Understand the investor, and you'll understand the consolidator

There has been a lot of publicity, and also mutterings behind the scenes, about the various types of accounting consolidator currently in the marketplace.

For practices where equity holders are considering the option of a sale, a consolidator will prove tempting. But there are also concerns – will you get the same value compared to a ‘merger’ into a similar practice? How are they structured and funded…what impact will that have on staff, clients, and those partners looking to exit?

Well, there’s no simple answer, but a good starting point is to consider who is funding the consolidator. Understanding the intention of the investor will set a framework from which you can gauge the direction of travel of the consolidator.

For example, is the consolidator:

·        Internally funded?;

·        Significantly geared by established lenders?; or

·        Significantly geared by external investors such as a PE firm or VC business?

Once you know who the financial backer is, you can then gauge what their exit strategy will be. For example, PE will normally look at five years before they review and look towards an IPO, or refinancing.

Both an IPO or refinancing will have required solid performance combined with year-on-year growth – so the practice’s focus could move towards efficiencies and centralisation/standardisation.

There is a balance to be had between those targets and client service and delivery, of course. However, a focus on large-scale efficiencies and margin improvement could be at the cost of customer service, certainly in the short- to -medium-term.

The deal's wider impact

And whatever the plans are for you and colleagues as equity holders, understanding the impact of the move for those remaining behind should not be ignored. Remember - client goodwill and ownership are transferred to the acquirer/consolidator.

Salaried partners and aspiring salaried partners – who may have seen your exit as the chance to improve their profit share - may well find that the new owner has a different or less attractive remuneration structure…and if your key people find it unattractive then you could find them leaving before a deal is struck, damaging your practice’s value.

So understanding the offering to your pre-completion minority share and aspiring partners post-deal is vital.

And how will clients be treated after a deal is struck? If your agreement involves an earn-out, then any upheaval in processes or client delivery need to be understood and factored in. For example, payroll and possibly audit may be serviced from regional hubs rather than from your existing locations. Brand may be maintained by some, but changed by other consolidators.

There are lots of structures and models in the consolidator space – but they are backed by a similar number of investor and lending offerings. Understanding what underpins these practices-looking-to-buy will make it easier to gauge a consolidator’s intentions for you, your practice, staff and clients.

Kevin Reed is a consultant – content and engagement, for Foulger Underwood on a part-time basis. He is a former editor of Accountancy Age and Financial Director

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