Why Private Equity/Strategics Pay More Than Accounting Firms

- Geoff Bruskin
There’s a noteworthy trend in accounting firm acquisitions: Private Equity (PE) firms and strategic buyers, including Registered Investment Advisors (RIAs) and Management Consultants, consistently offer more competitive valuations compared to traditional accounting firms. This phenomenon isn’t just about deeper pockets; it’s rooted in fundamentally different valuation approaches and business models.
Why is this happening, and what does it mean for sell-side accounting firms in today's market?
PE & Strategics: A Platform for Growth
PE firms and strategic buyers operate on a platform model that leverages diverse experience and the ability to cross-sell additional solutions. This broad-based approach allows them to see beyond the immediate financials of a company, recognizing the potential for synergy and growth within their existing portfolios. Their investment thesis often revolves around long-term value creation, utilizing a comprehensive understanding of market dynamics and operational efficiencies.
Accounting Firms: Trained Conservatism
On the other hand, accounting firms have traditionally focused on a more conservative valuation methodology, primarily anchored on historical financial performance. This approach can lead to undervaluation, especially in cases where a firm’s value is significantly tied to intangible assets like client relationships and brand reputation. Modern PE and strategic buyers, conversely, value these assets highly, seeing them as key indicators of long-standing trust and loyalty that can be leveraged for future growth.
Understanding the Multiples
The disparity in valuation becomes even more apparent when examining the multiples paid for firms, particularly in the context of their earnings before interest, taxes, depreciation, and amortization (EBITDA). For low market firms with under $1 million in EBITDA, multiples can range from 1x to 1.5x gross revenue, and lower middle market firms, with EBITDA between $1 million and $10 million, see significantly higher multiples, ranging from 4x to 11x EBITDA when evaluated by PE and strategic buyers.
These higher multiples reflect a recognition of the intrinsic value beyond just the numbers. They indicate a willingness to invest in firms with strong, trust-based client relationships and a solid foundation for future growth, areas where accounting firms’ traditional valuation methods may fall short.
Here are a few comprehensive cross-selling opportunities to considerate:
Implications for Sellers
For business owners considering a sale, understanding these dynamics is crucial. Aligning with buyers who appreciate the full spectrum of your business’s value can lead to significantly better outcomes. As the market continues to evolve, we encourage our clients on the sell-side to explore all avenues and consider the broader strategic fit of potential buyers, not just the initial valuation figures.
Conclusion
In conclusion, the valuation gap between PE/strategics and accounting firms is more than just a difference in numbers; it’s a reflection of fundamentally different perspectives on what constitutes value in a business.
At White Tiger Connections, we we ensure you get the highest possible valuation for your firm. Don’t let your hard-earned success go to waste.
Book a call with us today and let us help you secure a legacy-defining deal!
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