Always remember – It’s all about the fit.
An initial heavy focus on fit rather than the transactional elements of a deal is the best way to approach a potential transaction. This holds true whether you are selling or merging, and regardless of who the buyer is. Our experience has overwhelmingly been that owners who first focus on buyers that represent the best opportunity for their clients, remaining partners, and staff generally end up the happiest with their exit results, including price and terms. Private equity buyers tend to get to brass tacks quickly, so it’s important to keep this in mind so you don’t miss key steps. If you’re selling your accounting firm to Private equity, there could be a much longer working period than in a normal exit, so it’s important to consider what that relationship will be like in the workout period for the owners or partners who stay on after the closing. For a deeper dive on fit, check out our whitepaper: Sellers Guide to Evaluating Buyers
Multiples (accounting practice valuations) are going up.
We’re seeing significant increases in multiples, especially for firms over $5M in annual revenue. Just a short time ago, it was common for multiples to decline (and for terms to weaken) as firms crossed the $2M range. This was primarily driven by demand. The number of potential buyers used to fade in that range. Many individual buyers have a hard time getting financing for deals that exceed this size. They may also not be experienced with managing larger teams. Now, with PE involved, they want firms this size because they need a larger team in order for their business model to work. It’s incredibly challenging to scale a firm when there is risk that the owner gets pulled back into the day-to-day, which is too often the case with smaller firms. Now we are seeing a complete reversal of the past trend. We’re seeing multiples increase as practices get larger. This makes sense, because there is more stability and predictability as a firm grows, which attracts more buyers that have even more capital to put to work.
PE deal doubled selling price. As an example, we consulted with a $5M firm about three years ago when the managing partner was just in the early stages of exit planning. At that time, with its cash flow and other characteristics, that firm might have sold for $3.5-$4M, which is less than a 1X multiple. But recently we sold a majority stake in that CPA firm to a Private equity buyer for $7.5M. Plus, the seller is staying on for a few years, and will get another payday when he exits in full.
Negotiations and due diligence are different
Private equity buyers negotiate for a living. Many absolutely negotiate in good faith. Sadly though, we’ve seen some cut-throat tactics employed, so it’s worth noting. At best, they may only eat your energy and time with ongoing requests and delay tactics. At worst, they may try to renegotiate the deal just before the scheduled closing – and never in the seller’s favor.
Due diligence will often involve a 3rd party and can be much more onerous than when an individual or firm buyer conducts due diligence on their own behalf. A lot of the requests can be boilerplate for other businesses and won’t apply, but we’ve observed some very in-depth requests that can take the selling firm a significant amount of time to gather and review. Generally, when selling to another CPA firm, the due diligence has tended to be lighter and more high-level because there is a deeper understanding from the buyer going in.
Closing agreements and operating agreements
When one or more partners are staying on, operating agreements tend to be much more detailed with PE buyers than traditional buyers. These agreements – and the negotiations to hammer out the details – may delve into every possible scenario that might arise over the period of continued ownership and may span 50 pages or more. Expanded due diligence for sellers is required.
This blog is an excerpt from a soon to be released white paper we are writing on Private Equity Firms.
We will also be hosting a live discussion on September 18th and 24th at 3:30 ET. Join us for that Market Update!
