By William Carlino

In 2022, private equity firms entered the accounting arena with abandon, making major investments in several Top 100 firms such as Eisner Amper and Citrin Cooperman to name two. Other agreements surely will be completed early in the New Year.  

The benefits of a private equity infusion to a firm’s senior partners are almost immediate. Private equity entities often tender a lot of cash upfront to owners nearing the end of their careers, instantly returning a significant portion of the value built over years in addition to paying multiples that range anywhere from 6% to 10%. Private equity investment also offers a second or third “bite” at the proverbial apple with an expected secondary transaction three to five years down the road to secure even greater value for the partners. Perhaps there may even be a third round of monetization.  

No doubt, running through the minds of many younger firm owners who may have as many as 20 or more years of full-time work is a nagging “What’s in it for me?” concern.

Private Equity as a Partner

A stark difference between the current wave of private equity investments and accounting consolidators of the late 1990s is that private equity is dependent on the existing management of a firm to help create the returns they expect. Younger owners are key to that strategy. Many private equity firms currently acquire a 49% stake or less in a firm, thereby maintaining the firm’s management hierarchy and creating a true partnership as opposed to a buyout, in which entrepreneurial partners are relegated to employees.

Elimination of the Liabilities Associated with Buyouts

Many partner retirements remain unfunded, so they must be shouldered by the next generation of owners even if the retirement debt is affordably structured. Add to that typically long payout periods, anywhere from 10 to 15 years. It is a financial obligation for the remaining owners that never seems to ebb. Even in the best planned compensation systems, there is often an element of tenure that rewards senior partners. Sometimes this can be a significant factor in delaying the retirement of senior owners.

This retirement “holding pattern,” however, could be mitigated by the investment a private equity firm would make in a practice. The liquidating event that occurs with a private equity investment is likely to accelerate the retirement of some senior partners. That should have the effect of freeing up profits that would be allocated to the younger partner group.

Available Capital for Growth

Mergers have become a means to drive growth in the accounting profession. Not one member of the Top 100 firms has gotten there via pure organic growth, and growth is vital in recruiting and retaining younger partners. Additionally, service diversification has become a cornerstone of future growth for many firms, offsetting the diminishing value of traditional compliance-based services. Acquisitions are a means of building advisory and consulting practices for many firms. Traditionally, mergers and acquisitions among accounting firms have been structured in a way that requires very little capital. However, that will not work with the acquisition of most nonaccounting consulting practices. One of the important roles a private equity investor provides is additional capital for acquisitions. Because access to capital should create a much stronger firm with a broader range of services, younger partners can focus on niches that interest them, thereby having greater career choices to pursue.

Conclusion

If your firm is a good fit for acquisition by a private-equity-backed firm, you may find that it can be an excellent opportunity for all the generations of partners in your firm, not just those that initially capture more of the upfront purchase proceeds.  

William Carlino is managing director, national consulting services, at Whitman Transition Advisors LLC, a consulting firm specializing in CPA firm succession and M&A. He can be reached at wcarlino@whitmantransition.com.  

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