The Second Bite of the Apple: Why Your First Private Equity Deal Depends on Modeling the Second

The private equity wave reshaping the accounting profession shows no signs of slowing. Over the past five years, sponsors have acquired stakes in firms representing billions in combined revenue, fundamentally changing the ownership structure of a profession long defined by partner-driven capital and internal succession. For many firms, the appeal is obvious: liquidity, growth capital, professionalized infrastructure, and a resolution to succession challenges that traditional partnership models struggle to solve.

Alongside those benefits, one phrase has become central to how these deals are modeled: the “second bite of the apple.” In a transaction, partners are encouraged to take some liquidity today, roll a portion of their equity, and participate in an even larger exit when the sponsor sells the firm four to five years later.

In theory, this sounds like a positive: solid exit liquidity for a retiring generation of partners, and an opportunity for the next generation of the firm’s leadership to have not just one, but two significant financial events. However, the risk lies in how rarely firms model what that second bite means for the people who will own and lead the firm after the first generation has exited.

Firms subject the first transaction to exhaustive scrutiny. Valuations are negotiated, tax implications analyzed, and legal structures carefully reviewed. Yet the second transaction, the one that determines whether equity rollovers were worthwhile and whether compensation trade-offs created durable wealth, remains largely unexamined. It exists as a narrative rather than a concrete set of numbers.

The Architecture of the Second Transaction

When a private equity sponsor acquires a stake in a firm, it typically introduces a capital structure designed to operate across multiple ownership cycles. The sponsor provides capital, an acquisition engine, and a growth thesis. In return, it receives contractual and structural priority over how future enterprise value will be distributed.

Those priorities come into force at exit. Whether the firm sells to another sponsor, a strategic acquirer, or recapitalizes, return hurdles, preferred economics, and waterfall provisions shape how much of the enterprise value created during the holding period flows to the sponsor and how much flows to continuing partners.

In many real-world structures, a substantial majority of the enterprise value created between the first and second transaction accrues to the sponsor rather than to the continuing partners, even when those partners retain meaningful nominal equity. That outcome means that today’s ownership decisions therefore determine not only who receives liquidity now, but also who will truly own the value created over the next decade.

Why Equity Retention Compounds Across Transactions

One of the most consequential decisions in a private equity transaction concerns how much of the firm is sold.

A firm that sells 30 percent of itself is making a very different bet than a firm that sells 70 percent. Yet those choices often get framed as questions of how much liquidity partners want today rather than how much of the enterprise they intend to give up permanently.

Across two transactions, the difference becomes decisive. Partners who retain 70 percent of the firm’s equity participate in most of the future growth. Partners who retain 30 percent own only a residual claim on it. Over successive exits, that gap widens.

The same compounding applies to valuation mechanics and deal terms. Multiples, waterfall structures, preferred returns, and dilution protections carry forward from one transaction to the next. Concessions made to close the first deal become embedded in every outcome that follows.

Most firms never see these dynamics because they never model them. By the time the second transaction approaches, the structure is already fixed.

How Different Partners Experience the Same Deal

These dynamics affect partners differently depending on where they sit in the ownership lifecycle.

A founding partner in their early sixties uses the transaction to monetize a lifetime of work. Liquidity and certainty take priority. What happens after they leave matters, but it does not shape their financial result.

A mid-career partner accepts reduced current income (the scrape) and partial loss of control in exchange for the potential of future equity appreciation. Their outcome depends on whether the second transaction delivers what the first implies.

A newly admitted partner had little to no voice in the deal. Their ownership stake is small. Their entire professional future now runs through a capital structure they did not design, and yet they have to live.

What can cause tension is that each cohort operates under a different psychological frame. Senior partners seek closure. Mid-career partners seek optionality. Rising partners seek belonging and along-term stake. A single ownership system now has to accommodate three incompatible mindsets. Modeling the second bite provides the only way to reconcile those differences.

What Firms Should Be Modeling

Second-transaction analysis belongs at the center of any ownership decision. Before committing to private equity, firms benefit from modeling the economic implications of at least two full ownership cycles. That includes projecting enterprise value growth, sponsor return requirements, dilution, and exit mechanics across different equity-retention scenarios. It also includes tracing outcomes for senior, mid-career, and rising partners under realistic assumptions.

This work supports a more robust, informed negotiation process. Firms that understand how value will flow in the second transaction can see which terms in the first deal preserve long-term ownership and which quietly transfer it. Without that visibility, deal discussions rely on narratives rather than economics.

Ownership structures that work across generations do not emerge by accident. They emerge from rigorous analysis.

Where the Real Work Begins

Modeling the ‘second bite of the apple’ reveals whether the promise of long-term ownership holds up under real economic conditions. Firms that treat ownership as a multi-generation system rather thana one-time liquidity event tend to make better decisions, retain stronger leaders, and build enterprises that endure beyond any single transaction.

At Winding River Consulting, this has become a core part of our focus. We advise firms navigating live transactions: modeling not just what happens at close, but what happens after, when the first generation has exited and the real test of ownership begins. If that’s a task your firm needs assistance with, contact us today.