PE in accounting: Is your firm ready?

March 27, 2023 2:06 PM

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Signing up with a private equity partner is like nothing that most accounting firms have ever done.

Even a major merger doesn't come close, given the unusual changes in ownership structure required to wall off the attest function — to say nothing of the addition of a whole group of owners with very different philosophies from those that prevail in the accounting profession.

Firms that are considering a deal, therefore, should expect the unexpected, adjust their expectations, and otherwise prepare themselves for a very different experience, and to help, we've assembled some advice from firm leaders that have gone through the process and other experts.

(See our feature story on private equity in accounting here.)

Get ready for a revolution

First off, firms and firm leaders need to realize that they're entering unknown territory, and that the rules won't necessarily be what they expect.

"It requires a different mindset," warned Charley Weinstein, CEO of Top 100 Firm EisnerAmper, which signed a deal with TowerBrook Capital Partners in August 2021 — and had been looking for the right PE partner and structure for almost a decade. "Having a business partner is very different from the way most firms operate. And so, if you want to become a platform company for a private equity sponsor, understand that there's a different mindset around it and you have to be willing to embrace it."

Educate yourself

"Do your homework," advised Sean Taylor, CEO of Regional Leader Smith + Howard Advisory, which announced a partnership with Broad Sky Partners in November 2022. "Don't race into this. I think it makes a lot of sense for you to educate yourselves on how the private equity marketplace is looking to work with the CPA firm industry. We spoke to multiple private equity firms and there was a decent amount of diversity in how different firms were looking to approach their work with CPA firms."

"I would suggest that if you're looking to seek private equity and you feel good about a CPA firm that's already taken on private equity … you should talk to them about what their experiences were," he added.

Have a vision and a plan

PE firms are generally looking to support you in accomplishing your goals — not to tell you what those goals should be.

"Before we ever even sat down with private equity, we had a vision in place, and we were resolved that we wanted to enter into a relationship with a capital partner," said Smith + Howard's Taylor. "Have your thoughts put together around how you want to grow, what you want your future to be. Don't wait to try to put all that together, but already have a formulated plan in place that you're ready to share and be transparent about."

"That is the No. 1 piece of advice I would have for CPA firms that are considering this," he continued. "It's really about how private equity is going to help you accomplish goals you already have, not about how you're going to set some new goals because private equity is in town."

Be ready for due diligence

Lisa Presnail/Presnail Photograp

When it comes to finding a PE partner, one area that will be reminiscent of accounting firm M&A is the primacy of due diligence.

"One thing I learned about the private equity process that I didn't fully appreciate going in was the level of dedication and focus that it required," said Avani Desai, CEO of Top 100 Firm Schellman, which announced a deal with Lightyear Capital in September 2021. "The process of negotiating and finalizing a deal is complex and time-consuming, and it is important to have a management team that can balance the demands of the transaction with the ongoing operations of the business."

Be ready to sell yourself

People rarely find themselves in the position of having to sell themselves or their businesses — to explain the value they can deliver to a potential partner.

"While accountants understand books and financials, they should also think about sell-side preparation and what they should do to be prepared to talk to investors," said Keith Campbell, a senior partner at digital services and consulting firm West Monroe. "A lot of these businesses just haven't thought about telling their story."

One key element? "Tell the story through data," he suggested.

Know yourself …

Working with PE is such a big change that firms shouldn't undertake it without some serious introspection.

"Evaluate whether you want to take a direct private equity investment or not," suggested David Wurtzbacher, president and founder of Ascend, a platform launched by PE firm Alpine Investors to partner with entrepreneurial CPA firms. "It's a really different world if you're essentially reporting straight up to the private equity firm."

… and your partner

Besides being sure of yourself, you want to be sure of your potential PE partner — and do the work necessary to make sure they're a good match.

"Resist the temptation to believe that all private equity firms are the same," said Wurtzbacher. "You need to be careful about who you choose."

EisnerAmper's Weinstein echoed that, stressing the importance of making sure you have a good cultural fit.

"Culture is really the key to success and having the right private equity private equity partner who understands your culture and embraces your culture," he said. "Know your future partner really well and make sure that they know you really well, as well."

Know your deal-breakers

One thing you'll want to learn from your introspection is what would cause your firm to walk away from a deal.

"You need to think through what your non-negotiables are right from the start as a firm, because if you're not clear on that, you run the risk of going pretty far down the road with a private equity group and getting to a place where there's a real conflict," said Smith + Howard's Taylor. "So on the front end of your conversations with private equity, express to them what's really important to you and what really matters and things that are really nonnegotiable."

For his firm, those nonnegotiables included making sure their leadership would stay in place, and that they would continue setting their own goals, rather than having the PE partner come in and dictate goals to them.

Protect your leadership

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Allan Koltin, president of Koltin Consulting Group, stressed the importance of leadership — particularly of the firm's managing partner or chief executive.

"The protection around the CEO is important, because a lot of the partners do this because they trust the CEO," he said. "We had this come up with a PE group where they said that they could unilaterally remove the CEO and our comment back to them was, 'You're going to have a problem because lots of the partners signed up because of the CEO.' The partners said, 'I've trusted you till now and you've never let me down. You always told it to me straight.'"

The deal eventually protected the accounting firm's leadership, while giving the PE firm some options in the case of extraordinary circumstances.

Evaluate the incentives

One very specific thing to keep an eye on is the alignment between everyone's incentives.

"A lot of people are privy to the idea that private equity introduces equity incentives to the younger folks, and I would caution people to deeply examine those," Wurtzbacher said. "There is a difference between a true equity security that rides right alongside the private equity firm, so if they make a dollar, you make a dollar, and if they lose a dollar, you lose a dollar."

"What has actually been more common so far is a stock option with a bunch of performance contingencies," he continued. "So that's not a promise or an equal share at a business. It is, 'Maybe we will pay you something if certain things happen.'"

Communicate early and often

Keeping everyone in the loop was a major part of the enthusiastic reception of Schellman's partnership with PE firm Lightyear Capital, according to Desai.

"We made sure to keep our employees well-informed and engaged throughout the process," she said. "The eventual purchase agreement was approved unanimously by the principal group — after we knew we were moving forward, we then held multiple town hall meetings led by the leadership team and founder Chris Schellman to address any of our team members' questions or concerns. We also made regional leaders available for one-on-one conversations and provided a comprehensive FAQ for employees to reference."