Rethinking Independence: 4 Exit Strategies for CPA Firms to Consider

Art Kuesel President, Kuesel Consulting
Moving Your Firm Forward

Whether related to people, technology, the burden of administrative duties, or simply staying abreast of rapidly evolving tax and accounting regulations, certified public accounting (CPA) firms across the country are facing a whirlwind of competing priorities that feel truly unsustainable, pushing them to consider an exit strategy.

For many CPA firm leaders, it can be hard to reconcile that the best path forward may not be continuing along the road of independence. If you come to this conclusion, I can assure you that you’ll still likely encounter mixed feelings about it. You may feel great comfort in deciding that you’ll no longer “go it alone.” You may also be apprehensive about the road ahead. Maybe you know anecdotally what a CPA firm merger may be like because you knew someone who went through one. Maybe you helped a client get acquired by a private equity (PE) firm and your expectations are framed by that experience (positive or negative). Or perhaps the entire process will feel foreign to you.

Regardless of what you’re feeling, one thing is certain: You’ll likely have many choices and options as you pursue an exit strategy. Here are just four to consider.

1. TRADITIONAL UPSTREAM MERGER

Historically, this has been the most common path for CPA firm owners seeking an exit. With this option, you essentially combine with another CPA firm and integrate into their systems, processes, and technologies. This firm could be a national, regional, or local firm. In these cases, you may or may not keep your office. This firm would likely hire most, if not all, of your people and would likely maintain current compensation for staff and partners. As a partner, you may vest into their deferred compensation system, or if you’re near retirement age, you might earn your buyout upon retirement over several years as agreed upon with the acquiring firm. What’s more, some firms may even embrace models like an employee stock ownership plan that distributes ownership and equity beyond the partner group.

2. PE PLATFORM

This is a relatively newer exit strategy available to CPA firms. With this option, you join a PE-owned platform (or network or association) of like-minded CPA firms interested in sharing common resources that couldn’t be scaled or replicated in a standalone manner. This option will likely yield firm valuations of double—if not more—based largely on your profitability. Also, terms may be more enticing, as PE buyers generally can afford large cash down payments and more favorable payment terms versus traditional buyers. Additionally, most PE platforms require some percentage of reinvestment in the platform (with a holding period) and offer generous rates of return. Mind you, the equity partner income pool will generally see a reduction of half (give or take), which can be challenging for many partner groups to navigate. In this model, scale is often the name of the game, as is outsourcing, offshoring, and investing in technology. Some of your processes and systems may remain untouched, while others change and evolve to capitalize on scale. The state of the platform—emerging, growing, or established—will see the range of shared resources vary greatly. What’s more, many platforms believe in distributing equity beyond the partner group. There are many variables and options in PE platforms, and they’re continuing to evolve rapidly, as well as grow at rates well beyond historical averages.

3. PE-BACKED CPA FIRM

Being acquired by a PE-backed CPA firm is a unique hybrid of the first two options we explored. With PE backing, the firm can offer PE valuations, terms, and options, but also offer a more traditional merger integration experience as if you were combining with a regional or national firm. There’ll likely be a similar focus on long-term scale and efficiency but with external capital turbo-charging the pace. Growth will also likely be pursued aggressively to achieve scale and profitability goals.

4. NON-TRADITIONAL BUYER

Historically, this has always been an option, but only recently have non-traditional buyers begun to aggressively pursue ownership in CPA firms. One example of a non-traditional buyer would be a large wealth management firm seeking a CPA firm to serve its clients with a variety of tax and accounting needs. With non-traditional buyers, the valuation and terms can vary greatly and may appear as the hybrid of hybrids, with some aspects of the transaction being more like a traditional merger and others being more like PE.

Bottom line, with any of these four paths, it’s important to balance and weigh the financial aspects of the transaction with the non-financial aspects. Things like culture, staff, and client “fit” matter and can’t be reduced to a number on a spreadsheet. Also, it’s important that you don’t feel the need to “settle” or accept the first offer you receive. It’s your right and responsibility to understand the landscape and select the best path for you, your firm, your people, and your clients. Even if your first choice doesn’t ultimately pan out, knowing you evaluated and considered all options available should help you feel better about where your firm is headed.

Related Content:

• Succession Planning Strategies Every Firm Leader Should Consider: Don't leave your greatest asset to chance. Start planning early to ensure your accounting firm prospers under new leadership.
• In Succession Planning, What Constitutes Success? Here are three succession planning choices for firms to consider—each with its own definition of success.