Private Equity: An Attractive Option for Practice Growth And Exit?

Private equity firms manage investment funds that buy stakes in businesses with the goal of growing value and exiting, typically within a 5-7 years timeframe (although this can vary). They're attracted to accounting practices because:

• Recurring revenue models provide predictable cash flow
• Fragmented market offers consolidation opportunities
• Professional services historically deliver strong returns
• Accounting sector has demonstrated that it is recession-resistant

PE firms typically take either a minority stake (letting you retain control) or majority stake (but with owners staying on to run the business).

Yes, in almost all cases. PE firms are attracted to businesses with strong leadership and expect those leaders to:

• Continue in key roles 
• Lead the business through the accelerated growth phase
• Participate in add-on acquisitions
• Stay through the eventual exit

If you're looking for retirement in the short term, strategic buyers or internal succession may be better fits, unless there are other leaders ready to step in to make your ongoing contribution less critical.

Both PE and strategic buyers use similar valuation methodologies (revenue or EBITDA multiples).

PE firms focus on:

• Standalone financial performance
• Scalability and growth potential
• Quality of team
• Platform capability for add-ons

Strategic buyers may pay premiums for:

• Geographic expansion
• Service line additions
• Client base synergies
• Team talent acquisition

Our market intelligence suggests numerous PE players are "doing the rounds" of many larger and mid-tier firms offering attractive multiples, potentially higher than strategic industry buyers may be willing to match. However, few of these PE offers are crystallising into completed deals so the impact of PE on selling multiples is still uncertain and fluid.  

If you've rolled equity into the deal (kept 10-40% ownership), you participate in the "second bite of the apple" when the PE firm sells in 5-7 years.

Take the following simple example scenario:

• PE firm buys 70% of your practice for $7M (valuation: $10M)
• You keep 30% equity ($3M value)
• Over x number of years, the practice grows to $20M valuation
• At exit, your 30% is now worth $6M

This "double dip" (initial liquidity + growth equity) may be highly attractive to practice owners who have confidence in their PE investor and belief in the growth plan.

PE firms typically look for practices with:

• Minimum $5M revenue (unless bolting onto an existing location)
• Strong profit margins
• Growth trajectory
• Attractive client base with strong retention
• High quality team
• Scalable operations (systems, not founder-dependent)

If your practice meets these criteria, PE could be a fit. However, equally you will likely get strong interest from strategic buyers.

This is a common concern of any practice merger or acquisition. The impact varies, but thorough preparation and communication in the initial deal stages can ensure the best outcomes for your team and culture:

Positive impacts:

• Professional development opportunities for team
• Investment in technology and systems
• Career progression pathways
• Resources to attract top talent

Potential challenges:

• Increased performance pressure/KPIs
• Decision making authority may be diminished
• More structured reporting/accountability
• Growth targets may feel aggressive
• Some team members may resist change

The key is choosing a buyer (whether PE or otherwise) whose culture and expectations align with yours. Evaluating cultural fit is an important focus for us during every sale process we undertake with our clients.

PE firms are highly experienced in acquiring businesses and will likely conduct more extensive due diligence than other buyers This will likely include:

• Financial: 3-5 years financial statements and forecasts, client revenue analysis, working capital review
• People: Key talent, team structure, remuneration, retention risks
• Operational: Client contracts, service agreements, pricing models
• Legal: Corporate structure, partner agreements, employment contracts, regulatory compliance
• Commercial: Client concentration, retention rates, pipeline, competitive positioning
• Technology: Systems assessment, data security, IP ownership, AI and automation opportunities

It’s important to prepare... DMY can help you navigate through with our extensive experience...