As published in the Accountancy magazine, October 2016 edition.
I met with a client in Suffolk recently and came away from the meeting concerned that there will be considerable change and challenges for firms of around £1m in fees in semi-rural market town locations throughout the country.
I had a great meeting, lovely people and very open and candid in terms of their situation, aspirations and challenges. This is a practice with around £1m of fees, it is the leading practice in a market town a little way away from Ipswich/Sudbury/Bury in a very pleasant environment.
The practice was previously four partners and is now down to two. The fee base is intensely loyal as are the staff, who number around nine. The two remaining partners are looking at five to ten years before retirement and our discussion revolved around profiling the practice over the next five or so years, ready for an eventual sale. There is no second tier management who might be considered for succession and the profitability is around £200,000 shared between the two partners.
There is very little financial scope to recruit succession. The candidate would be an experienced qualified accountant with earning expectations of £60,000 per annum plus. While I spoke with them I undertook some brief calculations on the value of the practice based on super profit; this did not look very attractive. The practice was worth possibly about £400,000 for a £1m of fees and it was truly lifestyle. The partners are very capable but the practice had saturated the marketplace in the 15-mile radius of their location.
The future prospect for this type of practice is not compelling. The changes in the accounting profession whether it be the result of IT, competition at the bottom end and at the premium SME level, or maintaining a broad range of skill sets will have an increasing impact over the next 5 years.
Recruitment is difficult as there are no major firms in the catchment area and they are reliant on people wishing to take a lifestyle choice and join, possibly investing in a £1m practice, which perhaps has a glass ceiling in its ability to develop, let alone double in size.
Alongside recruitment issues one also has to consider the target acquirers for this practice in, say, 5 years’ time when the current two partners wish to exit. The ideal solution is a large independent with multiple offices who may be willing to set up a satellite office in this market town.
The trouble is, most multi-office independents are looking for firms with at least £1.5m annual fees. The alternative is to consolidate the business into an existing office of a larger independent or competitors office. This alternative then raises the prospect of significant client loss, and a potential drift of clients to smaller practices in the immediate area who offer lower cost solutions for compliance work.
We can and no doubt we will offer consultancy which will improve the profile of the practice, however looking across the market town practices of similar size we feel that most will disappear within five to ten years unless there is a new model and relationship to service these clients in situ at a profitability significantly greater than the profits a traditional lifestyle practice currently generates.
We will be working with this practice to find solutions and improve its profile and positioning but I would estimate there might well be another 500-800 practices of similar size in a similar geographic position and facing similar challenges throughout the country.
Keith Underwood
