Recent Takeaways on Private Equity in Accounting

If you keep abreast of CPA industry news, you are well aware that not a week goes by without an announcement about firms being acquired, merged, or rolled into another CPA firm, almost all fueled by private equity (PE) in some manner.

Our blog in December 2024 addressed some of the pros and cons of being PE-backed and key questions to ask. But we wanted to look further into this topic to better understand:

• What do PE firms specifically look for in their targets?
• How are deals structured, and what is the value proposition to a CPA firm in terms of support services and internal resources?
• How do oversight and governance work?
• What is the integration process?
• What are the potential financial benefits?

Seeking answers, Rosenberg Associates attended the PE Summit sponsored by Accounting Today and subsequently met with a half-dozen PE firms to discuss these key questions. The PE firms we spoke with target mainly CPA firms with $2–$50 million in revenue.

Our Key Takeaway

Each firm has its own unique acquisition models, deal structures, approaches, and differentiators. Thus, anyone considering a PE partner must carefully consider the benefits, including the type of capital investment it wants, ownership retention, growth goals, appetite for risk, and its implications for culture and management. There is no single structure under which accounting firms are taking a PE investment.

Advantages to Accounting Firms PE Can Provide

In our conversations, each PE firm cited these advantages to accounting firms:

• Talent acquisition – financial and human capital resources to recruit and retain top talent with higher salaries, profit-sharing models, innovative benefits, leadership development and training, and access to offshoring
• M&A support – gaining access to capital for acquisitions, enabling expansion into new markets and service lines
• Technological advancements – investing in new technologies, streamlining operations, and supporting digital transformation
• Operational efficiency – reducing administrative burdens to partners, allowing partners to focus on strategy and growth
• Succession planning – developing strategies for leadership transitions, ensuring long-term stability; providing an early retirement option for senior partners, allowing younger talent to step into leadership roles
• Value creation – from increased efficiencies, reduction of partner administrative time, better use of technology, greater accountability, and centralized management structure

But, as we heard, each firm does it a bit differently, and some firms have been around longer and done more deals than others, which means they are further along when it comes to execution, implementation, and integration.

Private equity is reshaping the CPA firm landscape, and we help guide firms through it.

Our PE consulting services are tailored to CPA firms seeking to explore PE opportunities, whether it’s for growth capital, succession planning, or strategic expansion.

Learn more >

PE Firms’ Model, Approach, and Differentiators

Ideal Target

• Some firms appear to have defined a highly selective list of target criteria, whereas other firms have a broader set of criteria. Some of this depends on how they structure their deals.
• Criteria evaluated by PE firms:
  • minimum or targeted EBITDA
  • profitability
  • growth potential
  • management structure
  • partner ages and years to retirement
  • partner unity and alignment
  • objective evaluation of firm strengths and weaknesses
  • willingness to adopt evolving industry trends and operational improvements
  • specialized consulting and strategic services
  • next generation talent
  • shared philosophies and personality compatibility
  • employee turnover and related staff issues
• All PE firms state that they will continue to walk away from CPA firms that believe this route is a panacea for their internal problems, such as lack of leadership, succession, low profitability, poor operations, lack of growth, or those adverse to innovation, accountability, transformation, and value creation.

Deal Structure

• Some PE firms adopt a “one-firm model,” where the acquired firm is fully integrated into a larger brand. Generally, the PE firm acquires 100% of the ownership interest.
• Some PE firms adopt more of an “independence model,” which takes a few forms, but each acquired firm retains an ownership interest while being part of a larger entity. Some PE firms will buy a 100% ownership interest; some, a majority interest; and others, a minority interest. Generally, the CPA firm maintains its local identity, leadership and autonomy.
• Some PE firms have a hybrid model depending on their geographical coverage, size of target firms, industry specialization, etc.
• Regarding the actual transaction, issues that vary both among PE firms as well as individual deals include cash at closing, rollover equity, deferred cash, and go-forward compensation.
• Each deal has its own nuances and unique terms. Most do not follow a cookie-cutter approach.

Support Services and Internal Resources

• All the firms we spoke with offer, or intend to offer as they grow, some level of internal resources and support services, including:
  • talent acquisition and development
  • technology/IT management
  • payroll and benefit management
  • internal finance and accounting
  • legal and compliance
  • shared professional resources
  • business development
  • offshore resource management
• Some PE firms have developed their own comprehensive back-office support department. They have hired individuals into leadership positions and others in key roles to enhance operations and support for partner firms. Some have dozens of employees supporting the member firms, while others have yet to build out their teams significantly.

Oversight and Governance

• Some firms, primarily those that adopt the “one-firm” model, take a “hands-on, operator-led” approach. They leverage their operational expertise to drive improvements and actively unlock value within their portfolio companies. They work closely with the CPA firm management teams to tailor strategies.
• Some PE firms have a more “hands-off” approach, where the PE investor isn’t as actively involved in ongoing management and administrative duties; they provide resources and services and financial engineering, but the CPA firms continue to chart their direction and strategy with PE oversight.

Time Horizon and Exit Strategies

• Most, but not all, PE firms are still in the early stages of their investment in CPA firms, especially those under $50 million. Thus, although many may have defined their longer-term strategies and objectives, we find it hard to draw any conclusions at this time.
• Some firms we talked to say they have no plans to harvest their investments for many years; others haven’t built a large or strong enough network to even predict what their future play may be.
• Some PE firms will continue to grow their portfolios and create tremendous value for CPA firm owners and employees. This may lead to shorter-term holding strategies, and they may themselves take on additional PE investors or sell out. The advantage is access to additional upside after secondary sales at higher multiples.
• As more PE firms enter the market, it’s natural to predict that not every PE firm’s model will create the desired value-build or generate the anticipated financial and operational benefits. This may force them to explore sale/investment/liquidation options. Time will tell.

Other differentiators among PE firms

• Flexibility in deal dynamics
• Additional capital to invest in growth or acquisitions
• Firm valuations/EBITDA calculations
• Integration process timeline
• Equity incentive and profit-sharing models for partners and employees
• Size of member CPA firms, including technical resources, specialization
• Cultural and philosophical alignment amongst PE and member firms
• Reputation of PE firm; CPA industry experience of leadership team/operational team/advisory boards
• Value creation time frame

In summary, investments from PE firms allow accounting firms to adopt agile methodologies and foster a culture of innovation to stay ahead of competitors. When exploring PE options and the various available models and approaches, firms must carefully weigh the benefits against financial and strategic challenges and complexities.