Private Equity in the CPA Space: An Expanded Deep-Dive
1. The Growing Role of Private Equity in Accounting
The CPA profession has traditionally been partner-owned, with transitions handled through internal buyouts or mergers with other CPA firms. That model is changing. Private equity (PE) firms see CPAs as attractive acquisition targets because:
Recurring Revenue: Tax compliance and audit services create highly predictable, repeatable revenue streams, reducing risk.
Fragmentation: Thousands of small to mid-sized firms exist, ripe for consolidation.
Succession Gaps: Many firm owners near retirement age face a lack of internal succession options. PE steps in as a liquidity provider.
Cross-Selling Opportunities: CPA firms hold trusted relationships with businesses and individuals. By adding services—wealth management, advisory, outsourced CFO—PE can grow wallet share.
This shift is reshaping the industry. Firms are no longer just selling practices to larger CPA groups but are entering a world where financial sponsors dictate growth strategies and exit horizons.
2. How Private Equity Works in the CPA Sector
PE transactions in this space typically follow a platform + add-on approach:
Platform Acquisition: A larger firm (often $3M+ in EBITDA) becomes the anchor investment. It has the infrastructure, leadership, and brand recognition to scale.
Add-On Acquisitions: Smaller firms ($1–2M EBITDA, sometimes even less) are tucked in, leveraging the platform’s technology, back-office, and compliance systems.
Key operating levers include:
EBITDA as the North Star: Unlike revenue-based valuations, PE focuses almost exclusively on adjusted EBITDA. Add-backs (owner perks, non-recurring expenses) are scrutinized.
Operational Efficiency: PE firms may centralize HR, IT, billing, and marketing across the platform to cut costs.
Growth Initiatives: Firms are sometimes encouraged to expand into consulting, managed services, and advisory lines, which have higher margins than compliance-driven tax work.
For firm owners, this means joining a growth engine rather than just “selling out.” But it also comes with new performance expectations.
3. Capitalization Structures in PE-Backed CPA Deals
When PE acquires firms, the deal is rarely all cash. Instead, capitalization relies on both debt and equity:
Equity
Limited Partners (LPs): Pension funds, endowments, sovereign wealth funds, and high-net-worth investors provide the majority of the equity pool.
General Partners (GPs): The PE firm contributes a small portion but controls strategy and earns carried interest on successful exits.
Management Equity Roll: Selling partners are often asked to “roll over” 20–40% of their equity into the new entity. This keeps them aligned with growth and the eventual exit.
Debt
Debt funds a substantial portion of CPA acquisitions, usually 40–60% of deal value. The mix may include:
Senior Secured Loans: Lowest cost of capital, typically provided by banks.
Mezzanine Debt: Higher-yield financing, subordinated to senior loans. Sometimes includes warrants.
Unitranche Facilities: A hybrid structure combining senior and mezzanine into one simplified instrument, popular with PE.
Debt magnifies returns but introduces constraints—covenants that CPA firms must live within.
4. Debt Covenants: Guardrails for PE-Backed CPA Firms
Lenders protect themselves through covenants, which function like guardrails:
Leverage Ratio: Measures debt to EBITDA, often capped at 2.5x–4.5x. This limits how much debt can be used.
Fixed-Charge Coverage Ratio (FCCR): Ensures firms generate enough free cash flow to cover interest, principal, lease obligations, and capex (typical minimums are 1.2x–1.5x).
EBITDA-to-Debt Service Test: Requires quarterly reporting of EBITDA against debt service obligations.
Why this matters: CPA firms usually don’t grow revenue 20–30% annually like software companies. Their stability makes them attractive, but lenders impose stricter covenants because margins can be squeezed if partners retire early or if client concentration is high.
If covenants are breached, consequences include:
Requiring equity cures (owners inject more capital).
Higher interest costs on refinancing.
In worst cases, lenders gain control rights.
This means growth must be carefully managed, and valuations are capped by what debt capacity allows.
5. How Debt Covenants Impact Valuations
Valuations in CPA private equity deals generally range from 2.5x to 6.0x adjusted EBITDA:
Smaller Firms (<$2M EBITDA): Often closer to 2.5x–4.5x due to concentration risk and dependence on key partners.
Mid-Market Firms ($2–5M EBITDA): Can achieve 4.5x–6.5x if diversified, with strong advisory revenue.
Platforms ($5M+ EBITDA): Sometimes command premiums above 6.0x if they are anchor acquisitions.
Debt covenants restrict how high PE firms can bid. For example:
If leverage is capped at 2.5x EBITDA, and a firm generates $1.5M EBITDA, the maximum debt is ~$3.75M.
If the total purchase price is $6M (4x EBITDA), PE must cover the remaining $2.25M with equity.
This equity requirement makes PE cautious. To bridge valuation gaps, PE often shifts payment into earn-outs, deferred consideration, or equity rollovers.
6. Payment Terms Typically Presented
The structure of PE-backed CPA transactions differs from traditional CPA-to-CPA mergers:
Cash at Closing (30–60%)
Provides immediate liquidity to selling partners.
Financed through a mix of debt and equity.
Equity Rollover (10–40%)
Owners reinvest in the new entity.
Offers a “second bite at the apple” when PE exits in 5–7 years.
Aligns incentives between PE and management.
Earn-Outs / Deferred Payments (10–20%)
Structured over 12–36 months.
Based on retention of clients, partner transition, or hitting EBITDA targets.
Protects PE if key clients leave post-closing.
Consulting / Employment Agreements
Retiring partners often stay on in reduced roles (e.g., 2–3 years).
Provides continuity for clients and stability for lenders.
This structure balances seller liquidity with lender requirements and PE’s need to ensure ongoing performance.
7. Broader Implications for the Industry
The entry of PE is changing the culture of accounting firms:
Shift from Partnership to Corporate Governance: Decision-making moves from senior partners to boards controlled by financial sponsors.
Pressure on Margins: Debt obligations force tighter cost management.
Consolidation Wave: Smaller firms without scale risk being left behind or acquired at lower multiples.
Career Pathways: Younger CPAs may benefit from clearer advancement structures, equity opportunities, and more sophisticated training programs.
While some criticize the financialization of the profession, others see PE as a solution to succession crises and a path toward modernization.
Final Thoughts
Private equity is reshaping the CPA industry through leverage, consolidation, and operational efficiency. Sellers gain liquidity and upside potential, but also face new financial disciplines tied to debt covenants and EBITDA performance.
For firm owners, the key questions are:
How much cash vs. equity roll do I want?
Am I comfortable with lender covenants dictating operations?
Do I want a second bite at the apple, or am I seeking full retirement?
Understanding how these deals are capitalized, structured, and constrained is essential before engaging with private equity.
About Us
Ashley-Kincaid is a premier mergers and acquisitions firm dedicated to helping CPA firms nationwide grow and succeed through strategic acquisitions, while also providing exit solutions for sellers.
With deep industry experience, Ashley-Kincaid specializes in firm-to-firm mergers and acquisitions, catering to clients with gross revenues ranging from $500,000 to $15 million. If you're a CPA firm aiming to expand or considering an exit strategy, Ashley-Kincaid is your go-to partner. Schedule a Call today to explore their services and arrange a consultation.