Ah, yes: making a million dollars.
It’s one of the most common goals cited by readers, commenters, and random visitors to this site who just suddenly “got interested” in the finance industry.
If you don’t believe me, just take a look at some recent comments.
Everyone wants to be a millionaire, it seems.
The normal line of thinking is that fields like trading, investment banking, and private equity are faster, but much riskier ways to get there… whereas “normal company land” equals decades of toil up the ladder before reaching paradise at the end.
But there might be a “compromise” option: joining a Big 4 firm and becoming a Partner there.
And hey, some of the groups at the Big 4 are even related to banking – their internal advisory groups, valuation groups, and yes – transaction services (today’s topic).
Our interviewee today has worked in Big 4 Transaction Services for the past 7 years, and today he weighs in on just how viable this Partner-track “path” is, what you do on the job, and yes, even why bankers and Big 4 employees like each other secretly want to kill each other (Note: OK, maybe a slight exaggeration there).
Big 4 Recruiting
Q: So how’d you get into this industry?
A: Sure. First, let me start by saying that I’m working in a Scandinavian country so my experiences here may be different from what readers will see in the US, UK, and other markets.
I first started working here about 7 years ago, completing a combination of internships in audit and other departments before moving over to Transaction Services (TS).
I liked TS because it gives you more exposure to transactions and deal advisory, but they favor people with audit backgrounds and you really need to understand how companies report earnings in-depth.
I thought about going into corporate finance as well, but the Transaction Services group seemed like a perfect match for my background.
I called the Partner there, asked if they needed people, and they invited me in for an interview. It went well and they ended up giving me an offer.
The interview process was not very rigorous because I had already worked at the firm, and because they gave me the opportunity to work on a project before I joined, which was used as a “test” to see if I was good enough to work there.
So you might expect that type of “trial run” instead of the case studies, modeling tests, and brain teasers you might otherwise get.
Q: Great. We’re not going to focus on Big 4 recruiting in this interview, but did you have any thoughts on how best to stand out in the process, or what helped you the most?
A: First off, I got into the industry at a time when the economy was better and when everyone could get a job. The competition is much tougher these days and we get a lot of candidates who were clearly going for IB roles initially.
You definitely need strong accounting, project management, and “client relationship” skills, but beyond that you’ll also be tested on your personality and how you react in different situations.
At least in Scandinavia, certifications such as the CA are not helpful / do not exist, though that is obviously different in regions such as the US and UK.
They don’t really use case studies here, but sometimes they do set up “Business School Cases” where people from our firm go to universities and ask students to solve a problem and present their solution.
These are very, very helpful for the same reasons that investment banking case competitions also give you a leg-up, so I strongly recommend participating.
Big 4 Transaction Services On the Job: Got Financial Due Diligence?
Q: Great, so let’s talk about how your group is set up and the work you do in TS.
A: Here, it’s only one department that covers all sectors because I’m in a smaller country; in places like London, Frankfurt, and New York, TS is divided into different industry teams.
Another big difference is that in Europe we look at both historical financials as well as budgets and forecasts to assess whether or not business plans are realistic; in the US, though, TS groups only analyze past results and avoid weighing in on forecasts, due to SOX.
Our work is labeled “financial due diligence.”
Acquirers of companies hire us to dig into target companies’ financial statements, balance sheet items, and more, and alert them to red flags before they hit the “buy” button and lose millions / tens of millions or more on a bad acquisition.
Here are examples of some of the work we do:
- Analyzing a P&L and determining what has driven revenue growth over the past few years – Currency fluctuations? Additional unit sales? Price increases? A changing product mix?
- Normalizing metrics like EBITDA and EPS and pointing out non-recurring charges… and weighing in on whether or not companies’ “pro-forma” numbers are legitimate.
- Running analysis around working capital on the Balance Sheet and determining what a company’s cash conversion cycle looks like, how much they’ve been investing in fixed assets and whether that’s sufficient, and so on.
- Determining a company’s “true debt” level – for example, are there unfunded pension liabilities, litigation costs, or environmental liabilities that need to be factored in when calculating Enterprise Value and finalizing the deal documents?
We also work closely with legal advisers and the operational due diligence team (usually outside industry experts) to analyze these issues.
For example, the operational due diligence team might look at the company’s CapEx forecasts, see that they’re planning to spend $100 million next year, determine that’s insufficient, and then come back with a higher suggested number… which we would then have to use in our assessment of the company.
The lawyers might investigate the company’s legal structure and find unfunded pensions in a hidden subsidiary, which we would also have to factor in.
So we take into account what all these groups say and translate their findings into financial analysis and our evaluation of the target company, which we then present to the acquirer.
Q: So it sounds like you do a lot of the analysis that you see in IB, but at a much deeper level, and without a lot of the nonsense grunt work that IB analysts and associates suffer through.
A: Yeah, that’s a good way to describe it.
There’s a lot more emphasis on analysis and digging into the numbers and there’s far less writing and presentation/document processing than in IB.
Q: But I’m also assuming the compensation is also far less to compensate for that?
A: Haha, well, let’s talk about the work/life balance first.
On average, I work about 50-60 hours per week here.
Occasionally I’ll have some weekend work, and sometimes we have busy seasons with long hours; this past spring, for example, I actually had my first 100-hour workweek.
But on the whole, hours are far more reasonable than in IB.
The short answer on compensation is that you won’t make big money at the Big 4 until you’re on the path to becoming an Equity Partner.
To give you an idea of the numbers, a newly hired “Consultant” (entry-level staff) just out of undergraduate might earn the equivalent of a $60K USD base salary with a $10K bonus.
Then, as you move up to “Senior Consultant” (which takes ~2 years), you might earn a $80-90K USD base salary with a $20-30K USD bonus.
The next rung on the ladder is “Manager,” which takes another ~2 years; you might earn $100K+ there, with a bonus of $20-30K.
After that, you become a “Senior Manager” after another 2-3 years, then a “Director” after another few years, and then a “Junior Partner” before you become an “Equity Partner” and receive a percentage ownership in the firm (after a “buy-in” period).
I am not sure about the exact base salaries and bonuses at all those levels, but they grade your performance each year and your bonus is linked to a certain number of months’ salary.
On average, you can expect 2-3 months’ salary for your bonus – so this is completely different from IB, PE, or hedge funds, where your bonus might be a multiple of your annual base salary.
I can also tell you that the average, fully-vested Equity Partner here earns around $900K – $1 million USD in total compensation each year.
Note, however, that the numbers can actually be higher in major centers such as Frankfurt or London; I believe Equity Partners there can earn the equivalent of several million USD per year, and I’ve heard of one Partner who allegedly made $10 million USD (but that’s the rare exception rather than the rule).
Q: Wow, thanks for that data dump.
How hard is it to actually move up the ladder?
A: It’s very difficult beyond the “Manager” level.
Sure, the work isn’t as intense as what you see in IB, but people just take more of a “grind it out for years/decades” mentality… whereas you see much more rapid turnover in finance.
Some people just stay for a few years to get the training and knowledge, and then move into roles with better pay.
But among those who stay, it is definitely an “up or out” culture because they’re not going to let you stay on as a Manager or Senior Manager or Director indefinitely.
Some people jump through the levels and climb the ladder more rapidly (extreme high performers).
So sometimes you see promotion times reduces from 3 years down to 1-2 years, but it’s still very rare.
Others stay, attempt to get on the Partner-track, but then find out it’s not possible, so they move onto a career elsewhere.
Q: You’ve reminded me of Game of Thrones (plus, I have to ensure there’s at least one reference to it in every single article on this site):
A: Hah, yes, very fitting.
I’m not sure if the Big 4 TS environment is really “chaos,” but hey, close enough.
Q: Numbers-wise, can you give us a sense of how difficult it is to make Partner?
A: Sure… in a given year in my country, we might hire around 100 people out of university.
Of those, around 1-2 will go on to become Junior Partners.
And even fewer will ever become Equity Partners – so your chances of reaching the top are less than 1-2%.
Usually, you need to bring in around $2 million USD of revenue to become a Junior Partner; to become an Equity Partner, you have to present a business case around a specific sector you want to focus on and bring in at least $4-5 million USD of revenue.
Again, the numbers may be different in other regions but the basic point is simple: you need to generate sales that are a multiple of your compensation to advance to this level.
We might earn around $200-300K USD on the average financial due diligence assignment for a medium-sized company, so at the Equity Partner level you’ll need to bring in 15-25 of these assignments each year.
That’s very, very difficult and it is arguably even more difficult than what investment bankers do to source deals – because it’s easier to earn higher fees on only a few deals than it is to earn lower fees on dozens of smaller assignments.
Why Transaction Services Staff and Bankers Are Never, Ever, Ever Getting Back Together
Q: Let’s talk more about how Transaction Services compares to investment banking. What are some other differences, and why do the two sides not particularly like each other?
A: Besides the work itself, the key difference is that bankers focus on getting the deal done, getting paid, and moving on.
Here, by contrast, we get paid regardless of whether the deal ever closes. As a result, we have different goals and that inevitably creates tension.
Often, bankers will suggest that we “soften” the language used in our due diligence reports because they want to get the deal done without the buyer pulling out at the last-minute.
In theory, we should ignore those requests and be as truthful as possible.
In reality, often we’ll follow what they say or reflect at least some of it because we want to get hired by that bank in the future.
So that is why the two sides misunderstand and tend to mistrust each other.
Also, sometimes we “look down” on bankers because their accounting and technical knowledge is sometimes not as good as ours.
We dig into the numbers in greater depth than bankers, which sometimes results in them “offloading” work onto our team to save time.
The Transaction Services group is definitely more respected in Europe than in the US, so the exit opportunities are also better here.
Q: Another difference might be the way bankers and Big 4 employees view money and “models and bottles.”
A: Definitely. Even the Partners earning $1 million+ here can be stingy and they don’t like to spend money on luxury goods, clubbing, expensive cars, etc.
Here’s a story for you: a Partner here was once out with friends at a café near the office. They were going to get a cup of coffee that cost around $10 USD, which is exorbitant, but hey, it’s still just $10 USD… and this guy was making $1 million per year.
Instead of paying for the coffee, he actually went all the way back to the office, got coffee there, and then came back to join his friends.
And many Partners will drive cheap / old cars or live in smaller places to save money. They don’t skimp on clothes quite as much, though they probably wouldn’t spring for $3,000+ suits, either.
Q: Can I slap that Partner? Wow.
Given the lower fees and higher technical rigor, do you think there’s a chance that Big 4 advisory / transaction services groups will become competitive with the large banks?
A: No. The problem is that much of the work that Big 4 firms do is skill-based, as opposed to relationship-based.
Anyone can reconcile bank statements and trial balances, so competition in areas like audit and even financial due diligence is brutal.
In the post-financial crisis world, competition for TS assignments among the Big 4 has been heating up as well, so even our own assignment fees and hourly rates are under pressure.
Think about a banker setting up a deal, though: he might be the only person on the planet that can connect a particular buyer and seller.
Sure, the technical skills required are far lower, but bankers earn much higher fees because of their access to so many buyers and sellers and their ability to make deals happen.
The two fields are so fundamentally different that it’s unlikely the Big 4 will ever become competitive with large banks.
Q: Yeah, that’s what people don’t seem to “get” when they wonder why bankers get paid so much… as much as I’ve explained it before.
Are you planning to stick around for the long-term?
I’m actually leaning toward ER because it’s more of a team environment, whereas in PE you’re more isolated – especially at the smaller firms.
There are also advantages to the networking opportunities and events offered by the large banks.
Most Big 4 firms are very, very social with frequent happy hours on Friday, weekend trips, and group dinners – and I don’t want to lose that aspect even if I have to work longer hours.
Q: Great. Any final thoughts on who would fit in best with the Transaction Services group at a Big 4 firm?
A: Ironically, a lot of candidates get rejected from IB, come join the TS team, and then find that they like the work more than the work in IB since it’s more analytical.
So if you like to dig into the numbers, analyze the financial statements in-depth, and take on more of a “detective” role, and you dislike the presentations, written documents, and administrative work you have to complete in IB, this is the group for you.
I’ve seen people who have worked at bulge bracket banks for 2 years that don’t even know how to build a 3-statement projection model – whereas you get immediate exposure to the technical side here.
Of course, you have to be fine with more of a hierarchy, slower advancement, and lower pay until you reach the very top (if you reach the top).
Q: Awesome. Thanks for your insights!
A: My pleasure.