what’s your firm worth? private equity wants to know

businessman holding box with money flying out of it

the m&a picture has changed.

by 卡塔尔世界杯常规比赛时间 research
rosenberg survey

you probably thought you’d never hear these three words together, but here they are: accounting is hot.

this isn’t to say that cpa practices have six-pack abs and saucy haircuts. they don’t. but as far as markets go, accounting firms are hot items for investors looking to snatch up profitable organizations.

more: the new pipeline: outsourcing and offshoring | is this the last year of accounting’s golden age?
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the attraction is the consequence of two years of double-digit growth – the golden age of the accounting industry. revenues jumped in 2022, and then they jumped again in 2023. and 2024 ain’t looking too bad, either.

according to the 2024 rosenberg national survey of cpa firm statistics – the 26th edition of the gold standard analysis of the industry – fee growth in 2023, excluding mergers, ranged from 3.2 percent for firms billing under $2 million, to 11.4 percent for firms with over $20 million in billings.

fees per person in 2022 ranged from an average of $162,110 at the smallest firms to $225,169 at the big ones. significantly, realization – net fees divided by gross fees – ranged from 93 percent among the small, about 90 percent among the midsized and 87 percent among the huge.

numbers like that attract the attention of private equity investors. as charles hylan, managing director of the growth partnership, which produces the annual survey, notes in his “forward” to the survey, “pe sees tremendous value in the accounting profession and continue to make investments.”

how tremendous?

just how tremendous the value is depends on how one measures values. it’s complicated.

  • cpa practices are operating under a variety of new models.
  • the application of technology, so varied and quickly changing, isn’t easy to assess.
  • business may be great, but succession is a crucial issue.
  • staff is hard to hire and easy to lose.
  • mergers and acquisitions can impact all of the above – and vice versa.

and when private equity cash flows in, everything changes and interacts.

as marc rosenberg, of rosenberg associates, says in the observations section of the survey report, “one thing that pe transactions have made abundantly clear, and something i’ve been saying for 20 years: cpa firms are worth way more than the piddly one times fees (or less) that have typified cpa sales for decades.”

pe firms may be looking only at the traditional metrics of value, but their money’s still green, and their injection of investment funds is making m&a more difficult for accounting firms looking to acquire what they lack.

terry putney, of whitman transition advisors, offers a detailed comment in the survey:

“many traditional firms that have historically relied on m&a as a significant growth strategy have resigned themselves to the fact that they will have difficulty competing with pe on many acquisition opportunities. whereas there are about a dozen well-known pe firms that have acquired and are operating accounting firms, there are two to three times that many seeking to enter the market. i think it’s fair to characterize the current market as a feeding frenzy within pe.”

so some pe firms may be diving into a feeding frenzy with a weak awareness of all the variables that are fomenting turmoil in the accounting industry.

jennifer wilson, at convergencecoaching, says, “i fear that pe firms are overpaying for their equity stakes (and driving firm prices up for acquirers) and that realization will begin to dawn on some of them who realize there might not be a flip in sight.”

in other words, to some extent pe is adding even more turmoil to the ongoing turmoil, more mud to the muddy waters of valuation. but that doesn’t mean that anybody’s eschewing the frenzy. by all accounts, private equity’s here to stay, and more’s on the way.

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