Accounting for private equity-backed transactions: a guide for finance teams

Private equity-backed transactions (PE) can fundamentally change how a business is structured, financed and reported. For finance teams, this often means navigating a wide range of new accounting challenges at speed, while also meeting increased expectations from investors and lenders.

While private equity investment can accelerate growth, it often introduces new reporting obligations, financing structures and accounting challenges that many finance teams will not have encountered before. Understanding these issues early can help businesses avoid unexpected complexity after the transaction completes.

While every transaction is different, there are several accounting and reporting areas that repeatedly create challenges for finance teams. We explore some of the most important considerations below.

Key takeaways

• Private equity-backed transactions often introduce complex group structures and financing arrangements.
• Management incentives and share-based payments require careful accounting analysis.
• Debt and equity classification can have significant implications for reporting and covenant compliance.
• Finance teams should prepare for increased reporting requirements and investor scrutiny.
• Early planning can help avoid common accounting and reporting pitfalls.

How do private equity deal structures impact accounting and financial reporting?

One of the first challenges finance teams face is understanding the structure of the transaction itself and how that structure affects accounting and reporting obligations.

PE-backed structures are often more complex than traditional acquisitions. This could be due to the introduction of external finance arrangements, group structures or the introduction of complex earn-out instruments or management incentives. The transaction itself is also likely to put significant strain on finance teams. Finance teams need to understand not just the transaction itself, but how different layers of the group interact for accounting, regulatory and reporting purposes.

Private equity transactions can often involve the introduction of a stack of group companies, usually a Topco, Midco and Bidco. This ‘stack’ of companies typically issues a range of financial instruments (both debt and equity) down the chain until it reaches the acquiring entity (usually Bidco). The key considerations at this point for finance teams are ensuring that the appropriate transactions are recorded in the appropriate entity and instruments are correctly recorded as a liability or equity under the appropriate standards.

In addition, there may be debt covenants or additional reporting requirements as part of the structure, for example consolidation requirements, verification of key metrics and additional reporting requirements.

Incentive schemes, remuneration and other arrangements

As part of a transaction, previous shareholders post-transaction management and employees may receive equity, participate in option arrangements or be entitled to contingent payments. These arrangements can be complex because finance teams need to determine whether they form part of the consideration paid for the business or should instead be accounted for separately, for example as remuneration for future services or as share-based payments recognised over time.

Under acquisition accounting principles, certain transactions are not treated as part of applying the acquisitions method. These can include arrangements that settle pre-existing relationships between the parties, such as supply agreements, schemes or payments that remunerate employees or former owners for future services, including share-based payment awards and certain contingent payments, and reimbursements for acquisition-related costs. The terms of each arrangement need to be reviewed in detail to determine the appropriate accounting treatment.

There may also be further reporting requirements around management option arrangements in the form of employment-related securities reporting. There is both a potential registration and an annual filing requirement, so please reach out to us if you would like support understanding these requirements.

Debt vs equity classification in private equity-backed transactions

This is the most critical accounting aspect of any private equity transaction. There will likely be the introduction of various instruments which can have characteristics of both debt and equity. Seemingly equity-like instruments may need to be treated as debt, particularly where there are fixed returns or redemption obligations. It is critical that finance teams review key agreements as part of the transaction process to understand the likely accounting classification against the applicable accounting standards. It may also be worth seeking external accounting advice and preparing a detailed paper for your auditor to be reviewed in advance of the year end.

There may also be a range of practical impacts that the introduction of these financial instruments may have on the business or group. Some key examples that we have seen regularly include the impact on Capital requirements in FCA regulated businesses, potential impact on banking covenant arrangements and existing incentive plans. These considerations need to be looked at alongside the upcoming changes to FRS 102 may also affect earn-out arrangements where performance measures are linked to EBITDA or other profit-based metrics. Earn-outs should continue to be measured in line with the terms of the relevant arrangement. Those terms may include a clause that deals with the effect of changes in reporting standards on the performance metric, or they may not, so this should be established early.

One specific area to consider is the change to lease accounting, because operating lease charges may be replaced by interest and depreciation. Where EBITDA is used as an earn-out metric, finance teams may therefore need additional reporting schedules or reconciliations to bridge between statutory results and the earn-out calculation, particularly where multi-year earn-out arrangements are in place.

Purchase Price Allocation (PPA) and acquisition accounting

Acquisition accounting can introduce new requirements for finance teams, particularly where intangible assets need to be identified and valued for the first time. As part of the acquisition process, finance teams will usually need to carry out a purchase price allocation (PPA) exercise. This PPA exercise allocates the purchase price to the assets and liabilities acquired and crucially looks for separately identifiable intangible assets eg brand or customer lists that may not have been recognised previously in the target entity.

This PPA process may require expert valuation advice with differing recognition criteria across IFRS when compared to UK GAAP. There may also need to be consideration around independence requirements which may restrict your existing professional adviser from supporting you.

Accounting for transaction costs in private equity transactions

Under IFRS, acquisition-related costs are generally expensed as incurred, other than costs associated with issuing debt or equity securities. Under FRS 102, some costs may be capitalised, but only where they are directly attributable to the acquisition. Finance teams should therefore analyse the nature of each cost, who incurred it and the relevant accounting framework before determining the treatment.

Post-investment reporting requirements for PE-backed businesses

Beyond technical accounting, many finance teams experience a step change in reporting expectations following the transaction. Some examples of these pressures may include a change in accounting standard for reporting (particularly if PE fund is based outside the UK), as well as tighter and increased regular reporting requirements.

Depending on the wider group structure, there is also usually at least one consolidation requirement in the group which may be a new reporting requirement for finance teams. Consideration may need to be given around the introduction of new automated processes and whether additional resources may be required to support additional accounting and audit requirements.

Increasingly, investors are also looking beyond traditional financial reporting. Businesses may be asked to provide information on sustainability, governance and other non-financial metrics as part of ongoing portfolio company reporting, making it important to establish robust processes early.

Preparing finance teams for private equity ownership

As we’ve covered, private equity transactions can introduce a range of accounting, reporting and operational considerations for finance teams. While getting the technical accounting treatment right is essential, successful transactions often depend on much broader factors, including the quality of financial information, the effectiveness of reporting processes and the ability of the finance function to adapt to increased investor expectations.

In practice, many of the challenges finance teams face following a transaction are not purely technical. Private equity investors typically require more frequent reporting, greater transparency and faster access to reliable information. As a result, finance leaders should think beyond the immediate transaction and consider whether their reporting processes, controls, systems and resources are capable of supporting the business throughout the investment lifecycle.

The following areas are often just as important as the technical accounting considerations discussed above.

Reporting expectations under PE ownership

Private equity investors often require more frequent and more detailed reporting than management teams are accustomed to. Accurate monthly reporting, robust forecasting and clear KPI tracking can quickly become business-critical, both for management decision-making and for meeting investor expectations.

Controls and data quality

Private equity investors expect confidence in the numbers being reported. Strong controls, reliable processes and high-quality management information can help avoid surprises during the investment period and support a smoother exit process. Finance teams should consider whether existing processes are robust enough to withstand increased scrutiny.

Technology and automation

Many growing businesses find their finance systems come under pressure following investment. As reporting requirements increase, improving automation, data quality and reporting capability can help finance teams provide timely insights while reducing the burden of manual processes. Businesses may also benefit from undertaking a finance function review to identify opportunities to strengthen systems, streamline processes and enhance reporting capabilities. In many cases, investment in finance systems and reporting processes can be just as important as the accounting treatment itself in supporting future growth.

Exit readiness starts early

Many of the accounting decisions made at acquisition can have implications years later. Maintaining clear documentation, understanding the rationale behind key accounting judgements and embedding strong financial reporting disciplines from the outset can help businesses remain exit-ready throughout the investment lifecycle. Businesses that are considering a future sale may also benefit from undertaking vendor assistance work early in the process to identify potential issues and improve transaction readiness.

How Saffery can support PE-backed businesses

The accounting considerations arising from a private equity investment often extend well beyond the transaction itself. Early planning and a clear understanding of the accounting, reporting and regulatory implications can help finance teams avoid common pitfalls and focus on supporting growth under private equity ownership.

Our Transaction Services, Accounting, Audit, Tax and Sustainability teams regularly support businesses through private equity transactions and would be happy to discuss any of the issues raised in this article. Please get in touch with Tom Alun-Jones or another member of the team to find out more.