Big 4 Transaction Services: Pathway to Private Equity, or Just a Small Improvement Over Audit?
At some point, almost everyone “becomes interested” in Big 4 Transaction Services (TS) teams:
- Auditors fantasize about escaping from a boring, repetitive grind and moving into a higher-paying job with more interesting work.
- Aspiring investment bankers think about their Plan B options and wonder if a Big 4 job offer might be a good pathway into IB.
- Corporate finance professionals want to escape their repetitive work and assume that anything related to deals will be an improvement.
- And career changers figure that Big 4 firms might offer easier pathways into higher-paying jobs in finance, consulting, and related fields.
I could go on, but you get the idea.
The point is, everyone debates the merits of these jobs, but there’s still a lot of confusion over what “Transaction Services” means.
We’ll delve into all these points in this article, but let’s start with the basic definition:
The Transaction Services Job Description
Transaction Services Definition: Transaction Services (TS) teams at Big 4 and other accounting firms advise on specific aspects of M&A transactions, such as financial due diligence and the valuation of intangible assets, and they help buyers assess the financial risk of deals; when TS teams advise sellers, they confirm financial results and business trends to potential buyers.
The TS group may also be called “Transaction Advisory Services” (TAS), among other names.
At the large accounting firms, such as the Big 4, Transaction Services is usually split into different sub-groups:
- Valuations and Appraisals
- Financial Due Diligence (FDD)
- Corporate Finance (may be a separate group)
- Integration Services
- “Business Recovery Services” or Restructuring (may be a separate group)
We will focus on groups #1 and #2 (Valuations and Financial Due Diligence) here.
Corporate Finance and Restructuring are quite different and don’t fit the TS definition above, and the Integration Services group is smaller and has less readily available information.
We did publish an interview about Big 4 Restructuring a long time ago, so refer to that for more details.
We’ve been using the name “Big 4 Transaction Services,” but many non-Big 4 firms and business valuation firms offer these services as well; examples include RSM, BDO, Grant Thornton, Moss Adams, and CLA.
The nature of Transaction Services roles differs heavily based on region.
In Europe, for example, TS teams analyze both historical financial information and forecasts.
But in the U.S., TS teams can analyze only past results due to regulatory differences.
Big 4 Transaction Services vs. Investment Banking
Professionals in TS groups work on deals differently than investment bankers.
M&A investment bankers execute the entire deal process from start to finish, including finding and contacting potential buyers and sellers, marketing the company, and negotiating the purchase agreement.
By contrast, Big 4 TS teams:
- Work on only one specific part of the deal (e.g., when a potential buyer is conducting due diligence, or when a deal is closing and the buyer needs to integrate the company and re-value the seller’s Balance Sheet).
- Are paid on an hourly basis with fees that are not linked to the deal closing successfully.
- Earn fees per engagement somewhere in the $200K – $800K USD range, which is less than what investment banks earn even on “small deals” (but the collection probability is also much higher).
The exceptions here are the Corporate Finance and Restructuring teams at Big 4 firms, but they’re often considered separate from Transaction Services (see below).
Valuation vs. Financial Due Diligence vs. Integration Services vs. Corporate Finance vs. Restructuring
There are many groups within or around “Transaction Services,” so it’s worth explaining how they differ.
The Valuation, Financial Due Diligence, and Integration Services teams all advise on specific aspects of deals and get paid for specific projects, so they fit the definition above.
The Valuation group, similar to business valuation firms, usually works on tasks like purchase price allocation, re-valuing sellers’ assets and liabilities in M&A deals, Goodwill impairment testing, and the valuation of financial assets.
If you’re in the group, you’ll learn far more about valuation than the average banker, but you won’t get much exposure to entire deal processes or other types of modeling.
The Financial Due Diligence (FDD) group digs into companies’ financial statements to highlight trends and identify “red flags” before buyers complete M&A deals.
For example, they might determine the key revenue drivers over the past few years, figure out the company’s cash conversion cycle, determine whether or not the provided EBITDA figures are accurate, and find the company’s “true debt” levels (including hidden and off-Balance Sheet items).
Quality of Earnings (QoE) reports to assess a company’s recurring earnings and the validity of its accounting policies are also common.
The FDD team typically does this work during the bidding phase of an M&A deal, when potential buyers have access to the seller’s data room.
Finally, the Integration Services team assists with the post-merger integration process when the buyer and seller’s financials, taxes, reporting, and other systems must line up.
In contrast to these three groups, the Corporate Finance and Restructuring teams are much closer to investment banking.
The Corporate Finance team at most Big 4 firms is an internal investment bank that executes entire M&A deals from beginning to end.
The experience is more relevant for IB/PE roles, but these CF teams also tend to work on smaller deals than the FDD teams.
If the TS team works on due diligence for $1 billion deals, the CF team might execute deals in the $100 million – $200 million range.
Recruiting: How to Join a Big 4 Transaction Services Group
Some Transaction Services groups hire candidates directly out of undergraduate or MBA programs, but internal hires from other groups, such as audit, tend to be more common.
On-campus recruiting, when it happens, usually takes place at the top ~10 schools in the country for accounting, which are different from the “target schools” for investment banking.
For example, in the U.S., the list might include universities like Notre Dame, the University of Illinois at Urbana-Champaign, UT Austin, BYU, Michigan (Ann Arbor), and others in that tier.
There is some overlap with the top schools for IB recruiting, but relatively few students from the Ivy League and equivalent schools end up in these roles.
An accounting degree helps, but it’s not necessary if you’ve had enough relevant work experience, and you already have the required Excel, accounting, and analytical skills.
The CA or CPA certifications can help if you’re moving into TS from another full-time job; accountants take these credentials more seriously than bankers (but again, it’s region-dependent).
If you want to move from audit to Transaction Services, hiring usually occurs after tax season each year.
However, you may need to network for around a year to get to know everyone in the TS group and maximize your chances.
So, you might be looking at 2-3 years to move from audit to TS.
If you want to improve your chances, involve yourself in the audits of acquisitive companies or ones with complex issues around revenue recognition, stock-based compensation, or intangible assets.
Transaction Services Interview Questions
If you network your way into the interview process, you can expect a few rounds of interviews with behavioral/fit and technical questions, potentially a case study or Excel test, and then a final-round interview with the Partners.
The interview questions are very similar to investment banking interview questions, but they’ll focus more on accounting and valuation and less on topics like LBO modeling.
For example, expect questions about what the Change in Working Capital means, EBIT vs. EBITDA vs. Net Income, and “accountant only” topics like trial balances and how to walk through events using debits and credits rather than financial statement changes.
The case study or Excel test could involve almost anything, so here are a few examples and practice exercises:
- Excel Database Functions
- Excel Practice Test for Interviews with INDIRECT, MATCH, and SUMIFS
- INDEX/MATCH Tutorial
- 3-Statement Modeling Case Study (30 Minutes)
The Transaction Services “Work Product”
It’s difficult to find real examples of the reports that TS teams write because there’s no disclosure requirement.
I managed to find one short, partially redacted example, which you can access below:
Just like an investment bank can advise the buyer or the seller in an M&A deal, a TS team can also advise either party.
If the seller hires the TS team, the deliverable is usually a “vendor due diligence” (VDD) report that makes it easier for potential buyers to analyze the seller’s business before placing a bid.
If the buyer hires the TS team, the output is usually a “due diligence report” based on the seller’s data or a review of the seller’s existing VDD report, where one TS team challenges the conclusions and adjustments of another TS team.
Besides the tasks mentioned above – analysis of revenue drivers, normalization of metrics like EBITDA and EPS, Working Capital and cash conversion cycle analysis, and determination of “true debt” levels – a few others include:
- Detailed revenue analysis, broken down by customer, channel, geography, and product.
- Customer contract analysis, including any onerous or hidden terms.
- Trial balance analysis to detect shenanigans in the underlying debits and credits.
- Lease analysis, where the team estimates the ongoing costs and rental increases from existing leases and the ones that need to be renewed.
- Revenue and EBITDA bridges that demonstrate how both metrics have changed based on products, channels, and customers.
- Budgeted vs. actual numbers to judge the accuracy of management’s past forecasts.
- Inventory analysis, including aging, inventory by product, average levels, and provisions.
- Review of financial forecasts (outside the U.S.) to determine whether they’re completely fictional or somewhat believable.
Professionals in the TS / FDD teams may also interview management about everything above, and they’ll write a detailed report with their findings at the end of the process.
If you’re in the valuation team, your work tasks will be similar to the ones covered in the business valuation firms article, with a focus on numbers rather than written reports.
What Do You Do as an Associate, Manager, Director, and Partner?
- Associate or “Consultant” – The entry-level role, where you do a lot of data and financial analysis (~2 years for a promotion from here).
- Senior Associate or “Senior Consultant” – The next level up; similar work, but you get the more interesting bits (~3 years for a promotion).
- Manager – You lead the Associates and review their work to write the reports (~3 years for a promotion).
- Senior Manager – You lead the Managers, perform reviews, and delegate work to everyone else (~3-6 years for a promotion)
- Director / VP – You do final reviews of the FDD and valuation reports and start managing client relationships (promotion time is highly variable).
- Partner – This one is divided into Junior Partner and Equity Partner roles, and your job at this level is to win new clients and more business from existing clients.
If you perform very well, you might reach the Partner level in 10-15 years.
But don’t be fooled: it’s not necessarily “easier” to reach the top than in investment banking because the turnover is also lower.
In particular, it’s difficult to get promoted beyond the Manager level because few people leave the job at that stage, and you need to start showing evidence of your ability to generate revenue to advance.
Transaction Services Salary, Hours, and Lifestyle
Let’s start with the hours and lifestyle since those are easier to describe: expect to work around 50-60 hours per week.
There are occasional late nights and weekend work, but nothing like the frantic nature of investment banking.
In normal, non-pandemic times, you might also have to travel to client sites occasionally, but far less than the travel schedule required in management consulting.
Before giving the compensation ranges, it’s important to explain the Transaction Services business model.
The fees from TS engagements are lower than audit fees, but the margins on the engagements are higher.
Many deals are staffed with a Partner or Director, a Senior Manager, and 2-3 Managers and Associates.
If an engagement takes a few professionals a month to complete, and it results in $300K in fees, that’s a very healthy profit for the firm.
The budget for each engagement is 100% negotiable with the client, and in some cases, firms end up billing clients less if a deal falls through – because of relationships and the desire to win future work.
These factors explain why total compensation (salary + year-end bonus) is higher than audit compensation but lower than investment banking salaries:
- Associate: $60K – $90K USD
- Senior Associate: $80K – $120K
- Manager: $100K – $150K
- Senior Manager: $125K – $175K
- Director / VP: $150K – $300K
- Partner: $300K – $1 million+ (if profits for the Equity Partners that own part of the firm are also counted)
There are cost-of-living adjustments, so expect lower compensation if you’re in a cheaper location outside major financial centers.
For all positions except Partner, the base salary comprises the bulk of the total compensation; year-end bonuses might be only 10-20% of base salary.
Often, the best way to increase your earnings is to switch to a different firm and negotiate for a higher salary and bonus.
Promotion Within Transaction Services Groups
You might now be thinking, “Well, the pay is lower than IB or PE pay, but I can just grind it out until the Partner level and earn a lot!”
Not so fast: 1-2% of new hires might eventually become Junior Partners.
And even fewer will make it to the Equity Partner level, where total compensation moves closer to $1 million+ due to ownership in the firm.
To reach those levels, you need to generate millions of dollars in revenue each year.
An average assignment could be worth something in the low-hundreds-of-thousands range, so that requirement translates into 10-20 signed engagements each year.
So, it’s arguably even more difficult than what a Managing Director in investment banking does because an MD can close a large deal or two and earn their pay.
Juggling dozens of clients and potential clients and trying to win assignments from them requires more multi-tasking and constant attention.
Oh, and if you do not advance to the Partner level, your exit opportunities are fine, but not spectacular:
Transaction Services Exit Opportunities
The top question here is “Can I get into private equity? I’m dreaming of private equity. Can I break into Blackstone or KKR directly from a Big 4 TS team?”
And the answer is “No, probably not.”
Some people do move from TS into private equity, but this usually happens:
- Outside the U.S.
- At smaller/startup funds.
- If you’ve worked with highly relevant clients, such as PE firms executing deals and bolt-on acquisitions.
The issue with moving directly into private equity is that you don’t gain experience working on entire deals from start to finish in TS.
It makes more sense to use a TS role as a springboard into investment banking or the internal IB team (“Corporate Finance”) at the Big 4 firm, and then move into PE from there.
Other exit opportunities depend on how long you’ve been working in the TS group:
- 1-3 Years: It’s possible to win IB roles, but more so at boutique and middle market firms; FP&A roles in corporate finance, corporate development jobs, and certain consulting roles are also plausible.
- 4-6 Years: You could get into corporate development, but investment banking gets more difficult at this stage because you’ll be over-qualified for Analyst roles. Corporate finance is still an option.
- Past 6 Years: At this stage, you should just stay and make a run for a Partner-level role. If you want to leave, maybe move to a client and perform their valuations and due diligence in-house.
Is a Big 4 Transaction Services Team Right for You?
Overall, Transaction Services jobs are “OK.”
The main problem is that TS is an indirect/lengthy way to break into the industry because:
- You usually need to join another Big 4 group, such as audit, and work there for a few years…
- …and then move into TS, work there for a few years…
- …and then move into IB.
- And there’s still no guarantee of winning this IB role because it depends on your region, clients, and the hiring market at the time.
Big 4 TS teams make the most sense if:
- You want to stay in the industry and work at a Big 4 firm for the long-term;
- You want to get into corporate development or win a related corporate role without doing IB first; or
- You’re in a region like Europe, where it’s somewhat easier to move into IB/PE due to the skillset differences.
Longer-term, there is also some risk of commoditization and automation because reviewing a company’s historical financial information is not exactly rocket science.
Yes, humans will always need to be involved, but with more advanced technology, lower headcounts could potentially support client engagements.
That said, the Transaction Services group beats audit in terms of pay, work, and exit opportunities.
So, if you’re bored to tears in your audit role and itching to do something different, TS is a good place to start.
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