Many professional services firms, particularly in advisory and public accounting, are now well into the journey of private equity and being investor-backed versus, internally, partner-owned. CEOs in these firms are accountable for growth, improving firm economics, de‑risking the platform, and positioning for a successful next turn. Likewise, the broader PE market is asking which firms can compound value across multiple ownership cycles and which will stall before the ladder reaches its next rung.
We are far enough into this evolution to see distinct patterns. Some investor‑backed firms are generating sustained EBITDA growth, multiple expansion, and exit optionality. Others are discovering, often too late, that simply scaling the traditional partnership model under institutional ownership has limits.
Firm leaders running PE‑backed accounting platforms and investors underwriting their future performance are all navigating this tension. But once the decision to take outside capital has been made, teams need to focus on an even harder question: what enables firms to keep climbing once the obvious scale benefits have been exhausted?
Economic thesis of investor-backed professional services firms
The economic premise of PE investment is straightforward. External capital allows firms to invest in growth and organizational capability at a level that is rarely possible in an internally owned partnership. If deployed well, that capital creates value for both owners and investors.
Let’s accept this thesis: outside investment offers a greater opportunity and greater probability of generating substantial gains. One thing is almost inevitably true: without a capital event or some outside vehicle, most internally-held firms will never be able to create true wealth creation for current owners without constraining investment, limiting growth, or economically burdening future generations of partners.
So, with outside investment a given, successfully navigating the investor-backed journey is dictated by the basic shape of the PE lifecycle: improving economics and successfully making the turn.
Improving economics has two core drivers: growth and increased profitability. Essentially, the equation is simple. Firm value is a function of EBITDA and the multiple applied to it. Increasing EBITDA comes from growth, margin expansion, or both. Increasing the multiple is more nuanced and reflects:
- EBITDA margin;
- Demonstrated consistent growth;
- Indications of competitiveness;
- Demonstrated leadership competence and discipline; and
- The investment climate and prevailing views of the industry.
While this formula is well understood in general industry, professional services firms are approaching unfamiliar territory in driving these things simultaneously under pressure to arrive at the destination on time (i.e., make the turn, ladder up to fully or partially monetize the first investor, and bring in a new one).
The challenge comes primarily from the collision between the ladder logic of private equity and the classic economics of professional services firms. Laddering investment assumes we can endlessly improve through successive generations of investors. But traditional professional services have limits: finite partner capacity, labor-market costs vs. billability, reliance on people in the advisory model, episodic client demand, and the like. As those limits dig in, EBITDA growth becomes harder to sustain, and multiple expansion harder to justify.
Firms that successfully make this journey recognize these limiting forces and navigate in ways that enable them to reach the next rung on the ladder. They reshape underlying economics; changing revenue composition, margin characteristics, and risk profile in ways that materially alter how the firm is valued. Firms that do not eventually reach a point where no attractive next turn is available.
The three stages of the journey: Climbing the ladder
These dynamics result in three distinct priorities of the investor-backed journey. They are roughly sequential but don’t need to be end-to-end as in “finish one before you start the other.” Indeed, it’s better not to wait too long to start each one, although success at each stage should improve margin and free up investment for the next priority.
The three stages are:
- Grow within the current model by scaling through the current offerings, services and structure.
- Optimize the current model by driving improved productivity through technology leverage, client management practices, overhead optimization, and the like.
- Transform the business to open up gross margins through new offerings, technology/AI, subscription models, SAAS, and the like.
Each stage has a distinct economic objective and a different set of leadership priorities.
Stage One: Grow the current model
In Stage One, value creation is driven by scaling the existing model while protecting its economic integrity. The objective is to translate capital into revenue expansion and absolute EBITDA growth while preserving the metrics that support future optimization and investor confidence. The indicators of success are simple, but compelling: revenue per partner, partner headcount, gross margin (revenues less cost of delivery), and non-fee-earner costs as a percentage of revenue.
In the early phases of PE ownership, economic improvement is typically driven by disciplined execution within the existing service model. Growth comes from adding productive partners, expanding client relationships, making selective acquisitions, and scaling operations while holding margins steady. When executed well, this version of the playbook can deliver meaningful EBITDA growth with limited structural risk. The risk points and management strategies are well understood and include:
- Growth strategy: A clear, focused strategy that answers three questions unambiguously: who we serve, what we sell them, and why we win. This approach to strategy defines priority industries, services, and client profiles—and just as importantly, what the firm will not pursue.
- Lateral hiring and acquisitions: Inorganic growth can create value or destroy it depending on discipline. Buying revenue for revenue’s sake will result in new partners who overpromise and underdeliver, acquisitions that feel like bolt-ons, and integration plans that are unrealistic and under resourced. Firms that diligently consider revenue portability, cultural fit, gross margin mix, leadership bandwidth, and integration complexity prevent phantom growth and preserve revenue per partner during periods of rapid expansion
- Maintaining utilization: The early growth phase demands rigorous workforce planning to ensure that utilization remains healthy across service lines and levels as revenue grows. Yes, non-partner headcounts will expand. However, hiring cadence should be tied to highly probable demand and be informed by a strong understanding of each service line’s cycles.
- Disciplined Investments: Investor‑backed growth introduces an influx of investment opportunities: technology, marketing, people, infrastructure. Stage One firms that succeed treat investment as a portfolio of choices, rather than a wish list. Once the choices are made, they need to be monitored to ensure yield. This discipline ensures that growth investments support near‑term scale without undermining capacity to optimize later.
- Controlling costs: Finally, Stage One growth depends on controlling the expansion of non‑fee‑earner costs. As the organization professionalizes, SG&A inevitably increases, but it must scale more slowly than revenue over time. Firms that manage this well stage investments in finance, HR, IT, and operations in line with revenue milestones.
Growth alone, however, does not materially change the underlying model. It creates size and momentum, but not yet resilience.
Stage Two: Optimize the current model
In Stage Two, the focus shifts from “how fast are we growing” to “how efficiently and predictably can we convert revenue into earnings.” Improving EBITDA margins is a more subtle art that starts with the obvious but ultimately encounters the barriers inherent in the classic professional services model. To start, some margin will be gained simply through scale benefits. If you grow, keep gross margin constant (or at least not down) and keep SG&A growth below revenue growth, your margin will improve.
Productivity improvements become the primary driver of economic improvement, rather than expansion. Optimization focuses on:
- Increasing per-partner productivity through better segmentation of roles, stronger client management, and institutional selling (cross-selling).
- Improving leverage by expanding the contribution of non‑partner fee earners without compromising gross margin.
- Professionalizing commercial, operational, and financial disciplines.
- Tightening governance around investment, headcount growth, and SG&A.
Investments in technology, data, CRM, marketing, training, and delivery infrastructure usually accelerate at this stage, helping the firm capture more revenue, higher margins, and greater repeatability from the same leadership and delivery base. When optimization is successful, EBITDA margins expand and performance becomes more predictable. The firm appears more “institutional” to future buyers, with fewer surprises and tighter execution.
But optimization, like growth, has limits. No matter how effective the systems or how strong the incentives, individual partners eventually reach practical limits on selling capacity, client attention, and delivery oversight. At some point, plates fill, and opportunities to improve begin to dry up.
Likewise, if we continue to do roughly the same things for roughly the same clients in roughly the same way, then there will come a point where gross margin hits a wall. We’ve reached the limit of hours we can expect people to bill, and we’ve increased billing rates to the maximum the market will bear. While pulling on the same levers may protect short-term EBITDA, they degrade the very attributes that future buyers care most about: predictability, partner/producer depth, resilience, and growth optionality. At that point, pushing harder on the same levers risks trading near‑term EBITDA for long‑term fragility.
This is the point at which further EBITDA margin growth will have to come from transforming the business model, the service model, or something else.
Stage Three: Transform
The final and most decisive stage is transformation. This stage begins when leadership recognizes that further improvement cannot come solely from doing the same work more efficiently, but must come from changing how value is created and captured. If optimization is about improving execution, transformation is about changing the economics.
This is where firms begin to decouple revenue from hours, growth from headcount, and insight from episodic engagements. Transformation typically involves institutionalizing the client relationship—the shift from episodic, partner‑centric advisory to durable, embedded, firm‑level value creation inside the client’s operations. This institutionalization takes several reinforcing forms:
- Advisory judgment is translated into repeatable frameworks, diagnostics, and decision tools that guide client behavior continuously rather than reactively.
- One‑off projects evolve into managed services and contracted outcomes, where the firm assumes ongoing responsibility for defined processes or risk domains.
- Compliance and advisory activities shift toward continuous assurance and monitoring models, reducing episodic intensity while increasing frequency and relevance.
- Technology, data, and workflows are embedded directly in the client’s operating environment, making the firm’s presence persistent rather than transactional.
Economically, this stage shifts the firm’s profile in ways that fundamentally alter valuation dynamics:
- Gross margins rise as offerings scale.
- Cashflows smooth as recurring revenue increases.
- Client retention improves through deeper operational integration.
- Key‑person risk declines as value creation moves from individuals to platforms.
For PE sponsors, transformation is where multiple expansion becomes plausible rather than theoretical. For CEOs, it is also the most complex phase to lead, requiring cultural change, investment discipline, and a redefinition of what it means to be a “professional services” firm.
Firms that succeed in this transition move from being valued primarily for the volume of advice they can sell to being valued for the infrastructure of trust and operations they provide. That distinction increasingly determines which investor‑backed accounting firms continue climbing the ladder—and which discover they have reached the limits of the traditional model.
Climbing vs. stalling
Firms that stall on the ladder tend to remain trapped between optimization and transformation: too complex to run like a traditional partnership, but not yet structured to deliver durable, scalable, repeatable economics. Often, this comes down to whether leadership recognizes early enough when the traditional model has reached its functional limits, and whether or not they are willing to redesign the firm and transform.
Firms that keep climbing make a different choice. They treat the transformation stage not as an innovation agenda or a future ambition, but as a core requirement of sustainability under institutional ownership. They use their scale, capital, and leadership depth to institutionalize client relationships, embed value into ongoing operations, broaden ownership to the leaders building platforms, and systematically decouple growth from partner capacity. In doing so, they shift the firm’s economic profile toward durability, predictability, and repeatability, creating a clear value narrative for future buyers versus headline growth alone.
Ultimately, the firms that continue to ladder across multiple turns are those that recognize a simple truth: private equity accelerates the journey, but it also shortens the distance between economic ceilings. To successfully raise those ceilings, firms must go through each of the three stages: Growth creates opportunity. Optimization creates leverage. Transformation creates longevity. The firms that align all three will continue climbing, while those that do not will eventually discover there is no next rung.
ABOUT THE AUTHORS:
Dave Kuhlman is an advisor to leading professional services firms at Lotis Blue Consulting, a management consulting firm based in Chicago.
Maggie Miller is a principal at Lotis Blue Consulting.
Photo credit: Nick Youngson/Pix4Free
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