Private Equity: Is it the Right Choice for Your Firm?
Private Equity investments in accounting firms have emerged as a game-changing trend, significantly reshaping the industry landscape. Over the past few years, PE firms have increasingly recognized the value and potential of accounting practices, drawn by their stability, consistent revenue streams, and opportunities for growth. This shift represents a new chapter for the profession, one where traditional models of ownership and operations are being redefined.
This article delves into the growing influence of accounting for private equity investments in the accounting world, examining the transformative impact it has on firms. By exploring the potential benefits and challenges of this investment model, it aims to provide accounting professionals with a comprehensive understanding of what PE investment entails. Additionally, we outline key considerations for firms contemplating this path, helping them make informed decisions about their future.
PE investment is not just about infusing capital - it’s about enabling growth, fostering innovation, and driving long-term value. However, this journey is not without complexities, including cultural shifts, regulatory challenges, and questions about client and employee impacts. Understanding these nuances is essential for firms to navigate this evolving environment and position themselves for success in a PE-driven landscape.
In the past 5 years, PE firms have shown increasing interest in accounting firms. This surge is driven by a variety of factors that make accounting for Private equity investment a lucrative and strategic opportunity. Here are the key reasons why accounting firms have become attractive to PE investors.
Private equity investments in accounting firms are reshaping the industry, offering opportunities for growth, modernization, and increased enterprise value. However, firms considering this path must weigh the benefits against potential cultural and operational shifts. By understanding the dynamics outlined above, accounting firms can better prepare to capitalize on this evolving trend.
“Private Equity” changes the way the CPA firms think about themselves!
Private Equity investments have fndamentally reshaped the trajectory of CPA firms, introducing transformative changes in how they perceive and position themselves. Traditionally, CPA firms have operated under partnership models that prioritize client service and professional expertise. However, PE deals are shifting the focus to a more corporate structure where Enterprise Valuation takes centre stage.
This shift brings a significant mindset change for firm partners, as the emphasis moves from simply running a professional practice to building a business that delivers long-term value. Partners are now encouraged to prioritize growth strategies, profitability, and scalability. This transformation often leads to:
While this evolution creates growth opportunities, it also requires firms to adapt to new cultural and operational dynamics. PE deals bring not just capital but also expertise in scaling businesses and creating efficiencies. For CPA firms ready to embrace this shift, the journey can lead to the best private equity investments that drive enhanced client offerings, stronger financial performance, and a sustainable business model in an increasingly competitive market.
To keep it in simple words, the accounting industry is witnessing a trend of smaller firms consolidating with larger ones, driven by factors such as labour shortages. This consolidation, coupled with PE investment, is poised to disrupt and potentially improve the public accounting industry.
Attracting best private equity investment requires CPA firms to position themselves as scalable, profitable, and future-ready businesses. PE firms are highly selective, seeking accounting practices that demonstrate strong fundamentals, growth potential, and operational efficiency. For CPA firms, standing out in this competitive landscape involves meeting specific criteria that align with PE’s strategic objectives.
PE firms prioritize accounting practices with stable, recurring revenues from long-term client relationships. This ensures predictable cash flows, which are critical for any investment. Firms offering diversified services—such as tax, advisory, and consulting—are especially attractive, as they show resilience and potential for cross-selling opportunities.
A healthy bottom line is non-negotiable for PE investors. Firms must demonstrate profitability through optimized cost structures, efficient service delivery, and strategic pricing models. Positive Metrics such as Revenue Per Partner, Billing Rates, and Profits Per Employee are key indicators of financial health.
CPA firms that have invested in modern technology, automation, and AI integration signal scalability and operational readiness. PE firms seek businesses that can grow exponentially with the right capital infusion, making forward-thinking firms more appealing.
Firms with a unique value proposition - whether through niche expertise, high-value client relationships, or innovative service models - stand out. Demonstrating a strong economic moat, such as a loyal client base or specialized offerings, enhances the firm’s attractiveness.
A firm’s ability to attract PE also hinges on its people and leadership. PE firms value practices with skilled teams and experienced leaders who can drive growth and manage change post-investment. Clear succession planning, especially in the face of retiring partners, is a bonus.
To attract best Private equity investment, CPA firms must think beyond traditional models and embrace a corporate mindset. It’s about presenting themselves not just as professional practices but as high-value businesses ready for transformation. The firms that align with PE’s expectations, can indeed position themselves as prime candidates for investment, paving the way for growth and modernization.
PE firms use a data-driven approach to evaluate CPA firms, focusing on key metrics that indicate financial health, operational efficiency, and growth potential. These metrics provide a comprehensive picture of whether a firm is a viable investment opportunity. Here are the most critical metrics PE firms track before finalizing a deal:
PE firms prioritize accounting firms with predictable and recurring revenue streams. Long-term client relationships and diversified service lines (e.g., tax, advisory, audit) indicate resilience and consistent cash flows, which are essential for stable returns.
This metric evaluates how effectively the firm’s partners contribute to overall revenue. Higher Revenue Per Partner signals that the firm is maximizing its leadership’s productivity and value generation.
Profits Per Partner and Profits Per Employee are key metrics that demonstrate the firm’s operational efficiency and financial health. PE firms look for firms with strong bottom-line profitability to ensure ROI potential.
Revenue Per Employee and Number of Staff Per Partner measure how well the firm utilizes its workforce. Firms with scalable staffing structures and efficient team management are more likely to secure PE interest.
A key data point is the average lifespan of a client relationship, which for accounting firms is often around 7.5 years. Longer client tenure indicates strong client loyalty and reduces churn risk, making the firm more appealing.
Firms that demonstrate minimum chargeability rates and premium pricing for services (e.g., charging $1,000+ for 1040 filings) show pricing power and value-driven service delivery, which PE firms find attractive.
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is a key profitability metric. PE firms focus on improving EBITDA margins post-investment and seek firms with scalable cost structures.
Firms that leverage automation, AI tools, and efficient tech stacks are preferred over those using outdated systems (e.g., “Frankenstein Tech Stack”). Technology-driven firms signal scalability and efficiency.
PE firms assess the diversity of the client base and revenue sources. Firms heavily reliant on a single client or industry pose higher risks, whereas diversified portfolios are seen as more stable.
These metrics not only help PE firms assess a firm’s current performance but also provide insights into its future growth and scalability. For accounting firms, focusing on optimizing these metrics before pursuing PE investment can significantly enhance their attractiveness and valuation. By presenting themselves as efficient, scalable, and profitable, firms position themselves as ideal candidates for PE-backed transformation.
While there has not been any one size fits all metric to consider the valuation of a CPA firm, taking a cue from the deals that have happened in the past 5 years, here is a chart that shows how are valuation metrices considered:
| Firm Size (Revenue) | Valuation (EBITDA Multiples) | Reason for Valuation |
|---|---|---|
| $1M - $5M | 3x – 5x | Smaller firms often lack scalability, modern infrastructure, and diversified service lines. Valuations reflect higher risks and limited growth potential. |
| $5M - $10M | 6x – 8x | Firms in this range demonstrate better scalability, more consistent recurring revenues, and initial investments in technology and automation. These factors make them attractive to PE investors. |
| $10M - $25M | 8x – 10x | Larger firms with diversified service lines, advanced technology adoption, and stable client relationships attract higher valuations. They are positioned for roll-up opportunities and operational efficiencies. |
| $25M - $50M | 10x – 12x | These firms exhibit significant market share, advanced processes, strong leadership teams, and proven ability to cross-sell services. Their size and infrastructure reduce risks for PE firms. |
| $50M and above | 12x+ | Industry leaders with extensive service portfolios, exceptional profitability, and global reach. These firms often serve high-value clients, enabling premium valuations driven by strategic positioning. |
* Disclaimer: The valuation multiples presented are based on observed market trends and recent deals in the accounting industry. They are for informational purposes only and should not be construed as financial advice or a definitive valuation benchmark.
Post-PE investment, firms often move Audit Services to a separate arm through an Administrative Service Agreement. This structure, known as Alternative Practice Structure, while currently the only option available, may face regulatory scrutiny in the future, similar to changes seen in the medical profession.
These investments introduce complex regulatory considerations, particularly concerning the separation of audit and advisory services. To maintain compliance and uphold professional standards, firms often implement an Administrative Service Agreement (ASA) to bifurcate these functions effectively.
Regulatory bodies place significant emphasis on ensuring the independence of audit practices as a fundamental pillar of ethical financial reporting and governance. This independence is crucial to prevent any potential conflicts of interest that may arise when firms offer both audit and advisory services. To comply with these regulations, CPA firms are required to implement a clear and operational separation between their audit and advisory divisions.
This structural division ensures that the integrity, objectivity, and impartiality of audit services remain intact, free from any undue influence of the more commercially lucrative advisory functions. By segregating these services, firms are able to maintain the trust and confidence of clients, regulatory authorities, and the public. Furthermore, this separation aligns with global best practices, safeguarding the professional standards of the accounting industry while enabling firms to explore growth opportunities in advisory services without compromising their core ethical responsibilities.
This approach not only addresses regulatory mandates but also demonstrates a firm’s commitment to upholding the highest standards of professionalism and transparency, which are essential for long-term success in the evolving financial landscape.
An ASA is a contractual arrangement that facilitates the operational separation between a firm’s audit and advisory entities. Under this agreement, the advisory arm provides administrative support - such as human resources, IT, and marketing - to the audit practice, ensuring that both entities operate independently in their core functions while sharing necessary resources efficiently.
To put in perspective, let us think about the key aspects that are discussed in an ASA are:
Tag-Along and Drag-Along Rights: These provisions are designed to protect both minority and majority shareholders in Private Equity (PE) deals. Tag-along rights ensure minority shareholders can sell their shares alongside majority stakeholders if a sale occurs, preventing them from being left behind in an ownership transition. Conversely, drag-along rights allow majority shareholders to compel minority holders to sell their shares during a sale, ensuring a smooth transaction process without holdouts that might delay or disrupt the deal.
Tenured and Geographical Non-Compete Clauses: Non-compete clauses are a critical aspect of PE agreements, particularly in professional services like accounting. Tenured non-compete clauses restrict departing partners or stakeholders from engaging in competing businesses for a specified time, ensuring the firm’s competitive advantage remains intact. Geographical non-competes further limit competition within a defined area, preventing former partners from poaching clients or establishing rival practices in the same region.
Non-Solicitation Agreements: To safeguard client relationships and employee retention, non-solicitation clauses prohibit outgoing partners or staff from recruiting the firm’s employees or soliciting its clients for a set period. This provision ensures stability within the firm, maintaining continuity in service delivery and operational efficiency post-deal.
Golden Handcuffs: These are financial incentives or benefits designed to retain key personnel within the firm post-investment. Often structured as long-term bonuses, stock options, or deferred payouts, golden handcuffs align the interests of the firm’s leadership with those of the PE investors. They play a crucial role in ensuring top talent stays engaged, driving growth and meeting the deal’s strategic objectives.
These contractual safeguards are essential in PE transactions, balancing the interests of all parties while fostering stability and long-term value creation. For CPA firms navigating the complexities of PE investments, understanding these provisions is critical to structuring agreements that align with their goals and ensure smooth transitions.
Regulations often stipulate that audit firms must be majority-owned by licensed accountants to safeguard professional integrity. This requirement poses challenges for PE investments, as direct ownership in audit practices may be restricted. To navigate this, firms may adopt alternative practice structures where the PE firm holds a stake in the advisory entity, while the audit division remains under the ownership of certified professionals. This structure complies with regulatory standards and addresses concerns about auditor independence.
The Securities and Exchange Commission (SEC) serves as a vigilant overseer in the realm of PE investments in accounting firms, with a primary focus on preserving auditor independence and ensuring the integrity of financial reporting. The SEC has expressed concerns that the profit-driven motives inherent in PE investments could potentially compromise the objectivity of audit practices. In a statement, SEC emphasized that such complex transactions with non-traditional investors elevate the risk to an auditor’s independence.
To mitigate these risks, the SEC advises accounting firms to exercise heightened diligence when entering into agreements with PE entities. Firms are encouraged to thoroughly assess the implications of these investments on their independence and to implement robust safeguards that uphold ethical standards. The SEC’s oversight aims to balance the infusion of capital into the accounting sector with the imperative of maintaining public trust in the financial reporting process.
The decision to sell all or part of an accounting firm to PE is a pivotal moment that requires balancing financial opportunity with the impact on people, culture, and the firm’s long-term vision. While PE investment promises growth and modernization, it also introduces new challenges that affect owners, employees, and the very ethos of the business. Here’s a comprehensive look at the factors to consider:
For many firm owners, a PE deal represents more than just a financial transaction - it’s a fundamental shift in how the firm operates and evolves. The move from a partnership model to a corporate structure means relinquishing some control and adapting to new decision-making processes. This can be unsettling, especially for owners who have built the firm over decades. Questions about governance, autonomy, and alignment with PE goals are often top of mind, making this a deeply personal decision.
Employees are at the heart of every accounting firm, and their experience is profoundly affected by PE investment. While the introduction of Employee Stock Ownership Plans (ESOPs) is often a strategy to align employee interests with firm goals, it’s not without challenges. ESOPs can:
However, the integration process may also lead to uncertainty, with concerns about job security, changes in role expectations, and increased focus on financial KPIs. Firms must actively communicate and manage these shifts to ensure employee buy-in and morale.
PE investments often address key pain points for partners, such as retiring partner buyouts and succession planning. These deals can provide significant financial payouts and create pathways for younger partners to thrive. However, the corporate model can dilute traditional partnership roles, leaving some partners feeling sidelined. A successful PE deal ensures that partner interests are balanced, with a clear focus on both rewarding past contributions and fostering future leadership.
Not all accounting firms are suitable for PE investment. Firms with strong recurring revenues, efficient operations, and the willingness to modernize are more likely to attract PE interest and thrive under its ownership. On the flip side, firms reliant on outdated models, resistant to change, or lacking scalability may struggle to meet the performance expectations of PE investors. Owners must conduct a thorough evaluation of their firm’s readiness and alignment with PE objectives.
PE investment offers clear advantages: access to capital, expanded service lines, and increased enterprise value. However, these benefits come with trade-offs:
In traditional accounting firm partnerships, senior professionals aspire to equity ownership, decision-making power, and the prestigious title of “partner.” However, in PE-backed firms, this structure often transforms. Senior staff, even those with ESOPs or income-based incentives, are effectively treated as employees rather than true partners. The equity ownership that once defined a partner’s role is diluted, and decision-making power is centralized under corporate governance.
An illustrative example comes from an employee at CBIS, a listed firm that recently acquired a major player in Markham. She chose to leave and join an independently owned regional firm. Her primary reason? The inability to access a genuine partner track and the perceived loss of control over her professional journey. While PE-backed firms often use the title “partner” for senior staff, it serves more as a label than a reflection of the traditional partnership model.
This distinction is not just professional—it carries social and career implications. For many professionals, being introduced as a true equity partner holds immense value and prestige, which is often diluted in PE-controlled firms. This loss of identity and autonomy can create dissatisfaction among high-performing employees, leading to retention challenges and a potential cultural disconnect.
The question “Is the sale worth it?” depends on the unique circumstances of each firm. For some, PE investment represents a transformative opportunity to scale, innovate, and secure their future in a competitive market. For others, the potential loss of autonomy and cultural changes may outweigh the financial incentives. By understanding the opportunities and challenges associated with accounting for private equity investments, firms can make informed decisions.
Ultimately, firms must consider not just the monetary aspects of the deal but also how it impacts their people, culture, and long-term aspirations. A well-executed PE deal is one where every stakeholder - owners, employees, and clients - feels that they are part of a journey toward shared success. With careful planning, clear communication, and a commitment to aligning values, firms can determine if the sale truly is the right choice for them.
Private equity investments in accounting firms involve PE firms acquiring partial or complete ownership stakes in CPA firms to provide capital and operational expertise. These investments aim to modernize accounting practices, enhance scalability, and drive long-term growth by introducing corporate structures and efficiencies while enabling expansion into new markets.
Accounting firms are appealing to PE investors due to their stable and recurring revenue streams, long-term client relationships, and opportunities for scalability. Firms with diversified service offerings, efficient operations, and investments in technology are particularly attractive, as they provide predictable cash flows and significant growth potential.
PE firms assess CPA firms based on several key metrics, including:
These metrics help determine the firm’s financial health, operational efficiency, and growth potential.
An Administrative Service Agreement (ASA) is a contractual arrangement used in PE-backed CPA firms to separate audit and advisory functions. Under an ASA, the advisory arm provides administrative support (e.g., HR, IT, marketing) to the audit division while maintaining operational independence. This ensures compliance with regulatory requirements and preserves auditor independence.
Private equity investments often introduce a corporate structure, shifting the focus from traditional partnership models to enterprise valuation and scalability. This can lead to cultural changes, such as:
Firms must proactively manage these shifts to ensure alignment with their long-term vision and maintain employee morale.
Shawn Parikh is the CEO and Co-Founder of MYCPE ONE. A Chartered Accountant by qualification, he has over 15 years of experience of being a problem solver for small to mid-size firms and over time he has given consultation to thousands of CPAs, accountants and tax pros. Shawn has always been a big believer and advocate of social enterprises and small accounting firms & businesses. He consults and speaks on several topics ranging from Building Remote Team - Remote Working, Offshore Staffing, strategic planning, Scalability of Accounting Practice, cloud accounting, practice management, LinkedIn marketing, etc.
Shawn Parikh
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