Private equity (PE) buyout offers can appear highly attractive to CPA firms, promising large valuations and growth opportunities. However, sellers must be cautious and scrutinize the fine print of the Letter of Intent (LOI) and transaction documents. Vague terms in the LOI often lead to new “deal points” surfacing in final purchase agreements, potentially leaving sellers with less equity and a lower effective valuation than initially presented.
Below are five critical reasons CPA firms should approach PE offers with care, negotiate key terms upfront, and ensure clarity before signing.
1. Large Valuations Mask Complex Transaction Structures
Private equity buyers often offer strong valuations for “platform” sized CPA firms, calculated as a multiple of earnings based on the firm’s characteristics and size. This big sticker price grabs attention, but the transaction structure tells a different story:
Breakdown: Most PE offers consist of:
- 40–60% cash at close
- Rollover equity (equity retained in the new business)
- Earnouts (contingent payments tied to performance metrics)
Reality: Sellers must understand that only a portion of the valuation is immediate cash at close, with the rest locked in equity and contingent payments, reducing the upfront payout and adding risk.
For context, see our full business valuation guide to understand how to truly value your CPA firm.
2. Rollover Equity Terms and Earnouts Tilt the Scale
Private equity firms design transaction structures to protect their investments, often making it difficult for sellers to retain equity and achieve the full valuation promised. Key terms of the two components—rollover equity and earnouts—illustrate how these mechanisms favor PE buyers:
- Rollover Equity and Protective Covenants: Sellers are often required to reinvest a portion of their proceeds into the new business through rollover equity. However, during negotiations of rollover equity documentation, LLCA, and other operating agreements, PE firms introduce protective covenants. These strict covenants routinely include clawback provisions that allow PE to reclaim equity if selling partners fail to meet benchmarks, such as maintaining fee production. These covenants ensure PE’s investment is secure, but they place a heavy burden on sellers to meet ongoing performance targets to keep their equity.
- Earnouts: Earnouts are deferred payments, typically spread over 2-3 years, tied to performance metrics like revenue or earnings growth. While they form part of the valuation, earnouts are contingent on hitting often ambitious targets. If these goals are not met, sellers may never receive the full amount promised, reducing the effective payout.
Learn more about the impact of earnings on valuation and how performance benchmarks can affect your final deal value.
Impact: These structures—protective covenants and earnouts—ensure PE firms minimize risk while maximizing control. Sellers and incoming partners must work exceptionally hard to preserve their equity and realize the deal’s full value, often under terms that heavily favor the PE buyer.
3. Leadership Transitions Sideline Existing Partners
Private equity firms rarely appoint existing managing partners as CEOs of the new platform:
- Scale Matters: PE aims to build firms with $100+ million in revenue, preferring leaders with P&L experience at that level. Few CPA firms are this size, so many managing partners are overlooked for platform leadership roles.
- Standard PE Playbook: PE installs external leaders, often sidelining partners who value autonomy and firm identity, altering the firm’s direction post-deal.
4. Cultural Clashes from Non-Accountant Leadership
Private equity firms prioritize rapid growth through acquisitions, often at the expense of firm culture:
- Leadership Misalignment: PE typically hires leaders without CPA experience, increasing the likelihood of culture clashes and disrupting firm dynamics.
To preserve firm identity during a transition, see our guide on leadership transitions and protecting CPA firm culture.
- Acquisition Focus: Their strategy—buying multiple firms and combining them—overlooks the nuanced partnership structures and client relationships unique to CPA firms, risking operational discord.
5. Debt-Fueled M&A Harms Long-Term Value
The private equity playbook involves acquiring firms and merging them to create a larger business for a larger exit multiple, but this approach has downsides:
- Debt Burden: PE finances acquisitions with debt, creating principal and interest fixed charges that strain free cash flow and limit investments in the core business.
- Integration Failures: Combining CPA firms is complex due to partnership dynamics (equity vs. non-equity partners) amid many other reasons. But ultimately, poor integration leaves firms fragmented, undermining value and increasing equity risk.
Negotiate Early, Protect Your Interests
CPA firms must be wary of private equity buyout offers and address these concerns before or shortly after signing an LOI. Large valuations can obscure complex structures, protective covenants, and operational risks that erode equity and value.
Sellers should negotiate cash-at-close terms, clarify earnout conditions, and assess leadership and debt implications upfront. By reading the fine print and securing favorable terms early, firms can avoid unfavorable surprises at closing and safeguard their legacy.
For more insight, read about the financial implications of CPA firm succession to make an informed decision.
At GreenGrowth CPAs, we take a different approach. We help CPA firm owners transition on their terms—with flexible deal structures, client-first integration, and legacy preservation at the core.
Ready to explore a better succession plan? book a confidential, no pressure call. It’s your legacy—we’re here to help you protect it.
