One Last Busy Season: Prepping Your Firm for a Successful Sale

More Americans are expected to turn 65 by 2027 than at any other time in history, the accounting labor force is constrained, and many firm leaders are beginning to exit the industry (or are at least thinking about it). At the same time, the highly fragmented accounting sector is the apple of many investors’ eyes, with private equity (PE) firms taking an especially keen interest in the industry. These and other factors are enticing more practice owners and/or partners to ask themselves: Is it time to sell, merge, or take on a PE investment?

Bob Lewis, MBA, president at The Visionary Group in Palatine, Ill., says that question is being floated by him by a lot of firms right now. And because internal succession teams may lack the resources needed to buy their practices, more of them are considering merging with other CPA firms or selling their practices altogether.

“If the internal succession team doesn’t have the capital to buy in, the only option is generally to merge with a firm or sell it,” Lewis says. However, he also sees firms taking a “hybrid” approach, whereby one or two partners may be bought out by the remaining partners. This strategy tends to work best when firms have a mix of younger and veteran partners, the latter of which may be planning to retire within the next few years.

The accounting industry has also piqued the interest of PE firms that wish to serve as strategic partners, providing capital, expertise, and guidance to drive growth and transformation.

Over the last three years, PE firms have staked their claims in firms of all sizes—a trend that CFO Brew says “shows no sign of slowing.” Accounting’s status as one of the few remaining highly fragmented industries is a key attractor. In an October 2024 article, Sabrina Howell, a professor of finance at New York University’s Stern School of Business, told CFO Brew, “Getting bigger gives firms an opportunity to take advantage of economies of scale.”

WHY ACCOUNTING FIRMS ARE IN BIG DEMAND

According to Brian Lunt, managing director at Stevenson & Company in Evanston, Ill., there’s a healthy market for CPA firm acquisitions right now: “Most of those deals are being executed by firms looking to expand their geographic reach or practice areas and are getting into the game by acquiring larger firms.”

Smaller firms are also merging together, with some of that activity driven by the availability of 100% United States Small Business Administration financing. “This type of financing encourages the combination of smaller firms,” Lunt says.

Drilling down further, Allan Koltin, CPA, CGMA, CEO of Koltin Consulting Group Inc. in Chicago, says there are two buyer tracks for CPA firms to consider: inside buyers and outside buyers. The insiders tend to be larger accounting firms. For example, a top 50 firm may be searching for potential acquisitions among the top 1,000 firms, and the latter may be looking for companies in the top 3,000 list.

“It’s kind of like the circle of life, with larger firms buying smaller ones and merging them into their own practices,” Koltin explains.

Outside buyers, on other hand, usually have available capital and are looking for potential acquisition targets in the industry. They can be PE firms, private capital investors, or even pension funds, some of which are based outside the U.S. Of course, much of that international interest can be credited to the spate of successful PE deals during the last three years.

“I was recently on a Zoom call with a Canadian pension fund and thought I was on the wrong call,” Koltin recalls. “Turns out they were looking to invest in U.S. accounting firms.”

IS THE SALE WORTH IT?

Koltin says accounting firms have historically been valued based on the “easy in/easy out” philosophy, through which senior managers become partners and, as part of the progression, can buy equity in the firm. The ownership was typically sold to the senior managers at a discount and reflected how their participation in the firm helped create its current value.

“Partners didn’t have to go out and borrow a lot of money to get ownership into their accounting firms,” Koltin explains. Upon exiting the firm, those partners were generally compensated based on their “best three years” of earnings, multiplied by two, and then extended out over a 10-year period.

Today, however, PE firms are coming in and pricing firms at almost double their revenue while also offering large cash payments at closing and the opportunity to have rollover equity in the business. That rollover equity is typically held for five years and can appreciate dramatically once the firm is sold to either a strategic buyer or larger PE firm.

Koltin says he’s been spending quite a bit of time advising firms on these trends: “Firm valuations have gone through the roof, and this presents a major challenge in most CPA firm boardrooms,” he says. “It’s called into question whether traditional valuations of CPA firms now need to be significantly increased for firms choosing to remain independent.”

PUTTING YOUR BEST FOOT FORWARD FOR A SALE

Of course, just because PE firms and others are scouring the industry for firms to acquire or invest in doesn’t mean you can just sit back and let the deals take care of themselves. Lewis says one of the best first steps in ensuring that you’re pricing your firm right is to look at details like the number of production hours being billed by partners.

“Some firms inflate their profitability basis based on a high number of billable partner hours,” Lewis explains.

For example, Lewis says a firm with several partners billing 2,000 hours each may expect a certain price, but the reality is that the buyer may not be able to replace those hours in the current market:

“That firm actually is worth less to an acquirer than a firm that’s making less but that has more leverage in it.”

Bench strength is another important consideration for firms interested in selling their practice, especially in an environment where backfilling leadership, management, and even junior positions have become extremely difficult.

“No one wants to just buy a book of business anymore,” Lewis says. “Twenty years ago, someone may have bought a firm with a $5 million book of business without much concern about having to hire new people to run it, but today, that $5 million firm has to have a bench that’s going to stay in place.”

Overall, regardless of which type of buyer or investor you’re working with, Lunt says patience will be the virtue throughout the courtship, due diligence, and sale process: “During this period, the buyer will likely analyze all financials, contracts, IT systems, cybersecurity compliance, human resource processes, leases, and anything else they can think of.”

Additionally, Lunt stresses that most buyers will require sellers to continue working in the practice for some period of time to ensure a smooth transition. They’ll also want to meet with your staff to ensure a good fit.

While this process takes time, Lunt says it helps ensure a good fit for the firm, its partners, and its clients: “Finding the next steward of your practice isn’t easy and takes a dedicated effort—plan your transition ahead of time to give yourself the flexibility to achieve your objective.”

Related Content:

• Merger Guidance for CPA Firms: Start Early, Plan Strategically for Long-Term Success: The papers are signed, and your merger is officially closed—but what comes next? Experts share their guidance for achieving post-merger success.
• Best Practices in Post-Merger Integration: Two seasoned public accounting firm leaders share their tips for finding success when combining firms.