The intricacy of exit strategies for accounting practice principals and Certified Public Accountants has heightened as private equity firms show an increasing interest in acquiring accounting practices. This shift changes the buyer pool and exit dynamics for sellers, with supply and demand being crucial factors affecting the multiple. Buyers are divided into owner-operators and aggregators/strategic buyers.
This article examines why private equity is attracted to the accounting industry, the competitive landscape changes affecting supply and demand, and implications for sellers.
Why is Private Equity Interested in Accounting?
Private equity values the accounting sector’s recurring revenue and fragmentation, allowing for consolidation and operational efficiencies through technology and outsourcing.
Additionally, accounting firms can act as trusted advisors, recommending other professional services, leading to growth and margin improvements for these private equity buyers into the future.
Impact of PE on Supply and Demand for Small Firms
Private equity employs roll-up strategies to aggregate smaller firms, aiming for arbitrage opportunities with larger PE. Smaller firms typically sell for a 3-4x EBITDA multiple. Aggregators can achieve 8-12x EBITDA by rolling up a number of acquisitions, increasing competition and pushing up multiples in the Mainstreet sized firm.
Other factors impacting supply and demand for small firms.
The demographics for the aging CPA population indicate that boomers will reach 65 at their highest level in 2024. This marks the beginning of a significant transfer of wealth over the next 7 to 10 years within the accounting sector.
Meanwhile, it is becoming increasingly difficult to find owner-operator buyers within the industry. The increase in supply due to boomer demographics combined with lower levels of demand from owner-operators negatively impacts multiples.
The Dilemma for Sellers
The dilemma presents itself as a strategic choice. To achieve the highest price and most favorable terms in an exit, sellers should consider all potential buyers, including private equity (PE) firms. The division within the buyer pool creates a significant decision for principals contemplating an exit. The PE segment of this pool is aggressive and competitive, offering a strong possibility of achieving the desired price and terms.
Buyers in highly competitive situations frequently offer more than the asking price to secure an acquisition. Conversely, the other segment consists of owner-operator buyers who are typically more experienced and credentialed but tend to make more conservative offers.
The Choice for Sellers
Sellers of small firms often prefer credentialed, experienced operators over private equity roll-ups. Ideally, they seek buyers who resemble a younger version of themselves. The idea of their firm being absorbed into a roll-up with out-of-state management, virtual operations, and no local leadership can be unsettling.
If presented with a scenario of don’t sell or sell to private equity, most would choose to sell. However, since offers vary greatly, exiting principals face a dilemma when considering buyers early in the process.
We have been guiding our accounting practice and CPA practitioners through these choices for years and would love to add value to your existing resources. If you would like to discuss the market in general, how private equity might play a role in your exit or guidance in making these decisions please feel free to contact us. You can email us, connect through our website by filling out the form below or call 602-614-3583 and ask for Ryan.
