7 considerations to consider to sell your accounting firm to private equity

The buzz around private equity firms acquiring large and small accounting practices has been growing steadily. Recently, CBIZ acquired Marcum LLP, and on the small scale, new CPAs want to buy existing small firms instead of starting something from scratch.

On the surface, it seems like an exciting opportunity—a chance to capitalize on years of hard work and potentially secure the future of your firm. But what really happens behind the scenes when you decide to sell your business to a private equity firm?

Understanding what to expect and how to prepare for the sale can make a significant difference in how smooth the transition will be, and how well your firm performs under new ownership. Here are some key points to consider.

1. Assess your leadership team

Private equity firms typically prefer to retain the current leadership during the first six to 12 months after the acquisition. This allows them to gain a deep understanding of the firm’s operations, client relationships, and internal dynamics. In some cases, they may even insist that the owner remain as the managing partner during this period.

Preparation tip: If your goal is to exit the business as soon as possible, start building a strong management team now. Begin delegating your daily responsibilities and extracting yourself from operational tasks. This might require investing in talent and could temporarily reduce your EBITDA, but it will make your firm more attractive to buyers by demonstrating that it can operate independently of you.

2. Understand the risks of leadership changes

While retaining leadership might be the initial plan, there is always a possibility that disagreements over the direction of the firm could lead to changes. Private equity firms are focused on maximizing their return on investment, and if they believe a change is necessary to achieve that, investors won’t hesitate to make tough decisions.

Preparation tip: It’s crucial to have open conversations with potential buyers during the negotiation process. Understand their vision for the firm and how they plan to achieve it. By aligning your goals with theirs—or at least understanding where they differ—you can better prepare yourself and your team for the changes that might come.

3. Prepare for debt utilization

Private equity firms often leverage debt as part of their acquisition strategy. This means that after the sale, your firm may be required to take on additional debt to finance growth or other strategic initiatives. While this can be beneficial in terms of expanding the business, it also increases financial risk.

Preparation tip: Before the sale, assess your firm’s current debt levels and its capacity to handle additional debt. If your firm isn’t already accustomed to working with leverage, consider taking out a small loan and get used to the process.

4. Evaluate your team’s performance

Before I created my fractional CFO firm, Tee Up Advisors, I worked for a private equity fund and discovered that private equity firms were known for their rigorous performance evaluations. As a result, family members or long-standing employees who were hired by a firm’s owner may face termination if they are not deemed to be performing at the level required by the new owners. The focus will be on economic efficiency, and non-performers may be let go.

Preparation tip: Conduct an honest evaluation of your team before entering negotiations. Identify any underperformers and consider whether it’s time to make changes. For key roles, addressing performance issues early can prevent a valuation discount. For non-key roles, having a succession or replacement plan in place will ensure continuity and reassure buyers that the firm is committed to maintaining high standards.

5. Rethink your compensation structure

One of the biggest shifts for firm owners post-sale is the change in how profits are distributed. Under private equity ownership, partners will likely move from receiving direct distributions of the profits to being on a fixed salary with performance-based bonuses. Even if you retain some equity, you might not see any returns from it until the firm is sold again, which could take several years.

Preparation tip: Prepare yourself and your partners for this change by rethinking how you view compensation. Start discussions early about how the new structure will work and how bonuses will be calculated. This will help set expectations and minimize disruption when the sale goes through. In addition, consider how this change will affect your personal financial planning and make any necessary adjustments ahead of time.

6. Strengthen your financial reporting

Private equity firms are heavily focused on the numbers, and will scrutinize every aspect of your financials before finalizing a deal. Inaccurate or incomplete financial reports can delay the sale or even reduce the final valuation of your firm.

Preparation tip: Ensure your financial reporting is as strong as possible well before you enter into any negotiations. This includes having up-to-date financial statements, detailed records of all revenue streams, and accurate projections for future performance. The more transparent and organized your financials are, the smoother the due diligence process will be and the more likely you are to achieve a favorable valuation.

7. Plan for cultural integration

Merging with, or being acquired by, a private equity firm doesn’t just mean changes at the financial or operational level; it also means cultural changes. Private equity firms often bring a more corporate mindset to the businesses they acquire, which can clash with the more entrepreneurial culture of an accounting firm.

Preparation tip: Begin thinking about how to bridge any potential cultural gaps early in the process. Identify what aspects of your firm’s culture are non-negotiable and which areas might be open to change. Communicating these clearly to the buyer can help ensure a smoother integration and preserve the elements of your culture that make your firm unique.

Be smart about the M&A process

By understanding what to expect and taking steps to prepare in advance, you can navigate the M&A process more effectively and maximize the value of your firm. Whether it’s building a strong management team, preparing for leadership changes, or ensuring financial stability, proactive preparation is key to a successful sale. As you move forward, keep in mind that the more prepared you are, the smoother the transition will be—and the better positioned your firm will be for future success.