You’re Not Being Outcompeted. You’re Being Outfinanced.
The bidder who beat you probably isn’t better at running the business. He borrows 200 basis points cheaper and doesn’t have to pledge his house.
The claim. If you own a business and keep losing to bidders who pay more than the numbers justify, you are probably not being outperformed. You are being outfinanced.
The evidence. Roughly half of historical buyout returns came from leverage rather than operations. Small firms are approved for credit at 37% under $100K of revenue versus 76% above $10M, pay roughly 200 basis points more, and 59% pledge a personal guarantee.
The correction. The tax code is not the villain here — two provisions everyone blames actually favor small firms. The advantage is access to capital and its price, which is a harder problem and a more honest one.
Yesterday, one top-ten accounting firm agreed to buy another for $5 billion in cash — $55.00 a share, about a 54% premium. Both sides are backed by outside capital. The combined firm becomes roughly the fifth largest in the country.
I am a CPA in Overland Park with a small team. I am not in that transaction. But I am in the market where it happens — a firm my size is exactly what these platforms acquire, and the phone calls are real. So this is not a complaint. It is me working out the buyer’s math, on the theory that anyone who might one day be on the other side of that table ought to understand where the return actually comes from.
Doing that math clarified something I had been explaining to clients badly for years.
When I plan, I don’t think about tax rates. Tax is a cost of capital. So is inflation. So is your borrowing rate. Of those three, the only one anybody argues about in public is the one that matters least to the outcome.
Which brings me to the conversation I keep having. A client loses a building, or a book of business, or a competitor gets acquired and immediately starts outspending him on people and software. He wants to know what he did wrong.
Usually the answer is nothing. He was more expensive to finance than the other guy, and that difference has almost nothing to do with how well either of them runs anything.
The gap, measured
This is the part I can put numbers on, and they are not close.
Read the last block again. A median small business borrowed at or above the high-yield corporate bond rate. Not investment grade — junk. That is the price of being small, and it is charged to businesses that in most cases carry far less leverage and default far less often than the issuers in that index.
And the guarantee is the part that never shows up in a rate comparison. A corporate borrower pledges the company. Your client pledges the company and signs personally — which means the true cost of his capital includes his house, and no spreadsheet prices that. Federal regulation requires it on SBA loans: holders of at least a 20% ownership interest generally must guarantee.
Where the returns actually came from
If cheap capital is the advantage, you would expect to find it in the returns. You do.
The cleanest peer-reviewed decomposition looked at 395 buyout deals from 1991 to 2007. Of a mean gross deal IRR of 56.1%, the authors attributed about 50% to higher financial leverage, about 16 percentage points to simply being exposed to a rising sector, and about 34% to firm-level performance that beat comparable public companies. Practitioner work by StepStone and McKinsey puts leverage plus multiple expansion at 59% of returns on 2010 to 2022 deals.
So roughly two-thirds of the historical result came from the financing structure and the direction of the market. A third came from running the business better. That third is real — I am not saying these are not capable operators. I am saying the scoreboard has been measuring two different things and reporting one number.
The most honest statement of this comes from the industry’s own advisor. Bain now frames the problem as “12 is the new 5”: the same 2.5x return that required about 5% annual EBITDA growth during the 2010s now requires 10–12%. That is a concession that the previous decade’s returns came substantially from conditions rather than from operations, published by the people who advise the buyers.
When the tailwind stops, you find out what was skill. The industry is finding out right now, in public, and its own consultants are the ones saying so.
What I got wrong: the tax code isn’t the villain
I started this piece expecting to find the advantage written into the Internal Revenue Code. I went looking for it specifically. It is not there, at least not in the two places everyone points.
The interest deduction limitation. Section 163(j) caps the business interest deduction at 30% of adjusted taxable income — and businesses with average annual gross receipts under $32 million for 2026 are exempt from it entirely. No cap, no computation, no carryforward. That is strictly better treatment than a large leveraged borrower receives. The 2025 tax act did restore a more generous measure of income for the companies still subject to the cap — but it also tightened the rules in two other respects, and the statute draws no distinction based on who owns the borrower.
Carried interest. Section 1061 requires a three-year holding period for a fund manager’s carried interest to qualify for long-term capital gain treatment, against one year for any ordinary investor. Measured against other investors, that is a penalty, not a loophole. The real argument about carried interest is whether it should be taxed as wages rather than as capital gain at all — a legitimate argument, but a different one, and anyone citing the three-year rule as evidence of favoritism has it backwards.
I could have left this section out. I am including it because it makes the actual argument stronger by elimination: the advantage is not a tax subsidy. It is access. Which is harder to legislate away and therefore more durable.
The gate that drifted open
There is one place where policy is doing quiet work, and it is the same mechanism I wrote about last time: a dollar figure nobody updates.
To invest in most private funds you must be an “accredited investor” — $200,000 of individual income, $300,000 joint, or $1,000,000 of net worth excluding your home. Those figures were set in 1982 and 1988. They have never been indexed. Here is the SEC’s own staff, on the record:
the percentage of U.S. households that qualify as accredited investors has grown steadily in the four decades since the definition was adopted, which appears to be largely due to the fact that the natural person accredited investor thresholds have not been adjusted to reflect inflation.— SEC staff, 2023 Report on the Review of the Definition of “Accredited Investor”
The numbers in that report: qualifying households went from 1.8% in 1983 to 18.5% in 2022, and are projected to reach 49.2% by 2042. Had the thresholds been indexed from 1982, the 2022 figure would have been 5.7% — and the net worth test would read $3,037,840 rather than a million dollars.
Note carefully which direction that cuts, because it is not the obvious one. The gate is getting wider, not narrower. Nobody voted to open it. It is opening because a number from 1982 sat still while the dollar moved, which means “accredited investor” no longer describes the population it was written to describe. Meanwhile the one related threshold that is indexed — the qualified client test governing performance fees — just rose in June 2026, which tightens things for fund managers.
I don’t have a policy recommendation there. I have an observation: the boundary between the world that borrows at 4.73% and the world that borrows at 7% is being redrawn by inflation rather than by anybody’s decision. That is the same mechanism that quietly raises your taxes, running in a different direction.
Now my own profession
I would not write this piece if it were only about other people’s industries.
As of June 2026, 10 of the 20 largest US accounting firms will be private-equity-backed once pending deals close. Of the 26 fastest-growing firms in this year’s industry rankings, only three have no PE connection. All five new entrants to the 2026 Top 100 used outside capital. Across the last decade the tracked deal flow runs to roughly 473 acquired firms and $49 billion of transacted enterprise value. No Big Four firm has taken PE capital.
The multiples tell the story better than the counts. Citrin Cooperman sold at a reported 11x EBITDA in 2021 and changed hands again in January 2025 at a reported ~15x — private equity selling an accounting firm to private equity. And the capital does what capital does: Baker Tilly’s sponsors are reportedly weighing a dividend recapitalization of up to $1 billion, funded with additional debt.
I want to be fair about why partners sign these deals, because the reason is real and it is not greed. Internal succession is breaking. The 2025 Rosenberg Survey found the average multiple used for internal partner retirement buyouts fell from 78.4% to 76.9% of revenue — internal values drifting down exactly as external bids climb. If your firm owes twenty years of retirement payments to partners and a buyer offers to fund them today, that is not a moral failure. It is arithmetic.
And it has a cost that lands on people who did not vote. Roughly 350 retired Grant Thornton partners were told their lifetime payments would be converted to a lump sum, and disputed the discount rate used to value it — in some cases, they said, coming up short by a million dollars or more. Whatever you think of that dispute, notice the mechanism: a discount rate chosen by one party determined what the other party’s thirty years were worth.
The regulators are watching and have not concluded anything. A PCAOB board member said in October 2025 that “by their very nature, the interests of private equity investors have the potential to reshape incentives for auditors in a way that prioritizes an accounting firm’s profits over audit quality”. The SEC’s chief accountant said in December that such structures “introduce risks, particularly with respect to audit quality and independence.” The AICPA’s proposed revisions to its rules on these structures went out for comment in December 2025 and, as of this writing, have not been adopted.
The detail that stopped me cold is from the California Board of Accountancy’s staff report: “Staff has learned that some APS firm leadership are instructing employees not to use the CPA designation in any public-facing materials” — websites, email signatures, social profiles. The license is the product. I don’t know the reasoning behind that instruction and the report doesn’t give it. But it is the kind of detail that suggests the two sides of a deal can walk away with different ideas about what was bought.
In fairness, and this matters: as of July 2026 there is no published peer-reviewed study and no PCAOB inspection data establishing that PE-backed firms deliver worse audit quality. Three regulators are asking the question. None has answered it. Anyone who tells you the answer is already in is telling you something the record does not support.
What this means if you own something
I am not going to tell you what to do with your business, and I am certainly not going to tell you what to invest in. But these are the questions I am asking about my own firm, and they change once you accept that the contest is over financing rather than operations.
- Know which game you’re in. If a bidder’s return math depends on leverage you cannot access at a price you can match, getting better at operations does not close that gap. It may still be the right thing to do — but not as a strategy for winning that auction.
- Price the guarantee. Most owners compare interest rates. Almost nobody prices what it costs to have their house inside the deal. If you would not lend your own home equity to your business at that rate, you have learned something about the rate.
- Read the offer for its financing, not its number. When a buyer’s return depends substantially on debt, that tells you something about what happens to the business afterward — the debt does not disappear at closing, and dividend recaps are a documented feature rather than an aberration.
- Compete where scale doesn’t help. The advantage is real in businesses where consolidation creates genuine procurement, technology, or overhead leverage. It is much weaker where the product is judgment, relationship, or local presence. That is a strategic question, and it is answerable.
None of that requires believing anything about private equity as an institution. It requires pricing your capital honestly, which is the same thing I would tell you about any other input.
The strongest arguments against me
Four, and the first two are the ones that would give me the most trouble.
1. Small lenders are the generous ones
If scale were the whole story, big lenders would approve more. They approve less. In the same Fed survey, small banks fully approved 57% of applications and large banks 43%. Community development lenders had the lowest full-approval rate of any category at 27%. And the headline access picture is not bleak: roughly 81% of applicants got at least partial approval, 51% of all firms had their funding needs fully met, and of the firms that didn’t apply, 63% said they didn’t need financing. Scale cuts more than one way.
2. The survey measures the borrowers who got in the door
The 6.75% median small business term loan rate is below the 6.92% average prime rate in the same quarter, which tells you that the lending survey’s respondents are prime-quality bank borrowers. The marginal borrower — the one who was denied, or who went to a merchant cash advance — pays far more than these figures show. That cuts in my favor on severity but against my precision, and I would rather say so than let a clean number do work it hasn’t earned.
3. The capital is solving a real problem
Accounting degrees awarded fell 6.6% in 2023–24, and new CPA exam candidates dropped from 42,626 in 2023 to 28,082 in 2024. Firms face a genuine succession and technology funding gap, and outside capital demonstrably addresses it — Top 100 revenue growth nearly doubled year over year, driven by PE-backed platforms. Independence has a cost too, and pretending otherwise would be dishonest. (Encouragingly, program enrollment rose 12.4% in spring 2025, the highest since 2020.)
4. Fund valuations are conservative, not inflated
I expected to find that private-market marks were flattered. The research says the opposite: reported valuations tend to understate subsequent distributions, and buyouts have exited above their last carrying value roughly 70% of the time over the past decade. The defensible critique of private-market reporting is about staleness, understated beta, and how IRR is calculated — not that the numbers are fake. I dropped that section rather than make an argument the evidence wouldn’t hold.
Questions
Open any of these for the answer and the source.
Where do you sit in this?
Independent practice, no outside capital taken. I am also squarely the kind of firm this market acquires, which makes me a potential participant rather than a neutral observer. Weigh that in both directions — it gives me a reason to look closely and a reason to want the numbers to come out a particular way.
Which is why the piece runs on figures from the Federal Reserve, the SEC, the PCAOB, a peer-reviewed finance journal and the buyers’ own advisors rather than on my opinion, and why the four strongest counterarguments are in it. If an argument only works when I am the one making it, it is not an argument.
Are you saying private equity is bad?
No. I am saying something narrower and testable: a meaningful share of the historical return came from financing structure and market direction rather than from operating skill, and the ability to access that financing is distributed very unevenly by firm size. Both halves of that are sourced.
Capable operators exist on both sides. The third of buyout returns that came from genuine firm-level improvement is real. My argument is about what the scoreboard is actually measuring, not about anyone’s character.
What would change your mind?
Two things. If return attribution research showed that operating improvement, not leverage and multiple expansion, drove most buyout returns, the core of this collapses. I looked specifically for that and found the opposite — but the recent-vintage evidence is thinner than the historical evidence, and Bain’s own “12 is the new 5” framing implies the mix is being forced to change.
And if the small-business cost-of-capital gap narrowed materially, the practical stakes shrink. Worth watching: the gap in Q4 2025 was roughly 200 to 245 basis points against investment grade.
Should I sell to a consolidator?
That depends entirely on facts I don’t have, and anyone who answers it from an article is guessing. What I would say is that the question is usually framed wrong. The interesting question is not “is the price good” but “where does the buyer’s return come from” — because that determines what happens to the business, the staff, and any deferred portion of your own consideration after closing.
If the answer is largely leverage, the debt is still there on Monday. Ask what the capital structure looks like, ask about dividend recapitalizations, and get the discount rate applied to any deferred or retirement obligation in writing. The Grant Thornton retiree dispute was fundamentally an argument about a discount rate.
What did you cut from this piece?
Four things, because the evidence didn’t support them. An argument that market concentration is broadly rising — the literature got materially shakier this year, including a Federal Reserve note warning that the standard datasets “likely render spurious most cross-sectional relationships,” and local concentration actually fell in industries covering 78% of employment. An argument that fund valuations are inflated — they are not. An argument that carried interest and the interest deduction are the mechanism — both cut the other way on their face. And a long section on stepped-up basis, which is its own subject and deserves its own piece.
Sources
Everything above is linked in place. Collected here so the record can be checked without hunting through the piece.
- Federal Reserve, Small Business Credit Survey: 2026 Report on Employer Firms — approval rates by revenue, collateral and guarantee data, denial reasons. Noted by the Fed as a convenience sample.
- Federal Reserve Bank of Kansas City, Small Business Lending Survey, Q4 2025 — median new term loan rates.
- 13 C.F.R. § 120.160(a) — SBA personal guarantee requirement.
- Acharya, Gottschalg, Hahn & Kehoe, “Corporate Governance and Value Creation: Evidence from Private Equity”, Review of Financial Studies 26(2), 2013, 368–402. 395 deals, 1991–2007.
- Bain & Company, Global Private Equity Report — the “12 is the new 5” framing on required EBITDA growth. StepStone and McKinsey attribution of 59% of 2010–2022 returns to leverage plus multiple expansion.
- Rev. Proc. 2025-32 — the $32,000,000 small-business gross receipts threshold for the § 163(j) exception, tax year 2026.
- IRC § 1061 — the three-year holding period for carried interest.
- SEC staff, 2023 Report on the Review of the Definition of “Accredited Investor” — the non-indexation acknowledgment and the 1.8% to 18.5% to 49.2% projections.
- 17 C.F.R. § 230.501(a) — the current income and net worth tests.
- CFO Brew — 10 of the top 20 US firms PE-backed once pending deals close, June 2026.
- Accounting Today — the 2026 fastest-growing firms; and the $5 billion Grant Thornton–CBIZ transaction, announced July 29, 2026.
- CPA Trendlines / Bay Street Group PE Deal Tracker — cumulative deal counts and transacted enterprise value since 2016.
- Bloomberg Tax — the proposed Baker Tilly dividend recapitalization, July 2026.
- 2025 Rosenberg Survey — internal partner retirement multiples falling from 78.4% to 76.9% of revenue.
- PCAOB Board Member George R. Botic, October 2025.
- SEC Chief Accountant Kurt Hohl, December 2025 (carries the standard no-legal-force disclaimer).
- California Board of Accountancy staff report, September 2025 — on the CPA designation being withheld from public-facing materials.
- IESBA staff alert, July 2025, and the NASBA Private Equity Task Force white paper.
Josh Mauer, CPA
Founder, Josh Mauer CPA LLC · joshmauercpa.com
This piece is opinion and analysis by a certified public accountant. It is not tax, legal, accounting, or investment advice, and it is not a recommendation to buy, sell, or hold any security or interest in any fund, business, or property. It does not evaluate any specific transaction, sponsor, or firm as an investment. Readers considering a sale, acquisition, or financing should obtain advice specific to their circumstances, and questions about securities regulation or the terms of a private offering belong with a licensed attorney or appropriately registered adviser.
Disclosure of interest: I own and operate an independent CPA practice that has not taken outside investment, and a firm of my size is the kind of firm the platforms described here acquire. That makes me a potential participant in this market rather than a disinterested observer, and readers should weigh it in both directions. Nothing here is intended as criticism of any named firm or investor, or of any partner group’s decision to take outside capital — the succession arithmetic that drives those decisions is real and is described in the piece. My interest is in understanding where the return comes from.
Every factual claim links to a primary document, a government source, a peer-reviewed journal, or a named industry publication. Where the evidence contradicted my expectations — on tax treatment, on fund valuations, and on market concentration — the correction appears in the body rather than in a footnote, and the material that did not survive verification was removed rather than softened.