The announcement of the nuptials between BDO and PKF, and the takeover of RSM Tenon by Baker Tilly, both in 2013, merely represented two of the most noteworthy mergers in a wave of consolidation amid mid-tier firms over recent years. There are, however, some new names linked with recent acquisitions, particularly focusing on the practices below the mid-tier. So who are the new entrants to the market and who are the key investors?
A good example at one end of the scale is the recent arrival in the market of HgCapital, a diversified venture capital business. HgCapital has acquired part of the equity in Blick Rothenberg, a London-based smaller mid-tier firm with an international network.
Blick Rothenberg was attracted to HgCapital’s approach for a number of reasons, including the pending retirement of a number of older partners seeking exits and goodwill payments. Both parties have built up commendable outsourcing businesses, which could form a separate entity in its own right in the merged business. Blick Rothenberg also has a significant number of entrepreneurial clients – another specialisation.
On the prowl
There are several other venture capitalists on the prowl, both in the UK and overseas, looking for the right sort of opportunities – an outsource operator to complement and enhance an existing business, for example. Other attractive opportunities may include firms with expertise in management accounts, write-up work, payroll and taxation, which are largely process-driven exercises.
An earlier private equity acquisition targeted Blackpool-based Nixon Williams and UK-wide firm SJD. The targets were predominantly involved in one-man consultancy and services to smaller businesses but had scale, strong internet marketing and a range of referral arrangements, unlike the majority of general practice accountancy firms.
Established overseas business outsourcers from Hong Kong, India, the US and Europe have also been looking to make strategic acquisitions of firms in the UK. Again, these acquisitions are focused on capturing international corporate client portfolios or the portfolios of high net worth (HNW) individuals.
New on the scene
There are, though, still more types of new entrant and investor out there attracted to practices and businesses that have built innovative profiles and successful teams. Could this selection of profiles and features drawn from our recent assignments be the future of the profession?
· ‘Lifestyle’ practice/investor. This is a business or practice that trusts its people to do their work anytime, anywhere and on any device. They take unlimited, fully paid holidays, have unconventional office arrangements, and work flexible hours to fit in with surfing/tide times and other hobbies. Such lifestyle firms have a successful mini-culture and a philosophy that is completely different. They have won a marvellous array of clients and attracted top talent. The trust they put in their brilliant staff pays off: they are forward-thinking, IT-literate and very innovative. Any firm they consider for acquisition will have to be leading-edge and IT-literate, and either have partners with the potential to adapt or the type of client who would find this culture very attractive.
· One-stop shop for microbusinesses. This offers a number of products and services, and provides clients with the essential tools to run their businesses. Technology is at the heart of the customer service experience. It is all about meeting the unique and specific needs of the client base. The combination of new processes and technologies has ensured success
and client compatibility. This type of new entrant will be programmed to operate in vertical sector and product services.
· Equity attraction. With succession an ongoing problem for many firms, some have introduced processes to allow staff who perform well to acquire equity irrespective of grade or status. This is a culture where staff are encouraged to offer great client service. The firm does not want individuals operating singly or in silos, and offers equity to those who do the right thing. This type of new entrant is going to attract ambitious employees who want to work hard and be rewarded fairly for their efforts rather than take the risk of being made partner in 15 years’ time (maybe).
· Multidisciplinary practices. Some mid-tier/smaller firms are becoming more significant in providing advisory, accounting, tax and legal services to small businesses and entrepreneurs. Relevant professionals are brought in as employees to assist clients globally.
· Tax specialists. These businesses service a specific locality for all enquiries to do with HMRC. They could deliver their services in a number of languages to suit the region. This could be seen as a commercially led, consultancy project.
· Online accountants. These guys have a strong future ahead. Many business owners do not want to do their own bookkeeping. With the assistance of a cost-effective outsourced operation, potentially overseas, the return on these specialist activities can be immense, especially with the effective use of technology. Digital tax accounts will enhance the demand for bookkeeping services. Video blogs, use of the internet, social media advertising and YouTube clips keep clients and other businesses informed.
· Advisory services as a specialism. A specialist firm’s service offering can include tax advisory and potentially offers an enhanced commercial awareness and understanding of entrepreneurs. This might command a higher average fee per client of, say, £7,000-plus.
· Non-audit. With greater regulation, a heavier regulatory requirement for audit, and the audit threshold rising constantly, a number of practices are wondering what to do with the small number of audits they have left. Do they even want to continue with audit? Some practices – in particular, small and medium-sized firms – no longer see audit as part of their business let alone their core activity.
Legal and wealth management firms are still looking at acquiring HNW and tax-based portfolios, but the number of these acquirers has declined since the interest seen before 2008. Smaller mid-tier firms – with an annual fee income of £25m to £50m – continue to make acquisitions but are becoming much more selective in the client base they target.
However, the compliance consolidators are still acquiring practices. The model now usually has a client-facing front-office in the UK and a back-office in Asia or a lower-cost location in the UK. Some new entrants are offering 1.3 to 1.5 times fees on acquisition but are looking for smaller clients and sole traders, and steering away from audit and advisory. These purchase prices are above market levels and, in our view, unsustainable. The platforms they use are mainly cloud-based.
Franchising models are again being considered for servicing small businesses and for providing, at the extreme, quasi-FD services for small and mid-size companies and owner-managed businesses. The mid-size branded franchise firms such as Hacker Young, Haines Watts and Moore Stephens continue to take on members, but in the main are interested in client servicing from a bigger pool rather than equity investment, and in direct management.
Regional independents continue to grow by acquisition. Depending on their location, some regional firms are now dominant in their catchment area; they can absorb practices on retirement and successfully merge in younger partners seeking to grow with a larger firm. By virtue of their position, such firms can drive down valuations. It’s almost impossible to imagine a greenfield practice growing to any size as an independent in these locations, although the serial acquirer Baldwins, based in the Midlands, would be an exception.
The market is evolving – fast. It might be time to look at your options.
Things to consider
· What model is best for the practice of the future?
· Where are the profit drivers?
· What is the market demanding from members in practice?
· Will general practices survive the trend towards specialisation?
Phil Shohet is a senior consultant at Foulger Underwood
This article originally appeared in the ACCA's Accounting & Business magazine