A Peek Behind the Curtain: The Highs and Lows of Private Equity

Private equity has accelerated its investments in accounting firms in recent years and entered the collective consciousness of our industry. However, while PE is on the lips of many managing partners, many still have questions about what it’s really like.

My goal is to give you a peek behind the PE curtain based on our experience with independent firms, PE-backed ones, and those considering both options.

The good news…

Private equity valuations are often higher than the internal formulas firms use for partner buyouts.

But use caution…

While this is often true, we also need to understand how this is possible. It’s less about CPA firms being undervalued in the past and more about how PE seeks to create future value. PE often defaults to using primarily financial levers like the following to create value:[1]

• Cross-selling – If you own two firms and one cross-sells work to the other, you have created new revenue for the total enterprise.
• Cost-cutting – The other primary way to grow earnings (aside from increasing revenue) is to cut costs. For CPA firms, this translates into offshoring, increased use of technology and AI, lower partner compensation (which we’ll discuss later), consolidated administrative functions, and an overall watchful eye on expenses.
• M&A growth – Buying more firms creates a larger firm, and a principle of business valuation is that larger firms tend to receive higher multiples in the marketplace because they have diversified away some of the risks (such as overreliance on one key person) that smaller firms inherently carry. This also supports cross-selling.
• Add debt – This is the least talked about but definitely a foundational part of a traditional PE playbook. By using as much debt as is operationally justifiable, PE can lower the amount of its own equity needed to fund a deal. This also boosts its return on that equity upon exit.

When you understand how PE increases enterprise value, it makes a lot more sense how it can afford to pay more. But there’s one more thing: A significant portion of the purchase price touted in a PE deal is based on future performance. In a PE deal, it’s not uncommon to receive 50% in cash up front, 20% along the way based on performance targets, and the remaining 30% as rolled equity. The rolled equity has value only upon exit in five to seven years (e.g., today’s PE buyer sells to another PE buyer). While the PE buyer hopes that it will be a significant financial windfall for everyone, the reality is that it depends on the economy, interest rates, industry conditions, firm performance, and competitive positioning relative to other sellers at that time. It’s unlikely to go to  zero, but variability is certainly associated with the rolled equity component of the purchase price.

PE deals also include what’s called the “scrape.” This is where the PE buyer and the seller agree on a set amount of total partner compensation. If the firm has $2M in EBITDA and the PE firm wants to acquire $1M of that (to support the valuation discussed above), the selling partners will need to cut their income in half going forward. Partners who were earning around $600,000 per year are now at $300,000. This is another way PE firms can pay more in the purchase price, because they have significantly lowered owner compensation expenses. However, the sellers themselves are effectively funding this increase in deal price.

The good news…

Cumbersome administrative functions such as recruiting, payroll, internal firm finance, IT, and accounts receivable are often consolidated into a shared function under a PE model.

But use caution…

The obvious benefit is access to “big firm” administrative capabilities in important areas such as recruiting and technology, while freeing up partners to focus on other areas. With more time available, partners will need to focus on building enterprise value, which generally means increasing EBITDA. Here are some ways partners may do so:

• Work more chargeable hours
• Sell more work (to new or existing clients)
• Manage a larger book of business
• Get work done more cheaply through offshoring, embracing technology, and leveraging more junior team members

On the surface, these are reasonable business practices and strategies we often recommend clients consider. However, there can be downstream consequences if they are taken to an extreme. A recent Accounting Today survey reported the following:

• Both in the survey and more broadly, one of the most commonly cited changes that PE brings to accounting firms is greater accountability and a higher level of reporting.
• “Our best people are more engaged and we are achieving more success than we knew we were capable of,” said a leader at another large firm. “Not everyone likes the change of pace or accountability, but the best people do.”¹

Many firms are still trying to understand the changes PE is bringing to the market and deciding how they want to proceed. If you need help defining your firm’s strategy to stay independent or go PE, we can help.

Contact us and learn more about PE >

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While consolidated administrative functions can be a good thing for overall firm value, they must be rolled out thoughtfully to preserve culture and team retention.

The good news…

Private equity offers owners a “second bite at the apple” when the PE firm exits its investment. This is when partners can “take chips off the table” in what is ideally a meaningful value-creation event.

But use caution…

The PE model offers monetization faster and more frequently than a traditional deferred-compensation retirement system. It has been likened to stock options in technology companies, where employees or owners can make money from an increasing enterprise value. While this does provide earlier liquidity for partners who want it, it also shifts retirement payments forward – payments that disappear under a PE model. A newer partner under a PE model would need enough successful exit events to fully realize this value. If market conditions change, debt loads grow too heavy, or the individual simply tires of the PE operating model and leaves, they may not realize that full value.

A harder-to-quantify issue is that under a PE model, firm size must scale rapidly to meet the owners’ required ROI target. In practical terms, a partner in a $10M revenue firm may join a PE-backed firm with $100M in sales, which then grows to $250M before exiting. That firm may then be sold to a new PE buyer seeking to grow it to $500M or more within five years. Anyone who has worked at both a large firm and a smaller firm knows that the culture and operations of the two can be dramatically different. As the firm grows under a PE model, the culture a partner experiences is likely to become radically different from what they previously knew. Partners must be willing to live with those cultural changes. While this may be welcomed by some, it may feel like “golden handcuffs” to others.

The good news…

Private equity may be helpful to firms without a strong succession plan.

But use caution…

Baby boomer retirements and the staffing crisis have made succession more difficult for the vast majority of CPA firms in recent years. Merging up has been one way (often viewed as a last resort) for firms without a viable succession plan to ensure clients and team members remain in good hands. PE platforms differ, but some are willing to acquire firms without a strong bench of future leaders because they can lean on other firms they have acquired to fill leadership gaps. That said, PE firms aren’t trying to buy more problems. Like any other buyer, they want strong firms. Some will actively rule out firms lacking sufficient succession continuity – particularly if client transitions can’t be handled reliably.

Firms with strong internal benches warrant higher valuations. Firms that haven’t given any meaningful thought to succession or invested in developing their teams will pay the price in the form of a lower sales valuation – if a deal can be struck at all. We’ve helped many firms successfully build and transition to their next generation of partners. It can be done – though it’s not always easy. Trading your independence because of inadequate future planning may ultimately be a steep price to pay. Again, consider survey results from Accounting Today:

• Survey question: “How satisfied are you with your firm’s experience partnering with your private equity investor?”
  • 67% of partners were very satisfied or somewhat satisfied.
  • 52% of all other employees were very dissatisfied or somewhat dissatisfied.

This shows a significant gap in how a PE deal impacted layers of the organization. If taking care of future leaders and employees is a high priority, strengthening your internal succession plan may become even more important.

Evaluating what private equity means for your firm is not a one‑time decision but an ongoing process of reflection and alignment. At Rosenberg Associates, we help firms clarify their vision, values, strategy, and goals so they can determine their next best steps with confidence – whether that means remaining proudly independent or transitioning to private equity ownership. Ultimately, the right path forward is the one that aligns with your firm’s long‑term vision and values. By taking a deliberate, informed approach, leaders can move forward knowing they’ve considered not just what is possible, but what is right for their firm.

[1] Accounting Today, “PE in Accounting Firms: From Dumpster Fire to Excitement,” accessed February 24, 2026, https://www.accountingtoday.com/news/pe-in-accounting-firms-from-dumpster-fire-to-excitement