow that we have. And so, we have a great opportunity to build our business bigger and to build our business faster, and with all the leverage we have, in terms of being able to use technology, and right-shoring, et cetera, we think we can significantly improve our margins, as well.

Blake Oliver: So, you're saying that one of the problems with the traditional model is that, on the partner side, partners don't have much incentive to reinvest in the firm because what they'll see out of that, the growth they'll see out of that is abstract, and it's kind of down the road at retirement. It- generally, they want to take the money home that they've earned, and invest it personally.

[00:15:06] Creating liquidity for partners before retirement

Blake Oliver: And, and so this- but this creates liquidity, right, because the stock price goes up. They own stock. They can sell the stock. They can ... Will the firm buy back stock, like if I wanted-

Charly Weinstein: Yes.

Blake Oliver: If I'm a partner, and I want to leave, that could be a really complex kind of thing to negotiate.

Charly Weinstein: We have built aspects of that into our models. So, partners, when they hit a traditional retirement age- so, don't forget the distribution you have of partners in accounting firms, which are getting older, and older, and older, you know, on the average. And so, think about it, if you're a 62-year-old partner, who's going to be retiring at 65, making significant investments in the traditional accounting firm model, and growing businesses that three years down the road, four years down the years down the road, five years down the road will start throwing off real profitability and create real value. Well, already retired.

Blake Oliver: Right.

Charly Weinstein: And so, the incentives- and many firms, many of the partners in, in many firms are, are quite focused on stewardship, and growing the firm, and leaving it in better shape for the next generation, but not everyone.

Blake Oliver: Right.

Charly Weinstein: If you're a partner towards the tail end of your career of making those big investments, which come out of your profits, and you're not going to see the payback of that before you retire from the firm, it's hard to ask partners to do that on a regular basis. But if you own stock, and the value of the stock is going to increase by these investments, even if you retire, you can choose to hang onto your stock, if you believe the stock is going to go higher. Then, you can hang on to the stock, and every four to six years, we hope there's a liquidity event. Or when you hit that normal retirement age, you can, you can sell your stock back to the company at fair value. And so, you have- you have more options in this, in this model. As a partner, you have more options.

Blake Oliver: Yeah. It's aligning, um, financial incentives, right, with what you hope would be the, uh, the, the, just ... I don't know what you would call it. Just the firm, uh, goals.

Charly Weinstein: Yeah.

[00:17:26] Management Incentive Program Stock

Blake Oliver: Let's go to the staff side because this is what me the most as somebody who left public accounting as a manager. So, I was a manager at a Top 25 firm, and I was presented with an opportunity to go into tech. I had a good salary at my firm that I was at, but the path to partner was not clear. no equity; there were no options. So, when I was presented with the option to go into technology and get stock options invested over four years, I mean, that was- seemed like a good deal as opposed to the alternative, which was sit around and wait and hope. So- so, how, how, how would I have a different experience at Eisner?

Charly Weinstein: Well, so, we have a management incentive program, which is akin to stock options, and all of our- everyone who gets to the partner level immediately has equity participation, in our firm now. And when you think about it, uh, in our prior iteration, first, you became an income partner for a number of years, and then if you proved to be doing well, then perhaps you can shift to equity after three, four, or five years. Now, day one, everyone who becomes a partner has equity.

Charly Weinstein: And we also have this management incentive program available, which functions just like stock options. So, in your- when you were in public accounting, you were- if you would have gotten to partner, then you still would have waited till you're 65 to have any kind of liquidity event. Here, if you're in your 30s, and you get to that partner level, you can anticipate that there will be, and hopefully- this all depends on how well we do. And, of course, we- we need to do well to, uh, to, uh, create liquidity and create value for all of our, uh, constituents.

Charly Weinstein: But if we just go along the path of growth and profitability that we had for the, you know, for more than the last decade, there will be liquidity events every four to six years. And you would have a liquidity event. If you were 35, you'd have a liquidity event when you're 40, as opposed to when you're 60. And you can imagine, over the course of your career, if you could be building value in your stock, creating periodic liquidity events, you might've felt differently about public accounting.

Blake Oliver: So, the equity incentive plans. What did you- call it? a Management ...?

Charly Weinstein: Management incentive program.

Blake Oliver: The management incentive program. So, that is limited to partners, or are staff able to participate?

Charly Weinstein: It's limited to partners, um, and, um, it is a program that's in place. So, it's not just when you become a partner, but anyone who's a partner who's advancing in their career can participate in MIPS. We call it management incentive program shares; call it MIPS. And so, anyone, you know, anyone can participate at any point in time in the partnership in this MIPS program.

[00:20:56] Was there any resistance to moving to this new model?

Blake Oliver: So, there's now a board of directors, I take it. The partners own stock. They vote like a corporation. They elect their board of directors, which selects the CEO. Very different than a traditional partner/everybody votes kind of situation. Was there any resistance to moving to this model?

Charly Weinstein: No, uh, the 207 partners, who were partners at the time of the transaction, voted a hundred percent in favor of the deal. We added a new partner class. So, we closed on July 30. We added 12 new partners, October 1, which was our traditional timing for adding new partners. So, we added 12 new partners, October 1, and a hundred percent of the partners were on board. But that goes back to- Blake, that goes back to those first meetings we had with the partners in 2016, saying change is coming. disruption is coming to the profession. Look at Pilot- Pilot, I think Pilot has a, uh, uh, uh, valuation of-

Blake Oliver: A billion-dollar Billion dollar valuation.

Charly Weinstein: Over a billion dollars.

Blake Oliver: Yup.

Charly Weinstein: And so ... You know, we're a great firm. We've been around since the 1960s; we have $500 million of revenue, and, you know, 2,000 colleagues, and Pilot has a valuation of over a billion dollars. And so, that's disruption.

[00:22:24] Will this happen with all the big firms?

Blake Oliver: So, do you think that this is going to happen with all of the big firms?

Charly Weinstein: It's not right for everybody. I mean, you have to embrace change. I mean, the- one of the things we also talked about in 2016 with the partners was this concept of being comfortable with the uncomfortable. And so, this has changed, and it's, it's different. And, not all, not all firms have partners that are receptive to change. So, I don't think that all firms will go in this direction. And I also- I've been around a long time. So, I, I, I've been at this- for 44 years, I've been in the profession and been running EisnerAmper since 1998, or 1999. And I've been around long enough to know that there are a lot of ways for firms to be successful, and Eisner was successful in its own right, and we had our way of doing things.

Charly Weinstein: Of the top 20 firms, there are 20 different ways of doing things, and you can be successful in a lot of different ways. So, this model was right for us. We think it helps us advance our strategy. Our strategy hasn't changed one iota, and when we talk about the firm, we talk about- we use three words: sustainable, relevant, and important. And sustainable really means anticipating and meeting the changing needs of your clients. And indeed, nowadays, it really means anticipating and meeting the changing needs of your changing clients because every business is being disrupted. And we think that this investment by TowerBrook, and this ownership model, and structure enables us to be sustainable, relevant, and important into the future.

Blake Oliver: Well, that is really exciting to hear. For those who want to learn more about EisnerAmper, or connect with you online, where would you direct them?

Charly Weinstein: Definitely best to shoot me an email at, uh, As you can imagine, it's a very, very busy time, and so, if too many people care to reach out, it might take me a little while to get back to you, but, yeah, absolutely. And I've done some speaking engagements; I'll do more. If people want to learn more, or find this of interest in any way, shape, or form, uh, just a, a quick Google will, uh, will, will, you know, get some more information to you.

Blake Oliver: Go ahead and search Google for Charly Weinstein and Eisner Advisory Group LLC. We've been talking today about a new way of adapting to disruption in the accounting profession. Charly, thanks for your time.

Charly Weinstein: Blake, it's been a pleasure. Thank you and look forward to chatting again.

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Can Private Equity Save The CPA Firm From Disruption?
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