Private Equity Consulting for CPA Firms
Where do you see your firm in the future?
Do you need help navigating your options?
Are you exploring private equity (PE) opportunities for your firm?
Do you and your partners understand the complexities of PE?
Does your firm need an infusion of capital to address challenges or spur growth?
If you choose independence, are you able to compete with firms backed by PE capital?
If you are a PE firm, are you seeking investments in the accounting space?
We Demystify Private Equity
This is a huge decision for your firm; let us help you make it an informed one
In today’s dynamic landscape, the influx of Private Equity investments in accounting firms has been transformative and has played a pivotal role in driving the growth strategy of CPA firms. As these Private Equity (PE) investments continue to flow into the accounting sector, many firms are now evaluating the potential benefits and challenges.
At Capstone Partners, we demystify the complexities and deal structures of PE, weigh the pros and cons, and help you unlock the value of your firm. Our PE advisory services provide CPA firms with the insights and support necessary to understand and navigate these complex transactions successfully. Our tailored approach ensures that firms can navigate the private equity landscape effectively, aligning with their long-term goals and cultural identity.
Understanding Private Equity
Private equity firms make investments in CPA firms, aiming to improve their value through capital infusion, operational changes, strategic guidance, accelerated growth and improved profitability. The goal is to increase the firm’s enterprise value over several years – typically 4-6 years - and then exit the investment by selling the firm to another PE firm at a sizable profit.
The Role of Private Equity in accounting
Private equity investment has become a catalyst for growth and innovation in the accounting industry, enabling firms to scale rapidly, access new opportunities and utilize the capital for talent, technology, expanded advisory services and strategic M&A. Private equity firms offer more than just capital; they provide strategic guidance and operational support to help firms maximize their enterprise value. They offer operational efficiencies, streamline processes, and promote accountability.
By partnering with PE firms, CPA firms can harness experienced investors who are committed to unlocking value and enhancing the overall business performance and profitability of CPA firms. The new structure adds value and incentives for current and future partners and solves the problem of unfunded retirement obligations. It’s a value creation plan and a true transformation.
What Capstone Partners can do for you
Making the decision to explore PE opportunities is likely the biggest decision your firm will ever make. To make an informed decision, you and your firm leadership must understand the complexities, pros and cons and deal structure specific to PE transactions, as well as the impact on your partners, team members and clients.
Let Capstone Partners be your guide.
As your trusted advisor, we demystify the process, clarify terminology, and identify suitable PE candidates. We guide you through every phase of the process, from the initial strategy and “what you’re looking for” meeting, all the way through close. We serve as a conduit and buffer between the parties and “hold your hand” as necessary. We help structure financially sound deals, manage risk, and ensure every move is calculated to enhance your firm’s value and market position.
Here’s what we do:
- We “get to know you”. Each firm is unique. We familiarize ourselves with your firm metrics, your culture, your expectations, your needs, and your timeline. Otherwise, how can we identify the right fit and promote you to other firms?
- Define and evaluate your goals, culture and growth strategy.
- Recognize and reconcile partner dynamics- Partners at different stages in their careers are looking for different things in a PE deal; obtain partner buy-in.
- Clarify key terminology and elements of a PE deal, including adjusted EBITDA, scrape, post-deal partner compensation, preferred dividend and earnouts.
- Make your firm acquisition-ready; review your financial metrics, profitability, and compensation structure.
- Recommend steps to maximize your value.
- Identify and target firms which are compatible with your criteria and culture.
- Facilitate introductions.
- Help strengthen your firm's position in the marketplace.
- Act as a conduit and buffer between the parties; ie “hold your hand” as necessary.
- Identify inherent risks and opportunities of each potential opportunity.
- Review and negotiate deal terms through closing.
- Assist with post-merger integration.
CULTURE IS PARAMOUNT
Cultural alignment between combining firms is paramount to the success of any PE transaction. Economics is just one piece of the PE puzzle. While deal economics and metrics are undoubtedly crucial, finding the “right” firm to partner with is equally vital.
Not all PE firms are created equal, not all PE deals are created equal. Firms need to ensure that their unique goals are met when making a deal, making sure clients and team members are well served. Accounting and advisory is a people-first business; your people are a priority. Compatibility with the firm you partner with is critical.
Cultural alignment and shared vision play significant roles in the long-term success of any deal. Cultural misalignment often results in a failed deal and should be avoided. A clearly defined post-acquisition, people-first culture provides a solid foundation for the newly combined entity to thrive and succeed.
How CPA firms benefit from PE investments
The current transformative landscape has presented CPA firms with many challenges. Talent, technology, succession, access to capital, M&A and yes, FOMO are but some of the evolving issues that firms are facing to stay ahead of the curve. The access to PE capital has turned most of these challenges into growth opportunities, including:
- Investments in talent acquisition, retention and development.
- Investments in cutting-edge technology.
- Grow and expand higher margin advisory services.
- Accelerate firm growth.
- Fund strategic acquisitions of other CPA firms and non-CPA firms (wealth management, outsourcing, consulting, cybersecurity etc).
- Strategic guidance.
- Rapid Scalability.
- Operational efficiencies.
- Provides a solution for succession planning issues; buys out unfunded retirement obligations.
- Allows next-gen partners to have a stake in the firm’s profits and growth.
- Corporate structure affords nimble and quick decision-making.
- Creates generational wealth for many partners.
- Builds a modernized workplace that top professionals want to be part of.
- The CPA partnership model is a flawed, consensus-driven, inefficient democracy.
- Creates value.
PE is not for everyone
Private Equity firms look for CPA firms with strong profitability metrics, proven growth rates and strong leadership. Many CPA firms do not pass muster and are not viable candidates to enter into a PE deal. Capstone Partners can work with you, recommend measures to improve your profitability and help you identify alternative paths to sustainable growth. Many CPA firms are not comfortable with the PE structure, other firms are mystified, misinformed or under-informed of the complexities of PE, while others simply wish to remain independent.
There is no right or wrong. In the current landscape, accounting firms have several strategic options to consider to achieve sustainable growth for their firm's future.
Whichever path you choose, Capstone Partners is happy to be your guide.
REMAINING INDEPENDENT
For a variety of reasons, many firms choose to remain independent, most of which are “fiercely independent.” Each firm charts its unique growth strategy, each firm has its own risk tolerance and each firm has its own identity and culture. In a profession undergoing rapid transformation, and in which M&A and private equity transactions are often deemed inevitable, it is still possible for firms to remain independent..and thrive. Independence must be a strategy, and it must be intentional.
Independent firms must be strategic about differentiating themselves. Key differentiators are:
- Close, sticky relationships with clients
- Strong focus on professional development
- Strategic use of capital
- A clearly-defined, unique firm culture
Independent firms do not have access to the same capital as those firms which received a PE infusion of capital. They must be nimble and identify other means of capital such as bank lines of credit, SBA loans, internal capital or ESOPs. For those firms wishing to remain independent, we offer practice management solutions to help you thrive and stay competitive. In order to compete and foster sustainable growth, firm leadership must adopt new approaches to strategy and governance. These include:
- Investing in technology, with an eye on AI.
- Investing in talent acquisition and retention, with a strong focus on professional.
- Development and long-term career path at your firm.
- Strategic acquisitions.
- Succession planning, including developing next gen leaders.
- Reexamine and redesign the terms of partner retirements and equity structures.
- Expand higher margin advisory services.
- Offer or enhance a niche or specialty practice.
- Emphasize and reward cross-selling.
- Utilize offshoring to increase margins and scale without increasing headcount.
- Raise rates to increase margins.
- Cull substandard clients.
POST-MERGER INTEGRATION
A signed deal is just the beginning. Realizing its full value depends on successful post-merger integration. Many deals fail during this post- merger stage.
We help create a transition plan to merge cultures, navigate communications, optimize synergies, and integrate operations. This ensures a smooth transition for both your team and your clients, building a stronger, unified post-merger firm.
Unleash Your Potential, Create Value
“Change is inevitable. Growth is optional.” ― John C. Maxwell
The influx of private equity investment into the accounting profession has played a pivotal role in driving the growth strategy of CPA firms. If your firm is exploring the opportunities that PE might offer, contact us at Capstone Partners. We demystify the complexities of PE, evaluate the pros and cons, walk you through the process, and help you unlock the value of your firm.