Practice M&A: The buyer’s view
There’s two sides to every deal, but what are the buyers of accountancy firms really looking at and looking for? Following a state of the practice M&A market overview, Richard Sergeant investigates from the buyer’s point of view.
What’s driving the interest in acquisitions?
The motivations and drivers for acquiring another practice are rooted in a growth agenda, however the context varies considerably.
As Jean Ellis of Liverpool accounting firm DSG suggests, “More opportunities will come up as compliance and general commercial pressures make it difficult to survive independently, and succession issues begin to unravel,” identifying broadly firms of one to three partners.
But that’s not all that’s going on in the view of Ian Cocks MD of Taylorcocks: “The digitisation of services is the big one. Extrapolate 10 years into the future and HMRC may get access to all the information it needs automatically. Every firm has to be thinking about maximising profitability”.
For others like Della Hudson of Hudson Accountants, it’s more about building scale to meet personal and business goals.
“It’s a short cut: I either buy fees and clients, or I spend money on marketing and growing that way,” Hudson said.
Good clients, good opportunities
All agree the ability to pick up a good quality client base that has long-term potential, typically through offering an extended service line, makes acquisitions attractive.
“A lot of the firms can’t provide the full range of services we can, so while you may be buying GRF you have to look at the overall quality and understand how you may be able to cross sell”, said Ellis.
And although expanding your footprint is a common driver, as Cocks points out, “It doesn’t have to be to gain a location, you could just be picking up lots of great business on your doorstep”
Key components acquirers are considering
Client potential is examined carefully including their age profile which “impacts on what kind of long-term value will be held in the existing base, and what work needs to be done to create growth,” Cocks said.
But the two other common elements are the importance of culture, and how the business itself is run.
“Accountants tend to attract clients that connect with the culture of the firm. So if you feel aligned to the practice, my feeling is the clients will align to you too,” Hudson said.
Cocks added: “The critical bit is values. Are we going to be working alongside people in a business who have a shared view on what we do and how we do things”
Ellis also added: “We look carefully at how the firm conducts itself in terms of compliance, and how they actually do business”. That combined with an assessment of their IT infrastructure is central in evaluating the scale, challenge and cost to effectively integrate.
What kinds of deals are being done?
Payments made in tranches is much the standard. As Hudson put it, “It’s the easiest way to agree and police”. But there is plenty of variation in the percentages and timings, as well as multiples (0.60 to max 1.1).
But other types of deal are possible, and conditions being right there are some interesting alternatives. Cocks provided an example: “We bought a business that was doing well but wanted to do better. By applying our marketing and central functions, they benefit from scale and are able to concentrate on leveraging the services we have in order to help meet their own ambitions”.
Staying with the business post acquisition means the possibility of different structures perhaps where there is a longer agreement period (10 years), a percentage share of growth as well as consideration for remaining value of the initial client base.
So what are seen as the big risks?
Inheriting difficult people, a clash of cultures, unsettled staff leaving (perhaps taking clients with them) and IT are all areas that can create post acquisition issues. Ellis encapsulated this neatly: “There is a high degree of trust involved in acquisitions, but even more so in accountancy as you are acquiring relationships” both in the practice as well as with clients.
The importance of a growth agenda
But ultimately the drive to successfully acquire another firm is routed in a clear belief in the value of a growth agenda.
“Growth is inspiring - it allows you to stay fresh” and with that “Size allows me to do more of what I want to do”, Hudson said.
“Growth is our oxygen”, Cocks added, “We are continually striving and showing there is opportunity out there. This is not about defensive short termism, you are there to inspire others to do more and progress”
Richard Sergeant is the managing director of Principle Point.