I recently had the pleasure of joining Dan Hood, Editor-in-Chief of Accounting Today, on his podcast On the Air with Accounting Today to discuss one of the biggest shifts we’re seeing in the accounting profession right now: the impact of private equity on the M&A market for firms under $10 million.
Traditionally, M&A in this segment was mostly driven by individual buyers, often managers wanting to go out on their own, or by firms looking to grow locally through acquisition. Occasionally, a large firm would step in for a strategic purchase. But today, the dynamics are changing dramatically.
Private Equity’s Growing Role
Private equity has started entering deals at much smaller firm sizes than most people would expect. We’re seeing PE interest start around the $3 million revenue mark, and in some cases, as low as $1 million if the buyer already has a footprint in the same metro area. When firms hit the $5 million range, PE interest tends to increase significantly. This shift is having a big effect on valuations and deal structures. Where larger firms used to command weaker multiples and less favorable terms, that trend has flipped. The demand is pushing up prices and improving terms as firms scale.
Cash at Closing and a Changing Deal Environment
One major difference I talked about with Dan is the amount of cash being put on the table. In the past, accounting firm deals didn’t always include significant cash up front, especially for larger firms. But now, with tools like SBA financing and increased competition, sellers of firms under $5 million can often expect much stronger cash terms.
That said, not every deal is what it seems. Some PE firms make big promises early, throwing out eye-popping valuations or “second bite at the apple” scenarios, only for sellers to find hidden contingencies buried in the fine print. I’ve also seen some firms enter exclusive negotiations, only to find their practices picked apart during due diligence.
Advice to Sellers: Plan Early & Build a Strong Business
For firm owners thinking about a sale, I shared what we always tell our clients: start planning early. Make sure your partnership agreements are clear on how exits will work. Just as important, build a strong, profitable, well-run firm. That’s what buyers are looking for.
Smaller Firms as Buyers
Another great part of the conversation was discussing how smaller firms are often active buyers themselves. Firms growing through acquisition, especially to access talent, are increasingly common. We’re seeing more “aqui-hires,” where the value in the acquisition lies in the team, not just the client base or revenue.
Scaling an accounting firm is tough, and acquisitions can be a smart way to push through growth plateaus. As I mentioned on the show, what might be a major operational issue at $2.5 million in revenue often isn’t a problem at $5 million. Acquisitions can help accelerate that transition.
It was a great conversation with Dan, and I appreciated the opportunity to share what we’re seeing in the market. If you’re interested in how these trends might affect your own succession or growth plans, I encourage you to check out the full episode.
Listen to the podcast over on Accounting Today!
If you want to chat with us about your firm’s valuation, request one here:
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