Accounting firms are indispensable partners for private equity (PE) firms. The financial intricacies of the private equity industry demand expert knowledge of the tax code and a rigorous approach to financial decision making.
This need for expertise holds true at all stages of the private equity lifecycle, from fundraising to exit. There are multiple dimensions to the support an accounting firm provides. Typical services include supporting due diligence, managing compliance and tax strategy for portfolio companies, and advising private equity firms on tax efficient exit strategies.
Very few accounting firms possess the capabilities required to simultaneously manage such a broad range of accounting and advisory needs. At Smith + Howard, we’re proud to partner with private equity firms and their portfolio companies nationwide. Our partners have led countless engagements with private equity firms over recent years, and stand ready to support the ever-changing needs of PE firms across the United States.
Keep reading to learn about the various ways Smith + Howard partners with private equity firms and discover how your firm stands to benefit from working with our team.
Smith + Howard is a nationally recognized accounting and advisory firm as a Best of the Best firm in the nation by INSIDE Public Accounting for the last 13 years. Smith + Howard was also named one of America’s Best Tax and Accounting Firms for 2022 by Forbes, based on recommendations by clients and peers.
At Smith + Howard, we’re proud to support private equity firms and their portfolio companies throughout the entire spectrum of the typical private equity engagement. From assisting private equity firms with due diligence and transaction advisory services to structuring exits for optimum financial benefit, our partners have the experience necessary to deliver successful outcomes.
Core to our success is our team’s innate understanding of the private equity model. Our partners understand the importance of tax efficiency at all stages of the value creation process and appreciate the distinction between book and taxable income.
With years of practical experience advising private equity firms, Smith + Howard is a partner you can trust to guide your firm through complex tax requirements, compliance, and operational challenges. Read on to learn more about the services we provide.
For a private equity investment to be successful, it’s crucial to embrace a robust process of analysis and evaluation before committing to a transaction. Conducting effective financial due diligence often requires an assessment of internal financial controls, complex financial modeling, and a risk management evaluation, among other elements. With these insights, private equity firms can assess the data they need to determine whether a potential investment makes fiscal sense.
Perhaps equally important, but often overlooked, is structuring the transaction and the resulting entity in a tax-efficient manner. Many private equity portfolio companies are structured as pass-through entities. Partnerships are particularly popular owing to the tax benefits they afford both the buyer and the seller. The seller can roll part of their equity tax-deferred, while the private equity firm gets a step up in basis and the ability to amortize intangibles such as goodwill 15 years under Section 197. Given the typical five to seven-year holding period, this affords private equity firms an attractive write off to their taxable income.
A key element in successful private equity investments is structuring deals to provide an optimal tax strategy, both throughout the ownership period and when the private equity firm ultimately exits the investment. Doing so requires both a strategic appreciation of the private equity environment as well as in-depth domain expertise––qualities the Smith + Howard team has in abundance.
Once a private equity firm closes a transaction, it typically manages the new asset for several years, focusing on growing EBITDA and improving book value. This process may involve investing in new technologies, folding in acquisitions of complementary companies, and various other strategies that can trigger tax and financial considerations.
Throughout this process, the goal is to maximize book income while minimizing taxable income. Various operational strategies can be executed with the support of an experienced accounting firm, including taking bonus depreciation and claiming significant tax deductions for major expenses that can be capitalized on book.
In addition to the tax considerations of the portfolio company itself, there’s also the question of the individual tax returns of the private equity firm partners. As portfolio companies tend to be structured as partnerships, the income they generate passes through to individual partners. Ensuring this income is taxed at the long-term capital gains rate, rather than the personal income rate, using strategies like the carried interest loophole should be a key focus for tax advisors. However, this holistic approach is often neglected by larger firms that take a more siloed approach, resulting in unnecessarily high tax bills for partners.
As a private equity firm prepares for the sale of an asset, there are a variety of tax considerations that must be kept in mind to ensure funds meet their objectives and maximize their after-tax cash. An experienced accounting firm can compute various scenarios and advise on how to best structure transactions to optimize net returns. In these scenarios, it’s important to consider the interest expense limitations specified under Section 163(j) as well as any related implications on a case by case basis.
Another element of this phase of the private equity lifecycle is preparing for a smooth handover to the new owners of the asset. During closing, it’s beneficial for sellers to provide buyers with an outline of the current tax strategy, including elements such as amortization schedules and tax credits. Uncovering these opportunities also enables private equity funds to apply new levers in the negotiation phase.
Successfully creating value in private equity requires a delicate balance of strategic vision and tactical expertise that enables funds to pull all available growth levers. At Smith + Howard, our team brings this blend of skills––providing expertise advising on the deal side as well as the in-depth knowledge of the tax code required to maximize financial performance.
Smith + Howard has a proven track record working with private equity firms across the nation. We pride ourselves on the accessibility of our partners, the rigor and skill of our team, and our appreciation of the connection between business and personal tax issues.
We take the time to explain complex concepts in relatable language, have access to technical expertise through our membership in an alliance, and focus on going above and beyond to deliver enduring value for our clients.
To learn more about Smith + Howard’s services for private equity funds, contact an advisor today.
If you have any questions and would like to connect with a team member please call 404-874-6244 or contact an advisor below.CONTACT AN ADVISOR