The first article in this series discusses aspects of the history of accounting firm mergers and acquisitions. The evolution of firm ownership continues to advance with Private Equity (PE) active in the acquisition of accounting businesses. What lessons can be gained from the Consolidators?
PARTNER DISCONNECT
I have interviewed several partners who sold their accountancy firms to the UK consolidators. These companies largely acquired firms based on a multiple of gross recuring fees (GRF). One times was often the benchmark. Therefore, there was the possibility that the managing partner might pressurise partners to bill, bill, bill prior to sale negotiations. I encountered one instance where partners were advised that any overbilling could be addressed post completion by issuing credit notes.
The CEO of the newly Alternative Investment Market (AIM) listed company was often someone closely connected with the firm that had been the anchor of the consolidation. Sometimes the managing partner of that firm was seen as a leader of the enlarged entity. In the early UK consolidation movement, there was evidence of an unwillingness to follow and implement the leadership demands. Partners reported:
Ongoing requirements including:
- To meet chargeable time targets
- To meet billing targets
- To improve job margin
- To improve cash collection
- To attend more management / admin meetings
- To sell more of the new services that the company was now offering
However, there were partners, who having sold their ownership in the firm, lacked the interest or motivation to follow the demands of leaders with whom they had no prior contact and little relationship or rapport. In other words, in selling, partners achieved a financial objective in realising ‘best value’ for their share in their business and now wished to soft peddle into the retirement phase of life. Put another way some were in switched-off mode.
MARKET REPORTING
Partners in the early UK AIM listed consolidations found their new hierarchy was required to bend the knee to the markets. In my own situation the firm that acquired my company was struggling. The CEO asked all former owners to take a two-month pay cut to boost reported profits. I complied with the demand but never knew how many others declined. I am not sure how much time passed before the company had to arrange a pre-packaged sale. – only to be acquired by Vantis, the latest AIM listed consolidator. Part of my original sale consideration was in cash and the balance in £1 shares. This share value on completion was £1 shares. On sale I received 30p a share. The hit I took was painful, but the sale meant I had succeeded in giving me some personal freedom with the buck no longer stopping with me. C’est la vie.
LESSONS FROM THE ABOVE
I report this to provide food for thought. But my counsel to firms selling today is to ensure the quantum of the price is clearly recorded in any agreement. Yes, earn out requirements are generally expected, but a managing partner recently mentioned to me his were easily attainable and targeted both revenue and profit growth. Be careful that earn out requirements are not too onerous.
REASONS FIRM OWNERS SELL TO PRIVATE EQUITY
Based on recent interviews conducted with firm owners there appears to be no change in the key drivers for sale. These are highlighted in the first article in this series. They include solving owner and management issues such as succession planning, realising firm value, talent recruitment, development of specialist services, technology alignment and raising capital for expansion.
PRIVATE EQUITY MARKETPLACE
Currently, I understand, there are about 50 PE operating in the accountancy sector in the US and a similar number in the UK. Since many of these companies are not widely publicised, I can’t verify the numbers; however, it is evident that PE is gaining significant ownership in accountancy businesses.
However, increased marketplace competition and economic challenges result in PE firms seeking higher returns from the investments they make. As a result, firms selling now face higher expectations for business development, cross-service collaboration and increased job margins.
PRIVATE EQUITY INVESTOR OBJECTIVES INCLUDE:
1 ENHANCED PROFITABILITY AND VALUE CREATION
PE investors have this uppermost in their minds – at some point in time the businesses acquired will be sold on. To achieve this, PE seeks to streamline management, implement performance management systems, and actively managing Key Performance Indicators (KPIs).
2 MARKETPLACE CONSOLIDATION AND GROWTH
PE investors usually seek over time to rapidly build a nationwide network of firms, boosting their market presence and attracting larger clients.
3 ACCESS TO NEW MARKETS AND CLIENTS
PE firms seek to use their networks to offer niche services and introduce high-value clients.
My next article will examine several PE entities in the US and UK. These companies include Azets and Xeinadin. These articles should offer insight into the evolving nature of accountancy business ownership. The prospects for PE in South Africa will be explored in my fourth and final article in this series.
Author
Mark Lloydbottom is acknowledged as a futurist who specialises in management planning, strategy and profit improvement for accounting firms. His management training programmes, and consulting are based on over 35 years’ experience as a practitioner and consultant. He has worked with professional service firms in fifteen countries and has lectured throughout Europe, North America and Africa.
